Foreign Earned Income Exclusion 2020
Christian Reeves

Foreign Earned Income Exclusion 2020

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In this article, I’ll look at the Foreign Earned Income Exclusion 2020. The FEIE is the most powerful tool in the expat’s kit and is the focus of international tax planning for individuals and small business owners living abroad. The Foreign Earned Income Exclusion 2020 is the only major tax planning option left after Trump’s 2017 tax law changes. 

I wrote that the Foreign Earned Income Exclusion 2020 is the ONLY tax deal left after Trump’s changes to the US tax code. In previous years, small business owners could use the FEIE to eliminate the tax on their first $100,000+ and then retain profits in excess of the FEIE in an offshore corporation. These days are gone… we Americans can no longer retain profits in our offshore corporations tax-deferred. 

And there was a time when we had hope that the Foreign Earned Income Exclusion would be made obsolete by President Trump. During his campaign, he had indicated that he would move the US to a territorial tax system. Rather than taxing US citizens and residents on our worldwide income, we could pay tax only on profits made in the United States. 

Well, big corporations and multinationals moved to a territorial tax system, but the little guy got the shaft (per usual). We expats are still taxed on our worldwide income and we lost the ability to use an offshore corporation to retain profits over the Foreign Earned Income Exclusion 2020 amount tax-deferred. For more, see President Trump’s Tax Plan and Expats

With that in mind, here’s what you need to know about the Foreign Earned Income Exclusion 2020.

As stated above, the most important tool in the expat’s U.S. tax toolbox is the Foreign Earned Income Exclusion for 2020.  And, in most cases, the Foreign Earned Income Exclusion 2020 is the ONLY tax break you get for living abroad. 

If you qualify for the FEIE, you can exclude up to $107,600 in 2020 of earned income free from U.S. Federal income tax. This amount is up from $105,900 for the tax year 2019, $104,100 in 2018, $102,100 in 2017 and $101,300 in 2016. If you’re married, and both spouses qualify for the exclusion, your total combined exclusion may be up to $215,200.

There are two ways to qualify for the Foreign Earned Income Exclusion 2020. You can be out of the US for 330 out of 365 days or you can be a resident of a foreign country for a full calendar year. 

The first option, referred to as the 330-day test, is the easiest to use. Just be out of the US for 330 out of any 365 day period. For example, if you are out of the US from March 30, 2020, to March 15, 2021, you qualify for the Foreign Earned Income Exclusion 2020. 

The second option, known as the residency test, is much more challenging to implement. To oversimplify a complex topic, you need to move to a foreign country with the intention of making that place your home for the foreseeable future. You should have a residency permit and pay taxes in this new home. 

In most cases, you will use the 330 day test for the Foreign Earned Income Exclusion for the first year or two you’re living abroad. Once you’ve put down roots in a new country, you can switch to the residency test. 

Maximize the Value of the Foreign Earned Income Exclusion 2020

While you can’t retain earnings in an offshore corporation in 2020, you still need a structure in a tax-free country to maximize the value of the FEIE. 

First, if you use a personal bank account or a US company to run your business, you must pay self-employment tax on your income. The Foreign Earned Income Exclusion does not reduce self-employment or payroll tax. 

If you draw your salary from an offshore corporation, you can eliminate SE tax. This is a savings of about $15,000 a year for a single person earning $100,00 and about $30,000 for a husband and wife where both are working in the business. 

Second, if you operate a business without a corporate entity, the amount of your Foreign Earned Income Exclusion for 2020 will be reduced in proportion to your expenses. 

For example, the FEIE is $107,600 for 2020. Let’s assume you gross $160,000 from business and your net profit is $80,000 after deductible business expenses. You report this income on Schedule C and use Form 2555 to calculate the Foreign Earned Income Exclusion. 

Your allowed business expenses are about 50% of your gross. Because you are using Schedule C, your FEIE will be reduced in proportion to your deductible expenses. So, your available FEIE for 2020 is 50% of $107,600 = $53,800. 

