# Foreign Earned Income



## morriswa (Apr 1, 2015)

I have a question which I cannot find a clear answer for online...

I am American and have an LLC in Florida and contract to a single client, also in Florida. My work is web design and I work completely remotely. Usually I work from home, either in Kentucky or Florida but 2 years ago I traveled with my wife around South America for over a year.

I have recently discovered from a friend who says that if you're out of the country for more than 330 days in a year then a foreign earned income exclusion can be filed. I cannot find anything that is specific to my situation. Can anybody advise please?

Also, maybe this is something that can be backdated for the year we were traveling.

Thanks,
Wayne


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## Bevdeforges (Nov 16, 2007)

If you can meet the requirements of the physical presence test, you can claim the foreign earned income exclusion for your earned income while out of the country. Foreign Earned Income Exclusion - Physical Presence Test

To claim the FEIE for prior years, you'll have to file amended returns for the years affected. 
Cheers,
Bev


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## cuerna1 (Mar 7, 2015)

Bevdeforges said:


> If you can meet the requirements of the physical presence test, you can claim the foreign earned income exclusion for your earned income while out of the country. Foreign Earned Income Exclusion - Physical Presence Test
> 
> To claim the FEIE for prior years, you'll have to file amended returns for the years affected.
> Cheers,
> Bev


I asked this question once before here - and never got an answer. Isn't there an assumption by the IRS that if you claim the foreign earned income exclusion that you, in fact, paid income tax in your resident country ? It is not a free lunch - is it ?


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## Bevdeforges (Nov 16, 2007)

No, the FEIE is not contingent on your paying income tax in your country of residence. Americans living and working in the Gulf States (where there is no tax) can still take the FEIE on the first $97K or so of earned income. Same goes for Americans working for "international civil service organizations" (i.e the OECD or other UN agencies) where the country of residence exempts pay from all income taxes.
Cheers,
Bev


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## cuerna1 (Mar 7, 2015)

Bevdeforges said:


> No, the FEIE is not contingent on your paying income tax in your country of residence. Americans living and working in the Gulf States (where there is no tax) can still take the FEIE on the first $97K or so of earned income. Same goes for Americans working for "international civil service organizations" (i.e the OECD or other UN agencies) where the country of residence exempts pay from all income taxes.
> Cheers,
> Bev


WOW ! No wonder we have never been audited !! It is a shame I just mailed this years taxes. Next year - and I suppose I'll have to rethink the quarterly pre-payments as well. Thanks a bunch.

Edit : even if my wife's German client deposits her compensation into a US bank ? Of course we could have that money deposited anywhere...


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## BBCWatcher (Dec 28, 2012)

If you are illegally evading some other country's tax system -- or working illegally in some other country -- that's a problem, usually a big one. But if you have that problem it's not for the U.S. to prosecute. (U.S. authorities do routinely cooperate in international tax investigations if it comes to that.)

Foreign tax evasion means you cannot take a U.S. foreign tax credit. You didn't pay the foreign tax, ergo you cannot put what you didn't pay on IRS Form 1116. If you do, _then_ you have a U.S. problem.


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## Bevdeforges (Nov 16, 2007)

cuerna1 said:


> WOW ! No wonder we have never been audited !! It is a shame I just mailed this years taxes. Next year - and I suppose I'll have to rethink the quarterly pre-payments as well. Thanks a bunch.
> 
> Edit : even if my wife's German client deposits her compensation into a US bank ? Of course we could have that money deposited anywhere...


The banks report your interest income and need to notify Treasury of any movements of $10,000 or more into or out of the country. But past that, putting money into a US bank doesn't affect the taxability of the transaction.

Just saw a WSJ blog post where they mentioned (in passing) that the IRS is pulling "all their" overseas personnel back home by the end of this year. Actually, the 3 offices they are closing have a total of 12 staff being reassigned. The IRS has never had much of a presence overseas - and now will have none at all.
Cheers,
Bev


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## cuerna1 (Mar 7, 2015)

Bevdeforges said:


> The banks report your interest income and need to notify Treasury of any movements of $10,000 or more into or out of the country. But past that, putting money into a US bank doesn't affect the taxability of the transaction.
> 
> Just saw a WSJ blog post where they mentioned (in passing) that the IRS is pulling "all their" overseas personnel back home by the end of this year. Actually, the 3 offices they are closing have a total of 12 staff being reassigned. The IRS has never had much of a presence overseas - and now will have none at all.
> Cheers,
> Bev


Fewer staff (more computers).


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## cuerna1 (Mar 7, 2015)

BBCWatcher said:


> If you are illegally evading some other country's tax system -- or working illegally in some other country -- that's a problem, usually a big one. But if you have that problem it's not for the U.S. to prosecute. (U.S. authorities do routinely cooperate in international tax investigations if it comes to that.)
> 
> Foreign tax evasion means you cannot take a U.S. foreign tax credit. You didn't pay the foreign tax, ergo you cannot put what you didn't pay on IRS Form 1116. If you do, _then_ you have a U.S. problem.


I'm the rookie here but I think you are touching on two different topics. We filed for a Foreign Tax Credit for those Mexican Income Taxes which were with-held here on our bank accounts.

Now as for the Foreign Earned Income Exclusion - we visited the local office of the Mexican IRS equivalent, shortly after getting here. We explained that my wife was receiving compensation from a German company which was being deposited into the US. Neither of us are receiving any compensation from a Mexican entity. We said we were reporting her earnings to the IRS. They said we need to report nothing here in Mexico - that we don't even need a Tax ID. Now - I don't know if we were speaking with the smartest person there. I guess our situation is similar to someone who provides international services over the internet from the comfort of their home. 

