Foreign Earned Income | TaxConnections is a where to find leading tax experts and tax resources worldwide.
Yes, eventually the IRS will find your foreign bank account. When they do, hopefully, your foreign bank accounts with balances over $10,000 have been reported annually to the IRS on an FBAR “foreign bank account report” (Form 114). And hopefully, interest and dividends from your foreign bank accounts will already be reported on your annual US tax return, including foreign disclosure forms and statements (Form 1040). When the IRS finds your foreign bank account and it has not been reported properly you are in a lot of trouble. Just Google FBAR penalties- nothing good comes up.
But I Don’t Owe Any Extra Taxes? I Live Overseas And Pay Tax Where I Live? My Exemption For Working overseas Eliminates Any US Tax Owed?
Read the articles you googled on FBAR penalties. Form 114 is a disclosure statement only, but some of the smaller penalties are $10,000 and 5% of your highest account balance. The penalties escalate from there to higher civil penalties and possible criminal penalties. You need to file an FBAR disclosure annually on your foreign bank account if the balance exceeded $10,000 on any day during the tax year.
Living and working abroad comes with many exciting benefits. In addition to exploring new lands and learning about new cultures, expats often earn additional income beyond just their regular salary. Foreign earned income can come in many forms. In addition to the wages that are earned, those who are working outside the United States also must declare as income bonuses, tips, commissions, and the like.
It is also common for expats working overseas to have non-cash income as part of their employment package.
While Congress offers the foreign earned income exclusion (FEIE form 2555) and the foreign tax credit (FTC form 1116) to lighten the tax burden of American workers abroad, they don’t want it too light!
What Is The Revoked Exclusions Rule?
Each year a foreign worker can choose to between FEIE and FTC to pay the lowest amount of taxes. The revoked exclusion rule is designed to prevent taxpayers abroad from switching each year between FEIE and FTC. Simply put, if you had been using FEIE then switch to using FTC, then you are prohibited from switching back to use FEIE for a period of five years.
Sadly, retail tax software products offer the choice without communicating the consequences for subsequent years. Also since the vast majority of domestic tax preparers never use form 2555, they are unaware also, of the implications of switching between the two. Revoked exclusions are, in my opinion, a senseless complexity designed to deprive foreign workers of flexibility and to entrap them in the complexity of the tax code. But it is the law. How can we protect ourselves? Let’s dissect what it means to revoke exclusion.