You will be allowed to exclude $53,800 of your $80,000 net using the FEIE. Thus, you will pay US tax on $26,200. 

If you had operated your business through an offshore corporation for 2020, you would have paid zero in self-employment taxes and would have been allowed the full FEIE amount of $107,600. 

Perpetual Travelers and the Foreign Earned Income Exclusion 2020

There’s one group of expats that can never use the residency test. A perpetual traveler is someone that is out of the United States but never puts down roots. This group includes military contractors and those who can’t become residents of the country in which they work and Americans who travel constantly. 

If you’re a perpetual traveler, you won’t have a home base. You won’t get a residency visa and you will not pay taxes in any foreign country. In this case, you must use the 330-day test because you will never qualify for the Foreign Earned Income Exclusion 2020 using the residency test. 

Because the residency test allows you to spend more time in the United States, it might be in your best interest to gain residency in a low or no-tax country. For a list of options, see Which Countries Tax Worldwide Income?

One of the easiest residency programs for Americans is Panama’s Friendly Nations Reforestation Visa. Invest $25,000 in teak and get residency. For more on this topic see Best Panama Residency by Investment Program (note the investment amount has increased from $20,000 to $25,000 for 2020). 

I hope you’ve found this article on the Foreign Earned Income Exclusion 2020 to be helpful. If you need assistance preparing your US tax returns, drop me a line to info@premieroffshore.com and I will connect you with a tax prep expert. If you would like to form an offshore corporation to maximize the value of the FEIE, you can reach me by email or at (619) 483-1708

US Expats and Retained Earnings in Foreign Corporations for 2018
Christian Reeves

US Expats and Retained Earnings in Foreign Corporations for 2018

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The days of retained earnings in offshore corporations are officially over. No longer can those of us living and working abroad hold profits in excess of the Foreign Earned Income Exclusion inside of our corporations tax-deferred. Here’s what you need to know about US expats and retained earnings in foreign corporations for 2018.

Please note that this article is focused on offshore corporations owned by US persons in 2018. A US person is a US citizen or green card holder no matter where they live or a US resident. For a more detailed and code focused article on this topic, see: Bloomberg on Controlled Foreign Corporations.

Also, there’s some speculation in this post and things are subject to change. The IRS has not issued guidance on how Trump’s tax plan affects US expats and retained earnings in foreign corporations in 2018. Though, every expert I’ve spoken with agrees that the days of retained earnings in excess of the FEIE are over.

A few short months ago, we expat entrepreneurs were all excited about Trump’s tax plan. He was going to eliminate worldwide taxation and move the United States to a territorial tax system. The US is the only major country on earth that taxes its citizens abroad, so this sounded great.

Well, the final bill fell far short of President Trump’s campaign promises. While multinationals were converted to a territorial tax system, and no longer pay US tax on foreign-sourced profits of their international divisions, the small to medium sized expat entrepreneur got the shaft.

If you’re an American expat operating a business abroad, you’ll want to sit down before reading this post. My buddy Gary said it best, “Trump has cut the legs out from under the American expat in favor of the Apples and Googles of the world.”

Let me start by defining a few terms.

For my purposes here, an American expat is a US citizen or green card holder living outside of the United States. They qualify for the Foreign Earned Income Exclusion by being out of the US for 330 out of 365 days or by becoming a legal resident of a foreign country over a calendar year. A resident of a foreign country might spend a couple of months in the US, but never more than 183 days in a year.

Those who qualify for the FEIE in 2018 get to exclude up to $104,100 in ordinary income from their US tax return. That means they get up to $104,100 in salary or business income tax-free because they’re living abroad. All capital gains and salary in excess of the FEIE is taxable in the United States (I’ll leave the Foreign Tax Credit for another day).

US expat business owners have traditionally held profits in excess of the FEIE inside their foreign corporations as retained earnings. This allowed them to defer US tax on these profits until they took them out as dividends. For more on this, see my 2013 article, How to Manage Retained Earnings in an Offshore Corporation.