I would LOVE to exclude 97K from my wife's compensation. But I always assumed that that was not the intent. Fortunately (?) she only has one or two years left before retiring and the issue will be moot.

Comments appreciated. Happy Easter !


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## Bevdeforges (Nov 16, 2007)

I don't know anything about Mexican taxes, but if they said you don't need to report anything, then do what you're told. For the US, you need to file taxes if you are a US citizen - and your wife, too, if she is a US citizen. No reason not to take the FEIE, at least on any "earned income" coming in. It does not matter a whit where it is being deposited. If she is outside the US while doing the work that generates the income, then it is "foreign earned income."
Cheers,
Bev


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## BBCWatcher (Dec 28, 2012)

Bevdeforges said:


> I don't know anything about Mexican taxes, but if they said you don't need to report anything, then do what you're told.


Better yet, get such advice in writing if at all possible.


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## baldilocks (Mar 7, 2010)

Bevdeforges said:


> The banks report your interest income and need to notify Treasury of any movements of $10,000 or more into or out of the country. But past that, putting money into a US bank doesn't affect the taxability of the transaction.
> 
> Just saw a WSJ blog post where they mentioned (in passing) that the IRS is pulling "all their" overseas personnel back home by the end of this year. Actually, the 3 offices they are closing have a total of 12 staff being reassigned. The IRS has never had much of a presence overseas - and now will have none at all.
> Cheers,
> Bev


They don't need to:
https://uk.finance.yahoo.com/news/no-hiding-place-expat-tax-105439727.html


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## cuerna1 (Mar 7, 2015)

baldilocks said:


> They don't need to:
> https://uk.finance.yahoo.com/news/no-hiding-place-expat-tax-105439727.html


I hear you but I'm not sure how that is going to work. I think I did 6 - 8938 forms this year. These obviously report my interactions with our financial institutions and ourselves - not the government. In Mexico - a Mexican citizen doesn't need to worry about taxes on bank interest unless it amounts to a certain 'real' rate above inflation - and that (almost) never happens. My point is - our 'bank' might be able to report something to the IRS but I'm not sure the government even knows. And - I'm not trying to hide anything from anybody - but how about all these other entities send me an annual report of sorts for me to provide info at tax time.


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## maz57 (Apr 17, 2012)

baldilocks said:


> They don't need to:
> https://uk.finance.yahoo.com/news/no-hiding-place-expat-tax-105439727.html


All the countries mentioned in the article you linked are going to be seriously disappointed when they discover that everybody will be exchanging information except the United States. There is presently no law which compels US institutions to send information to the tax agencies of foreign countries and there is not even any legislation proposed.

FATCA is a one way street. The US will become the world's largest tax haven and I doubt that is an accident. The US hates competition.


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## cuerna1 (Mar 7, 2015)

maz57 said:


> All the countries mentioned in the article you linked are going to be seriously disappointed when they discover that everybody will be exchanging information except the United States. There is presently no law which compels US institutions to send information to the tax agencies of foreign countries and there is not even any legislation proposed.
> 
> FATCA is a one way street. The US will become the world's largest tax haven and I doubt that is an accident. The US hates competition.


Not sure that is true. Here's a link to the US <-> Mexican agreement. Jump to page 10.
http://www.treasury.gov/resource-center/tax-policy/treaties/Documents/FATCA-Agreement-Mexico-4-17-2014.pdf


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## maz57 (Apr 17, 2012)

If you scroll down to page 17, (Article 6, 1. Reciprocity) you will see where the US says it will kinda, sorta, maybe get around to passing implementing legislation sometime in the indefinite future. I admit they do use the word "committed". 

No information will flow from the US to Mexico until this happens and no legislation is in the pipeline. This is the same standard wording used in the US/Canada agreement.


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## cuerna1 (Mar 7, 2015)

Ok - I kind of asked this before - but is there some way for the humble taxpayer to tap into the information that does flow between the banks / foreign governments / IRS ? I'd like to KNOW what is represented (kind of on MY behalf). Kind of like a free annual review of my credit reports. Otherwise it really does have a little feel of entrapment - that they are hoping one side (taxpayer) or other (bank) are going to screw up.


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## maz57 (Apr 17, 2012)

Here in Canada there is no way to find out what your financial institution is sending to the CRA (Canada Revenue agency) and there is no way to find out what the CRA passes on to the IRS. If an error is made at some point along the chain the first indication would be a letter from the IRS. 

You will, however, probably know if your US connection has been discovered by your Mexican financial institution because they will contact you to "clarify" your SSN, address, etc.


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## BBCWatcher (Dec 28, 2012)

You and your attorney will see that information at least in U.S. court if you or the IRS decide to go to court. It's evidence subject to discovery, just like any other evidence.

You may also be able to file a Freedom of Information Act (FOIA) request in the United States.


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## Bevdeforges (Nov 16, 2007)

For the most part I don't think you can request or demand an accounting of what was passed to the IRS. But, at least in countries where the banks already pass information to the government (usually the tax authority) you'll get some sort of report on what has been reported in connection with the local income tax process.

Here in France, the bank used to send out a paper listing the amounts from your account records and where to put them on your tax declaration. Basically, this is the same as the 1099 and other documents the US banks are required to send out each year (one copy to the IRS, the other copy to you). In France, they have revised the system so that the tax authority simply pre-fills your tax form with all information they have gotten from the banks (and gives you a detail of how much from which bank).

If you get any such information from the Mexican banks for use in preparing your local tax forms, that's pretty much the information they're passing along to the government, and from there to the IRS. OK, from the foreign banks they include year end balances - but I'm willing to bet that the IRS has access to that information from all the US banks anyhow.
Cheers,
Bev


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