# Foreign Earned Income Exclusion



## lhpdiver (Jul 30, 2014)

If you meet certain residency requirements etc you can apparently exclude more than $90K from your earned income at tax time.

What are the strings attached to this ? Is it expected that you will be paying Mexico on those earnings even if they were not paid in Mexico ?

Say a person lives all year long in Mexico, works as a consultant for a European company and has their pay deposited in a US bank...


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## sandcruiser (Sep 8, 2014)

my understanding of the earned income exclusion (from having lived abroad for 10 years in Costa Rica) is that the IRS does not expect you to pay US income tax on the first approx $90K if you 
a) have residency abroad
b) earn the money abroad
c) pay local taxes abroad

after the approx $90K exclusion, they do expect you to pay both local and US income taxes. 

It's not a "generous" as it sounds at first blush.


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## TundraGreen (Jul 15, 2010)

sandcruiser said:


> my understanding of the earned income exclusion (from having lived abroad for 10 years in Costa Rica) is that the IRS does not expect you to pay US income tax on the first approx $90K if you
> a) have residency abroad
> b) earn the money abroad
> c) pay local taxes abroad
> ...


The exclusion threshold increases every year ($91,500 for 2010, $92,900 for 2011, $95,100 for 2012, and $97,600 for 2013).

http://www.irs.gov/Individuals/International-Taxpayers/Foreign-Earned-Income-Exclusion---Requirements


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## Meritorious-MasoMenos (Apr 17, 2014)

TundraGreen said:


> The exclusion threshold increases every year ($91,500 for 2010, $92,900 for 2011, $95,100 for 2012, and $97,600 for 2013).
> 
> Foreign Earned Income Exclusion - Requirements


When I enjoyed this, from a U.S.-based company for working in Mexico, I still had to pay Social Security and Medicare taxes. I don't know if you have to pay them if the income is paid by a non-U.S. based company.


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## LMtortugas (Aug 23, 2013)

Foreign income is determined according to the country such income is generated within. To claim the exemption a US expat has to satisfy the IRS definition of permanent residence abroad, along with a host of other stipulations The filing can range from relatively simple to quite complex. A small investment in a knowledgeable tax CPA could potentially save a significant amount of money & trouble.


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## mxsailor (Sep 10, 2014)

Roger that. I've been filing a form 2555 since 2006. All I have to do is certify the number of days I'm in the US (can't be more than 30 per year, if I remember correctly). Have a simple sole proprietorship.


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## lhpdiver (Jul 30, 2014)

mxsailor said:


> Roger that. I've been filing a form 2555 since 2006. All I have to do is certify the number of days I'm in the US (can't be more than 30 per year, if I remember correctly). Have a simple sole proprietorship.


Great. So you have a Mexican RFC and pay Mexico the taxes you would normally pay the US on the excluded earnings ?? Someone once told me that the Mexican taxes on that excluded amount are HIGHER than what you would pay the IRS...


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## Isla Verde (Oct 19, 2011)

lhpdiver said:


> Great. So you have a Mexican RFC and pay Mexico the taxes you would normally pay the US on the excluded earnings ?? Someone once told me that the Mexican taxes on that excluded amount are HIGHER than what you would pay the IRS...


That may be the case, I have no idea if it is. However, doesn't it seem only fair and logical to pay taxes to the country you are living in?


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## lhpdiver (Jul 30, 2014)

Isla Verde said:


> That may be the case, I have no idea if it is. However, doesn't it seem only fair and logical to pay taxes to the country you are living in?


For us - the 'income' is not paid by anything Mexican at all - it comes from Europe. The day may come when that is not true and I would agree with you that Mexico would be entitled to it;s taxes.

To be honest we are more afraid of the IRS claiming we are doing something wrong than SAT. We have physically visited SAT and had a totally honest conversation with them and they said we don't even need an RFC. I hope Mexico never feels we are not being fair and we have to turn around and file amended returns in the US.

The last time we went to a tax professional for advice we had a one time only windfall event. The accountant provided very little more value than I had myself for years (in terms of expertise) and yet charged us a percentage of our AGI for services. Another time we went to one of those BIG tax services firms who refused to give us an upfront quote for services and when they had completed the entire return presented a whopping bill when we went to pick up the return. I'm sure the guy put some effort into his work, and I felt sorry for him - but they should have given us an idea of the cost ahead of time. (We told them thanks but no thanks).


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## Longford (May 25, 2012)

My understanding is that one need not be living in Mexico on one of the residency visas in order to be subject to Mexican tax regulations. People present in Mexico beyond 180 days (presumably residing but refusing to obtain one of the other visas) are also subject. I don't know if I'm 100% accurate on this but an accountant I know who works in international finance/taxation mentioned it to me earlier this week when I asked.


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## lhpdiver (Jul 30, 2014)

mxsailor said:


> Roger that. I've been filing a form 2555 since 2006. All I have to do is certify the number of days I'm in the US (can't be more than 30 per year, if I remember correctly). Have a simple sole proprietorship.


So you have a Mexican RFC and pay Mexico the taxes you would normally pay the US on the excluded earnings ??


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## LMtortugas (Aug 23, 2013)

Variant country income tax rates, double-taxation, etc. do not apply to the US Foreign Earned Income Exclusion until the allowed exemption is exceeded by one's earned wages, salaries, professional fees, and other services rendered in a foreign country. However, variant tax rates certainly apply if one claims the Foreign Tax Credit.


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## lhpdiver (Jul 30, 2014)

LMtortugas said:


> Variant country income tax rates, double-taxation, etc. do not apply to the US Foreign Earned Income Exclusion until the allowed exemption is exceeded by one's earned wages, salaries, professional fees, and other services rendered in a foreign country. However, variant tax rates certainly apply if one claims the Foreign Tax Credit.


Please help me - how is that info germane to the current thread ?


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## TundraGreen (Jul 15, 2010)

lhpdiver said:


> Please help me - how is that info germane to the current thread ?


It seems germane to me. However, even if it were not, there is no requirement that posts stick to the topic of a thread.


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