Then Trump’s tax plan came along and smashed American expat entrepreneurs. As with any tax overhaul, there are winners and losers. We expats apparently didn’t donate as much as the multinationals, so we’re the big losers.

The Tax Cuts and Jobs Act introduced major changes to the international tax provisions of the United States Internal Revenue Code of 1986, as amended, which generally govern the tax consequences to US persons with foreign corporations.  Some of these changes may have an impact on the tax structure of US expats.  

As a result of the new international tax provisions, the US owners of a foreign corporation, which are controlled by US persons, may be subject to (i) a “toll tax”, (ii) a tax on deemed “global intangible low-taxed income” (GILTI) and a minimum base erosion and anti-abuse tax (BEAT) in the United States, and thus US tax deferral on the income earned abroad in excess of the FEIE may be lost.

To put that into English, The Tax Cuts and Jobs Act hits expats on two fronts:

  1. We must repatriate foreign retained earnings from prior years and pay US tax at 15.5% on those profits. This tax can be spread over 8 years.
  2. The ability of expats to retain profits in a foreign corporation is eliminated. We must now pay US tax on our profits in excess of the Foreign Earned Income Exclusion. A business owner can earn $104,100 tax-free, or a husband and wife both working in the business can take out a combined $208,200 in 2018 free of Federal income tax.

So, an American expat that nets $1 million a year in his or her business will pay US tax on about $897,000, no matter where they live. The ONLY exception and the only place on the planet where Trump’s tax plan can’t reach is the US territory of Puerto Rico. More on that below,

The new tax law eliminated retained earnings in offshore corporations with a very small change to the law. It put just about every income category under the Subpart F of the tax code. Interestingly, oil revenue was the only item removed from Subpart F… I wonder how that happened.

Subpart F income in an offshore corporation is not eligible to be retained tax-deferred. It must be passed through to the shareholders and taxed. Shareholders pay tax on Subpart F income whether or not they actually receive it, much like income in a US LLC.

As a result, if your foreign corporation is a CFC, ordinary business income is now Subpart F income and taxable in the United States as earned.

For an article on the previous definition of Subpart F in a CFC, see: Subpart F Income Defined. If you’re a glutton for punishment, or just nostalgic for the good old days of 2017, see: How to Eliminate Subpart F Foreign Base Company Service Income.

I should also note here that US tax breaks for “pass-through entities,” such as domestic LLCs and S-Corporations are not available to expats. We got all of the bad and none of the good from Trump’s tax plan.

If you’re an American living and working abroad, you have a few options in dealing with Trump’s tax plan and the burden it puts on expats.

The most practical step is to form a US C corporation and start over with a new offshore corporation. Pay the repatriation tax on previous years in your old corporation and start fresh with a structure designed for 2018.

Building out a new structure that includes a US corporation might cut your US corporate tax by 50%. The current US rate is 21% and this can be reduced to 10.5% with a 50% credit in certain situations. In 2026 and beyond, the rate rises to 13.1%. For a detailed article from Harvard, see: Tax Reform Implications for U.S. Businesses and Foreign Investments and scroll down to the section on Low-Taxed Intangibles Income.

This US corporate strategy is much more complex than it sounds. Expat entrepreneurs need to watch out for double taxation. When you take out retained earnings from your US corporation as a divided, you’ll usually pay US tax on the distribution (on your personal return). Careful planning should go into building this structure and a long-term tax plan that minimizes double taxation must be developed.

Another option for businesses with partners abroad is to change their CFC status. The tax laws described here generally apply to Controlled Foreign Corporations. A CFC is a foreign corporation owned by US persons (residents, citizens and green card holders). If US persons own or control more than 50% of the business, it’s a CFC.

If you’re working with non-US persons abroad, you might restructure your business so it’s not a CFC. For example, a US company and a foreign company are working together on deals as separate entities. They might decide to join together in one corporation with each party owning 50% of the shares and having 50% control over the business.

