Foreign Tax Credit vs. Foreign Earned Income Exclusion – Tools you can Use to Reduce or Eliminate Tax Liability.

Washington, DC, 14th May 2022, ZEXPRWIRE, The United States, like most developed countries in the World, follows the worldwide income tax model to tax its nationals. All United State Nationals, not just the citizens, can pay tax to the US economy. The international taxing system goes beyond the borders. The nationals of the USA who do not reside within the borders of the USA and are working in a foreign country still need to pay a reasonable amount of tax to the USA government, even when they are already paying taxes to the government of the country they are working in. 

“The US economy also shows the foreign USA nationals income in their Gross National Product, and hence also accordingly subjects the income to the US tax. However, some USA nationals working in a foreign country may get a reduced or exempted US tax charge on the income they earn in the foreign country. This is possible if they meet a Foreign Tax Credit (FTC) or Foreign Earned Income Exclusion (FEIE) conditions. It is also possible for a US national to qualify for both of these tools and use them both together to get a more significant reduction in their US tax payment. “ suggests expert tax attorney John Pontius of Pontius Tax Law.

What are Foreign Tax Credits, and how do you qualify for them?

When a US national is working in a foreign country, they can get a reduced US tax liability on that foreign income if they have already paid the income tax liability on the income in that foreign country. However, this deduction is not dollar-to-dollar based. It requires a formal procedure to determine how much foreign tax credit they can claim and get a reduced Us tax liability. FTC can be applied for both passive and active foreign income. It is important to note that the nation cannot double count their incomes, and hence a formal equation is applied to the income and tax credits. In most cases, the nationals earning in a foreign country can score at least a small amount of their FTC and get a reduced US tax liability. 

What is Foreign Earned Income Exclusion, and how do you qualify for it?

A US national earning in a foreign country may be able to get a reduced US tax liability by using the FEIE. Under this, if the taxpayer is earning more than a specified amount, $108,000 (this amount is adjusted for inflation every year), they can then exclude the foreign earnings that exceed this amount and will only be liable to the US tax on amounts catering up to $108,000. This can, however, only be applied to active income, and passive sources of income such as dividends or interests cannot be excluded. Other conditions include; the US national must have a tax home in the foreign country they are earning, must qualify for the Physical Presence Tax or The Bona Fide Residence Test, and US employees belonging to US government agencies cannot claim for this tax exclusion.  

Hire an expert tax attorney:

For better advice and specificities regarding your case, experts highly recommended hiring an expert Tax advocate to help you file a reduced Us Tax Liability claim and make the most out of your income. 

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Published On: May 14, 2022