Foreign Earned Income Tax Exclusion?

Question

I have a dual citizenship and after graduating from a U.S. school, I was offered a job by a foreign company to work in that country (the one that I am also a citizen of). The job started in Aug. and I had not worked (and therefore no income) before that. I don't know how long I will work for the company but I'm pretty sure that I will not return to work in the U.S. in the foreseeable future. I do not have income earned in the U.S. and have no residence in the U.S. either. All the income comes when I'm abroad, but I'll only be here for 8-9 months (and only 5/12 of this tax year) when I file the tax return next year, so will I be eligible for the foreign earned income exclusion next year? And if not, will I get tax refunds the year after that when I will probably have worked abroad for over 16 months and will definitely have no problem claiming the exclusion?

Answer 1

You have to meet at least one of the two tests to qualify for Foreign Earned Income exclusion:
1. Physical Presence Test. You were present in foreign country for full 330 days in any period of 12 months in a row. (That is this continuous 12 months period can include two tax years.)
2. Bona Fide Residence Test. Since you are citizen of the foreign country you meet this test, unless you prove the IRS that you were in the foreign country for definite temporary purpose. (Since you don't have a job in the U.S. and don't have a definite offer of job when you return back, your stay in the foreign country cannot be definite temporary.)

In short, you will qualify for Foreign Earned Income exclusion if both the countries have tax treaty, you had earned income, and you paid taxes in the foreign country.
I suggest you read at www.irs.gov:
1. Instructions to Form 2555 (for the two tests), and
2. IRS publication no. 54: Tax Guide for U.S. Citizens and Resident Aliens Abroad.

Finally, you can always do what bostonianinmo has suggested: " If you can't take the exclusion you can take a credit for any foreign income taxes paid. Depending upon where you will be living that may be the better way to go since many countries have higher taxes than the US."

Answer 2

You need to meet either the Foreign Residence Test or the Physical Presence Test to get the exclusion. From what you have posted here that clearly won't be the case for tax year 2007. If you remain overseas for tax year 2008 then you probably will. If you're overseas for only 8 or 9 months in 2008 you probably won't.

Get a copy of IRS Pub 54 from the IRS website. The rules on the FEI exclusion are complex. If you can't take the exclusion you can take a credit for any foreign income taxes paid. Depending upon where you will be living that may be the better way to go since many countries have higher taxes than the US.