Another option is to buy a second passport from a country like St. Lucia and renounce your US citizenship. Note that it’s not sufficient to buy a second passport to avoid US taxation. You must also renounce your US citizenship and go through the expatriation process. This will take many months and can have a tax cost (exit tax).

In my opinion, every US expat entrepreneur that wants to maintain their citizenship, and is netting $500,000 to $1 million a year in a portable business, should move to the US territory of Puerto Rico. Puerto Rico is the only safe haven on earth not affected by Trump’s tax plan.

If you’re willing to move to Puerto Rico, and spend 183 days a year on the island, you’ll cut your corporate tax rate to 4%. If that’s not enough, you’ll also cut your capital gains rate on assets acquired after you become a resident to 0% (yes, that’s zero, nada, nothing). This zero percent tax rate also applies to dividends from Act 20 companies. ‘

For information on Puerto Rico’s Act 20 and 22, see: Changes to Puerto Rico’s Act 20 and Act 22.

As you read through the many articles on my website about Puerto Rico, note the following changes for 2018:

  1. Act 20 no longer requires you hire 5 employees. You can move to Puerto Rico and be the only employee of your business.
  2. Just like offshore corporations, Puerto Rican corporations can no longer retain earnings. This means that US shareholders of Act 20 companies who are living in the US no longer get tax deferral. To put in another way, after Trump’s tax changes, Puerto Rico’s Act 20 is only available to US citizens and green card holders willing to relocate to the island and spend 183 days a year there.

For an article that compares Puerto Rico’s tax incentives to the FEIE, see: Puerto Rico Tax Deal vs Foreign Earned Income Exclusion.

I suggest that Puerto Rico is best for portable businesses netting $500,000 to $1 million a year. I get to this number because of the fact that you, the business owner, must pay yourself a fair market salary. This salary is taxed at ordinary income rates in Puerto Rico. Then your corporate profits, which are net business income after you pay yourself a “reasonable” salary, are taxed at 4%.

You then distribute these profits to yourself as a tax-free dividend. Even if you move back to the United States, you’ll never pay personal income tax on the dividend. To see this is the US tax code, go to IRC Section 933.

So, Puerto Rico’s tax deal is basically the inverse of the FEIE. With the Exclusion, you get $100,000 tax-free and pay US tax on any excess. With Puerto Rico, you pay tax on your first $100,000 in salary and 4% on any excess.

If you don’t move to Puerto Rico, and remain offshore, your international businesses should be operated through a foreign corporation in a low or zero tax country. Operating your business without a structure or through a US corporation means you’ll also be stuck paying Self Employment tax at 15%. No matter your tax situation, an offshore corporation will almost always reduce your net IRS payment.

All expat business owners should be operating inside an offshore corporation to eliminate Self Employment tax and to maximize the value of the Foreign Earned Income Exclusion. You then report your salary from this company on IRS Form 2555 attached to your personal return, Form 1040.

I hope you’ve found this article on US expats and retained earnings in foreign corporations for 2018 to be helpful. This is sure to be a very hectic and confusing tax year. It’s in your best interest to seek planning advice from an international expert early in the year to minimize the impact of Trump’s tax plan on your bottom line.

For more information on restructuring your business, please contact us at info@premieroffshore.com or call us at (619) 483-1708. We’ll be happy to work with you to build a new and compliant international structure.

President Trump’s Tax Plan and Expats
Christian Reeves

President Trump’s Tax Plan and Expats

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You’ll find a lot of partisan bickering on the web about President Trump’s tax plan. Here’s my effort to give you the facts and just the facts (a la Joe Friday of Dragnet) on how President Trump’s tax plan affects expats and Americans living abroad.

Keep in mind that this article is focused on US citizens living and working abroad. US persons who qualify for the Foreign Earned Income Exclusion in 2018. I’ll leave State tax issues and changes to the code that don’t affect expats to others.

