An unexpectedly large increase in the so-called Foreign Earned Income Exclusion in the U.S. tax year ending on Dec. 31, 2022, of 7.1%, could be a “game-changer” for many American expats living in certain countries, such as the United Kingdom, according to David McKeegan, co-head and co-founder of Greenback Expat Tax Services.
According to McKeegan, the increase in the FEIE, to US$120,000 – from US$112,000 in the tax year for which most expats will have now submitted their returns to the IRS – could “open up new options for lots of expats,” especially those living in the UK.
Explains McKeegan: “If you assume an average exchange rate now of US$1.15 to each British pound, this would mean you could earn as much as £104,000 during the year while living in the UK – and exclude it all via the FEIE.
That is pretty significant, and very different from previous years.”
As noted in an article on the FEIE published earlier this year by the AXFNJ – written by Kansas City, Missouri-based Roland Sabates, of the Expat Legal Services Group – during the tax year ended on Dec. 31, 2021, the Foreign Earned Income Exclusion allowed employees and self-employed individuals to exclude up to US$112,000 of earned income from U.S. tax.
To qualify to be able to do this, though, Sabates noted, taxpayers needed to be able to prove that the income they were reporting was “earned”; that their “tax home” was located outside of the United States; and that they met either the “physical presence test” or “bona fide residence test,” which is a complicated business that is explained in detail on the IRS’s “Physical Presence Test Calculator” page.
'FEIE comes into its own
when Foreign Tax Credit doesn't work'
According to McKeegan, the benefits of making use of the Foreign Earned Income Exclusion come into play when "the Foreign Tax Credit doesn’t make much sense."
"People who want a more simplified filing procedure, and who don’t earn more than the FEIE limit; individuals who are considering moving to a lower tax jurisdiction; and individuals who have moved to the UK recently from a lower-tax jurisdiction – all of them should consider using the Foreign Earned Income Exclusion, he adds.
"As always, of course, it's best for expats to consult with a tax professional before they do anything having to do with FEIE and Foreign Tax Credits, to determine which method of avoiding double taxation works best for them, given their specific circumstances.
"But the relative drop in the British pound, coupled with this increase in the FEIE limits, do make this a viable solution for more U.S. expats living in the UK, as well as for 'digital nomads' passing through."
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