The first is claiming the Foreign Earned Income Exclusion on Form 2555 and the second is claiming the Foreign Tax Credit on Form 1116. The Foreign Earned Income Exclusion is only applicable to earned income, whereas the Foreign Tax Credit can be applied to both earned and unearned income.
How do I qualify for Foreign Earned Income Exclusion?
To benefit from the Foreign Earned Income Exclusion, the taxpayer must meet one of the following criteria: Works full time in a foreign country for an entire calendar year—known as the Bona Fide Residence Test. Works outside of the United States for at least 330 of any 365 day period—known as the Physical Presence Test.
When does the foreign earned income exclusion apply?
In fact, the exclusion applies only if you are a qualifying individual with foreign earned income who meets all of the requirements to claim the foreign earned income exclusion and you file a tax return reporting the income. The maximum foreign earned income exclusion amount is adjusted annually for inflation.
Do you have to file a tax return for foreign earned income?
Yes, since the foreign earned income exclusion is voluntary, you must file a tax return to claim the foreign earned income exclusion. It does not matter if your foreign earnings are below the foreign earned income exclusion threshold.
Can a self employed person claim the foreign housing exclusion?
The excluded amount will reduce your regular income tax but will not reduce your self-employment tax. Also, as a self-employed individual, you may be eligible to claim the foreign housing deduction instead of a foreign housing exclusion.
How much can I exclude from foreign income?
However, you may qualify to exclude your foreign earnings from income up to an amount that is adjusted annually for inflation ($103,900 for 2018, $105,900 for 2019, $107,600 for 2020, and $108,700 for 2021). In addition, you can exclude or deduct certain foreign housing amounts.