You’ll find that Trump’s tax plan made some cuts around the margins, but didn’t include expats in the corporate tax changes. Sure, we get the 2 to 4% reduction all Americans get, but we’re not affected by changes that will save multinationals billions.

Historically, US corporations have been taxed on their worldwide income. Double tax was eliminated with the Foreign Tax Credit and they could retain earnings offshore tax-deferred. But, when earnings were repatriated, they’d be taxed at ordinary rates.

President Trump changed all of this for big corporations. He moved corporations from a worldwide tax system to a residency-based tax system (also referred to as a territorial tax system). Businesses will pay US tax on their US sourced income and zero US tax on their foreign sourced profits. Trump also closed billion-dollar loopholes like the ability to move US source income offshore with payments for intellectual property.

We had hoped that American expats would get the same benefits. That individuals would move from a worldwide tax system to a residency based system. That we would pay US tax on US income and no tax on foreign sourced gains.

This didn’t happen. American citizens living abroad are still taxed on our worldwide income. I guess we expats weren’t a large enough voting block or that we didn’t donate as much to the campaigns as the multinational corporations.

As a result, we still must look to the Foreign Earned Income Exclusion and the Foreign Tax Credit to keep Uncle Sam away from our ordinary income (wages or business income). The FEIE for 2018 increased to $104,100, up from from $102,100 in 2017. The FEIE amount for 2016 was $101,300, 2015 was $100,800, and 2014 was $99,200.

This increase is based on the annual inflation adjustment for 2017 which applies to more than 50 provisions in the US tax code. For all the details see IRS Rev. Proc. 2017-58. It does not come from Trump’s tax plan.

One aspect of Trump’s move to a residency based system affecting the FEIE is a focus on residency. That is to say, the IRS seems to be moving away from the 330-day test and towards the residency test.

The IRS has figured out that auditing expats who are using the 330-day test to qualify for the Foreign Earned Income Exclusion is very profitable. Thus, they’re putting a lot of resources into targeting this group.

As a result, I’m telling my clients to convert to the residency test and conform with how the IRS now views corporations. Become a resident of a low tax country, making that your home base, and stop using the 330-day test to qualify for the Exclusion.

From the IRS’s perspective, you can be a resident of any country you like and qualify for the Exclusion. So long as it’s your home base, where you plan to live for the foreseeable future, and you where have a residency visa, you’ll qualify for the FEIE using the residency test.

The last of those criteria, getting a residency visa, is usually the most challenging. In my experience, the easiest country to get legal residency in is Panama. Simply invest $20,000 in Panama’s Friendly Nations Reforestation Visa and you’re in.

Where most countries require you to buy real estate or invest a large amount of money to start a business, Panama allows you to invest a relatively low amount in their green initiative and receive residency. For more, see Best Panama Residency by Investment Program.

Most expats shield the majority of their ordinary income from the IRS using the FEIE or the Foreign Tax Credit. Thus, the fact that Trump lowered personal tax rates by 2% to 4% makes little difference. You don’t pay US tax on your ordinary income anyway. And, if you do, you should be operating your business through an offshore corporation.  

What does affect most expats is US tax on capital gains. This rate remains unchanged at 20% (assuming the Obamacare tax is repealed). As a result, US citizens pay US tax on all capital gains, no matter where they live and no matter where the property or asset is located. If a US citizen living in Belize sells real estate in Belize, he or she will owe 20% on long-term capital gains tax to Uncle Sam.

What will help expats is that the standard deduction doubled under Trump’s tax plan. A single filer’s deduction increases from $6,350 to $12,000. The deduction for Married and Joint Filers increases from $12,700 to $24,000.

The vast majority of US expats will save big on their US taxes because of this change. We expats rarely have a mortgage on our international properties. Therefore, we don’t deduct mortgage interest on Schedule A and thus don’t itemize. An increase in the standard deduction will go directly to our bottom line in a dollar for dollar decrease in US tax on our capital gains.

