If you are one of the following categories of tax paying U S citizens or non-resident alien, you may have to include foreign earned income or its exclusion, which has raised too much importance in view of the current U S government’s insistence of filing of tax returns which got less importance over the period of time. Yes, the information is very serious that some with green card holders were told to file the tax returns or carry a copy of them before they land in the U.S.A.
(Quoting from IRS publication, referenced below
https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion
- “A U.S. citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year,
- A U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, or
- A U.S. citizen or a U.S. resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.”
Let us learn the details about foreign earned income and its variants.
What is the meaning of foreign earned income?
If you are a U.S. citizen or a resident alien of the United States and you live abroad, you are taxed on your worldwide income. However, you may qualify to exclude your foreign earnings from income up to an amount that is adjusted annually for inflation ($107,600 for 2020, $108,700 for 2021, $112,000 for 2022, and $130,000 for 2025)
What does foreign earned income include?
Foreign-earned income means wages, salaries, professional fees, or other amounts paid to you for personal services rendered by you.
It does not include amounts received for personal services provided to a corporation that represent a distribution of earnings and profits rather than reasonable compensation.
Self-employment income: A qualifying individual may claim the foreign earned income exclusion on foreign earned self-employment income.
The excluded amount will reduce your regular income tax but will not reduce your self-employment tax. Also, as a self-employed individual, you may be eligible to claim the foreign housing deduction instead of a foreign housing exclusion.
Let us talk about the resident alien.
Resident alien. A resident alien is an individual who is not a citizen or national of the United States and who meets either the green card test or the substantial presence test for the calendar year.
Let us understand the green card test.
1. “Green card test. You are a U.S. resident if you were a lawful permanent resident of the United States at any time during the calendar year. This is known as the green card test because resident aliens hold immigrant visas (also known as green cards).”
It is entirely possible being one’s physical presence is required, popularly known as substantial presence test.
2. “Substantial presence test. You are considered a U.S. resident if you meet the substantial presence test for the calendar year.
To meet this test, you must be physically present in the United States on at least: a. 31 days during the current calendar year; and b. A total of 183 days during the current year and the 2 preceding years, counting all the days of physical presence in the current year, but only one-third the number of days of presence in the first preceding year, and only one-sixth the number of days in the second preceding year.”
Filing
The following forms need filing.
U.S. Individual Income Tax Return 1040-ESstimated Tax for Individuals 1040-X Amended U.S. Individual Income Tax Return 2350 Application for Extension of Time To File U.S. Income Tax Return 2555 Foreign Earned Income 4868 Application for Automatic Extension of Time to File U.S. Individual Income Tax Return 8822 Change of Address
Do you get time to file the return for extension of time, if however, you pay the taxes on time?
You can get an extension of time to file your income tax return. In some circumstances, you can also get an extension of time to file and pay any tax due.
However, if you pay the tax due after the regular due date, interest will be charged from the regular due date until the date the tax is paid.
The extensions available are
- an automatic 2-month extension,
- an automatic 6-month extension,
- an additional extension for taxpayers out of the country, and
- an extension of time to meet residency tests
If, at the end of your tax year, you are married and one spouse is a U.S. citizen or resident alien and the other is a non-resident alien, you can choose to treat the non-resident as a U.S. resident. This election includes the situation in which one of you is a non-resident alien at the beginning of the tax year and a resident alien at the end of the year and the other is a non-resident alien at the end of the year.
You and your spouse will be treated U S residents till revocation is done in future.
How To Make the Choice Attach a statement, signed by both spouses, to your joint return for the first tax year for which the choice applies. It should contain the following.
- A declaration that one spouse was a non-resident alien and the other spouse a U.S. citizen or resident alien on the last day of your tax year and that you choose to be treated as U.S. residents for the entire tax year.
- The name, address, and SSN (or ITIN) of each spouse. (If one spouse died, include the name and address of the person making the choice for the deceased spouse.) You generally make this choice when you file your joint return Certain conditions apply for Foreign Earned Income Exclusion, Foreign Housing Exclusion, and Foreign Housing Deduction which an expert like a CPA will explain. Form No. 2555 extensively covers this aspect.
