How does the Foreign Earned Income Exclusion work if I live in Belize?

If you are a US citizen who lives and works abroad, you can potentially exclude a portion of your income, up to around US $100,000 under the Foreign Earned Income Exclusion.

 

There are two ways that you can qualify for the Foreign Earned Income Exclusion. The first is what is called Physical Presence Test. You qualify for the exclusion under this test if you are out of the US for 330 out of 365 days.  “Out of the US” means, literally...

If you are a US citizen who lives and works abroad, you can potentially exclude a portion of your income, up to around US $100,000 under the Foreign Earned Income Exclusion.

 

There are two ways that you can qualify for the Foreign Earned Income Exclusion. The first is what is called Physical Presence Test. You qualify for the exclusion under this test if you are out of the US for 330 out of 365 days.  “Out of the US” means, literally “out of the US.” You can’t fly to the United States, you can’t come into Miami on a flight and then fly to England because, in this example, you were not out of the United States.

 

For example, I would qualify under the Physical Presence Test if I were working for a US company that stations me in China for a year, so that year I am not working in the US and I get a salary paid from that company to me in China. In this case, I earned that money outside the US, so this qualifies me under the Physical Presence Test. My contract work or my corporation put me somewhere else for the year, and I work there.

 

The second way you can qualify for the Foreign Earned Income Exclusion is through what we call a Bona Fide Residence Test.  In order to qualify under the Bona Fide Residence Test, you have to be a resident of a foreign country and you have to have established that foreign country as the place you reside. That means you pay rent there, you work there, you have houses there, or you have utilities that you pay there; all the things that help establish the fact that you are living in a foreign country.

 

In order for me to qualify under the Bona Fide Residence Test, I am telling the US that I am living somewhere else, that I am working somewhere else, that I have plans of continuing to live and work in that country on an ongoing basis.

 

With the Bona Fide Residence Test, your timeframe gets a little bit longer. In general, you would now have to be outside of the US for 8 months and I can be inside the US for about 4 months, but its a bit more technical and includes the concept of a rolling 3-year average. It is a little bit complicated, so your CPA can help you figure out the exact details.  If you have been gone for a total of 3 years completely, in your fourth year, you can actually spend just under 6 months in the United States.

 

If you qualify for the Foreign Earned Income Exclusion, you still report the ordinary income you earn in that foreign country, and then you would be able to exclude a portion of that income from your US tax liability.  You can meet either of the criteria above; you don’t have to meet both.

While the Foreign Income Tax Exclusion does exempt you from Income Tax, it does not exclude you from the Self Employment Tax portion of your tax calculation, if you are self employed, such as I am. There are documents that exist on the internet, sponsored by the IRS that you should avail yourself of if you are a resident of a foreign country. TurboTax does an excellent job, but you'd need the business version if you in fact have a business in a foreign country. In...

While the Foreign Income Tax Exclusion does exempt you from Income Tax, it does not exclude you from the Self Employment Tax portion of your tax calculation, if you are self employed, such as I am. There are documents that exist on the internet, sponsored by the IRS that you should avail yourself of if you are a resident of a foreign country. TurboTax does an excellent job, but you'd need the business version if you in fact have a business in a foreign country. In Belize, there are a few accountants that specialize in Ex-pat tax law, situations, etc.

 

If you own a business or are a sole proprietor in a foreign country, you are generally in effect "self employed". (Unless you are a corporation, LLC, etc, but then, the tax laws are different, but still need to be understood.)  I would guess there are many people not in compliance with tax code, at their own peril I would say, because they have incomplete info or just haven't done the research necessary to understand the tax code as it relates to their situation. Or worse, they think the US Government can't know or won't find out. I would strongly urge anyone considering relocation to a foreign country or living in one to understand their tax situation. There are a number of IRS rules to establish foreign residency first off, and regardless of your income, you still have to file and disclose it. With FACTA coming on line, and by all accounts the US Government looking more and more at US Nationals living abroad, I strongly urge anyone considering moving abroad or living there to have a full understanding of their tax situation. Good news is, full time foreign residency does in most cases qualify you for an exemption from the US Affordable Healthcare Act.   

 

(TurboTax headquarters in San Diego, CA, pictured.)