This tax break is balanced against the loss of the personal exemption.  You can no longer deduct $4,150 for each dependent. As a result, expats with large families will see an increase in tax, even considering the increase in the standard deduction.

A change that affects new expats is the loss of the moving expense deduction. When you move abroad for work, you can generally deduct all moving expenses. For most expats, this amounts to thousands of dollars in the year they leave the United States.

I hope you’ve found this article helpful. The most important takeaway for most expats using the Foreign Earned Income Exclusion is that you should spend 2018 working toward the residency test. Whether you chose Panama, Belize, Nicaragua, or elsewhere, you need to get started as soon as possible.

nonresident FEIE
Christian Reeves

How to become a nonresident of the United States

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The 330 day test for the Foreign Earned Income Exclusion is being eliminated by President Trump. If you want to keep this tax break, you need to become a legal resident of a foreign country as soon as possible. Here’s what you need to do to become a nonresident of the United States for tax purposes.

Of course, the most important component of the residency test for the FEIE is residency. You must be a legal resident of a foreign country for a full calendar year to qualify for the FEIE using the residency test. Where the 330 day test was over any 12 month period, the residency test is January 1 to December 31.

It doesn’t matter where you get your residency visa for US tax purposes. So long as you have legal residency in a country which is your home base, you’re covered.

Of course, if you want to minimize your worldwide tax obligations, you should become a resident of a country that doesn’t tax foreign source income. For more on this, see: Which Countries Tax Worldwide Income?

For those that want to live in Europe, the most popular residency visa is Portugal. Buy a home for 500,000 euros, or deposit 1 million euros in a local bank, and you can qualify for residency. A resident of Portugal can live anywhere in the EU. You just need to spend a few weeks  a year in Portugal.

The most popular visa in the world is Panama. Invest $20,000 in their friendly nations reforestation program and become a permanent resident. This visa can also lead to citizenship and a second passport in 5 years. For more, see: Best Panama Residency by Investment Program

Once you have your residency visa, you need to cut as many ties with the US and create as many ties with your new home country as possible.  That is to say, a US citizen who wants to become a nonresident for US tax purposes must truly move and become a part of their new community, including:

  • Selling your US home;
  • Leaving US employment and becoming an employee of an offshore corporation reported on IRS Form 5471;
  • Establishing and spending time in a home located in your new country. This home should be of equal size, cost, and amenities as your US home;
  • Establishing business and social ties in the new country;
  • Discontinuing business and social ties in the United States;

Do not:

  • Keep your US home and let the children live there;
  • Have children in school in the United States;
  • Vote in State elections (Federal elections by mail, listing your foreign home as your residence is OK);
  • Have mail sent to your old address in the US. Establish a PMB address if necessary;
  • Continue to use US physicians, dentists, or other professionals who require the taxpayer’s physical presence to transact business.

Remember that you need to be a nonresident for Federal and State tax purposes. Sometimes these tests are different. Here is a list of ties a California court listed as indicating residency (In the Appeal of Stephen D. Bragg, May 28, 2003, 2003-SBE-002).

  • The location of all of the taxpayer’s residential real property, and the approximate sizes and values of each of the residences;
  • The state wherein the taxpayer’s spouse and children reside;
  • The state wherein the taxpayer’s children attend school;
  • The state wherein the taxpayer claims the homeowner’s property tax exemption on a residence;
  • The taxpayer’s telephone records (i.e., the origination point of taxpayer’s telephone calls);
  • The number of days the taxpayer spends in California versus the number of days the taxpayer spends in other states, and the general purpose of such days (i.e., vacation, business, etc.);
  • The location where the taxpayer files tax returns, both federal and state, and the state of residence claimed by the taxpayer on such returns;
  • The location of the taxpayer’s bank and savings accounts;
  • The origination point of the taxpayer’s checking account transactions and credit card transactions;
  • The state wherein the taxpayer maintains memberships in social, religious, and professional organizations;
  • The state wherein the taxpayer registers automobiles;
  • The state wherein the taxpayer maintains a driver’s license;
  • The state wherein the taxpayer maintains voter registration and the taxpayer’s voting participation history;
  • The state wherein the taxpayer obtains professional services, such as doctors, dentists, accountants, and attorneys;
  • The state wherein the taxpayer is employed;
  • The state wherein the taxpayer maintains or owns business interests;
  • The state wherein the taxpayer holds a professional license or licenses;
  • The state wherein the taxpayer owns investment real property; and
  • The indications in affidavits from various individuals discussing the taxpayer’s residency

The above is basically a list of why expats have relied on the 330 day test. It’s easy, you don’t need to invest or spend money to get a visa, and you don’t need to worry about your ties to the US. Just be out of the US for 330 out of 365 days and you’re good to go.

The problem is that expats often pushed their days in the US and the IRS loves to audit these returns. Many don’t realize that travel days and time in international waters can count as US days. Because the FEIE is all or nothing, the risk in these cases is significant.

More importantly, President Trump is moving the US from a global tax system to a territorial tax system. This likely means an end to the 330 day test and a move towards residency.

Because it takes time to become a legal resident of a foreign country, and time to break ties with the US, and you must qualify for a calendar year, I’m recommending clients begin this process as soon as possible.

I hope you’ve found this article on how to become a nonresident of the United States for tax purposes to be helpful. For information on residency visas, or to setup an offshore business, please contact me at info@premieroffshore.com or call us at (619) 483-1708. 

Foreign Earned Income Exclusion for 2018
Christian Reeves

Foreign Earned Income Exclusion for 2018

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On October 19, 2017, the IRS announced the Foreign Earned Income Exclusion for 2018. The FEIE for 2018 is a nice bump up from 2017. Here’s what you need to know about the Foreign Earned Income Exclusion for 2018 and how it might be affected by President Trump’s residency based tax proposal

Under Section 911 of the US tax code, the Foreign Earned Income Exclusion for 2018 increases from $102,100 in 2017 to $104,100 in 2018. The FEIE amount for 2016 was $101,300, 2015 was $100,800, and 2014 was $99,200.

This increase is based on the annual inflation adjustment for 2017 which applies to more than 50 provisions in the US tax code. For all the details see IRS Rev. Proc. 2017-58.

However, the Foreign Earned Income Exclusion for 2018 is subject to change. President Trump is proposing major changes to the US tax code which could change the FEIE amount for 2018 (or, more likely 2019). He might also succeed in his effort to move the United States from a citizenship based tax system to a residency based tax system.

If President Trump is successful, and all of us expats are hoping he is, the FEIE will be eliminated and those who are residents of a foreign country will pay zero US tax on income earned abroad.

In order to understand the Foreign Earned Income Exclusion for 2018, and how it might change next year, allow me to summarize it here.

As I said above, the Foreign Earned Income Exclusion for 2018 is $104,100. If you’re living and working abroad, and qualify for the Foreign Earned Income Exclusion, you can exclude up to $104,100 in salary or wages on your US Federal income tax return.

This salary can come from your US employer, a US corporation you own, a foreign employer, or an offshore corporation you own. If it comes from a US company, you and your employer are liable for payroll taxes. If you get paid from a foreign corporation, you are generally exempt from payroll taxes (which are about 15% combined on $100,000 in wages).

The Foreign Earned Income Exclusion for 2018 is to be reported on your 2018 personal income tax return using Form 1040 and Form 2555. Only income earned outside of the US qualifies for the FEIE. That is to say, US source income goes on Form 1040 and not Form 2555.

At the time of this writing, there are two ways to qualify for the Foreign Earned Income Exclusion in 2018. You can be out of the country for 330 days during any 365 day period or be a legal resident of a foreign country.

President Trump is saying he’ll convert the US from a citizenship based tax system to a residency based tax code. If that happens, the 330 day test would likely be eliminated and only those who are legal residents of a foreign country would qualify for the Foreign Earned Income Exclusion in 2018.

Under this tax system, the FEIE would eventually be eliminated and those who are legal residents of a foreign country would be allowed to exclude all of their foreign income. It seems likely that that the Foreign Earned Income Exclusion for 2018 will remain as described herein and that we will move to a residency based system in 2019.

Regardless of whether President Trump succeeds, we’re advising all of our clients using the FEIE’s 330 day test to convert to the residency test during 2018. You should be ready by January 1, 2019 to qualify for the residency test. Here’s why:

First, the residency test is lower risk than the 330 day test. Many of our clients have been caught missing their 330 days and have lost the FEIE. If you miss your 330 by even one day, you lose the Foreign Earned Income Exclusion entirely and 100% of your worldwide income becomes taxable in the United States.

Second, the residency test is easier to use in the long term. Sure, it’s simple to calculate how many days you were in the US and how many days you were in a foreign country. But, counting travel days year in and year out is a real headache.

When you use the residency test, you don’t need to keep track of your days to closely. You can be in the US on business for 2 or 3 months a year without an issue. Try not to exceed 4 months a year and never spend more than 183 days in the US, and you’ll qualify for the residency test.

Third, the residency test requires you to be a resident of a foreign country for a full calendar year. That means it must start on January 1 of 2019. I’m recommending that our clients spend 2018 getting their affairs in order and planning for the FEIE throughout 2018.

It takes a great deal of time and effort to qualify for the residency test. You need legal residency in a country you can call your home base. Plus, you need to cut as many ties to your home country as possible and create as many ties to your new country of residence as possible.

So, plan to use the Foreign Earned Income Exclusion for 2018 with the 330 day test and be ready with the residency test in 2019.

This means that you must secure legal residency in a country that will be your home base to maximize the value of the Foreign Earned Income Exclusion in 2019. It doesn’t matter for US tax purposes which country. So long as you’re a legal resident, you’ll qualify for the FEIE and Trump’s residency based tax system if it passes.

Of course you don’t want to exchange one high tax country for another. You want to secure residency in a country that won’t tax your foreign capital gains and your foreign sourced profits. For a list of these countries, see: Which Countries Tax Worldwide Income?

For example, I don’t recommend Mexico or Colombia because they tax residents on their worldwide income. I do recommend Panama because this country taxes residents on their local source income but not their foreign sourced profits.

If you’re living in Panama and selling to persons in the US, Panama won’t tax those gains. If you’re living in Panama and selling to Panamanians, you will owe tax on those sales.  

Next, you need a country with an efficient residency program that fits your budget… and there are a number of options here.

For example, if you have the cash, you can get residency in the European Union through Portugal’s golden visa program. Portugal requires you deposit € 1,000,000 in a local bank or purchase real estate for € 500,000 or more.

If you wish to live in Asia, you can get residency in Hong Kong by investing about $1.3 million in a local business. You can also gain residency in the Malaysia with a deposit of about $135,000 in a local bank or in the Philippines by investing $75,000 in a government approved business.

The easiest and lowest cost residency for US citizens is Panama’s Friendly Nations Reforestation Visa program. Invest $20,000 in one of the approved reforestation projects and get residency immediately. And this investment covers you, your spouse, and your dependent children 18 years of age and under. Government and legal fees apply to each applicant in addition to the investment.

If you can make Panama your home base, I guarantee that the Panama Reforestation Visa is the most efficient residency program and the best way to qualify for the Foreign Earned Income Exclusion in 2018 and beyond. For more information on this program, see: Best Panama Residency by Investment Program

I hope you’ve found this article on the Foreign Earned Income Exclusion for 2018 to be helpful. For more information, or for assistance with residency in Portugal or Panama, please contact us at info@premieroffshore.com or call us at (619) 483-1708. We’ll be happy to assist you with your international tax plan and support  you through the coming changes.