The above category of tax payers may file the following forms, if applicable.
- Form 8938. You must file Form 8938, Statement of Specified Foreign Financial Assets, to report the ownership of specified foreign financial assets if the total value of those assets exceeds an applicable threshold amount (the “reporting threshold”).
- The reporting threshold varies depending on whether you live in the United States, are married, or file a joint income tax return with your spouse. Specified foreign financial assets include any financial account maintained by a foreign financial institution and, to the extent held for investment, any stock, any securities, or any other interest in a foreign entity and any financial instrument or contract with an issuer or counterparty that is not a U.S. person. For more information
- Form 5471. Certain U.S. persons who are officers, directors, or shareholders in certain foreign corporations must file Form 5471
- Form 926. U.S. citizens or residents, domestic corporations, or domestic estates or trusts must file Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation, to report any exchanges or transfers of tangible or intangible property that are described in section 6038B(a) (1)(A) of the Internal Revenue Code to a foreign corporation.
- FinCEN Form 114 is filed electronically with the Financial Crimes Enforcement Network (FinCEN). The due date for FBAR filings is April 15. FinCEN will grant an automatic extension to October 15 if you are unable to meet the FBAR annual due date of April 15. The FBAR due date coincides with the filing due date for the current year Form 1040. Submission of this form is the core of tax filing and closely monitored by IRS.
- FinCEN Form 105. You must file FinCEN Form 105, Report of International Transportation of Currency or Monetary Instruments (CMIR), if you physically transport, mail, ship, or cause to be physically transported, mailed, or shipped, into or out of the United States, currency or other monetary instruments totaling more than $10,000 at one time. Certain recipients of currency or monetary instruments must also file FinCEN Form 105.
- Form 8865. A U.S. person must file Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships, to report the information required under section 6038 (reporting with respect to controlled foreign partnerships), section 6038B (reporting of transfers to foreign partnerships), or section 6046A (reporting of acquisitions, dispositions, and changes in foreign partnership inter
- Form 8858. Certain U.S. persons that own a foreign disregarded entity (FDE) or foreign branch (FB) directly or, in certain circumstances, indirectly or constructively must file Form 8858, Information Return of U.S. Persons With Respect to Foreign Disregarded Entities (FDEs) and Foreign Branches (FBs), and schedules to satisfy the reporting requirements of sections 6011, 6012, 6031, and 6038, and related regulations.
- Form 8621. A U.S. person that is a direct or indirect shareholder of a passive foreign investment company (PFIC) files Form 8621, Passive Foreign Investment Company or Qualified Electing Fund.
- Tax avoidance was earlier attempted through passive foreign investment.
- If you are an individual taxpayer that owns a mutual fund or ETF that is not domiciled in the United States, you may have a Form 8621 obligation.
One of the most popular form No. 2555 filed by above category of those with world wide income has been dealt with extensively below.
https://www.irs.gov/pub/irs-pdf/f2555.pdf
Let me input to show the variety and depth of its construction.
Part I General Information on employer, the details of employment or others
1. Your foreign address (including country)
2. Your occupation
3. Employer’s name
4 a Employer’s U.S. address
b Employer’s foreign address
5 Employer is (check any that apply): a A foreign entity
b A U.S. company
c Self
d A foreign affiliate of a U.S. company
e Other (specify)
6 a If you previously filed Form 2555 or Form 2555-EZ, enter the last year you filed the form.
b If you didn’t previously file Form 2555 or Form 2555-EZ to claim either of the exclusions, check here and go to line 7.
c. Have you ever revoked either of the exclusions? . . . . . . . . . . . . . . . . . . . . Yes No d If you answered “Yes,” enter the type of exclusion and the tax year for which the revocation was effective.
7 Of what country are you a citizen/national?
8a Did you maintain a separate foreign residence for your family because of adverse living conditions at your tax home? See Second foreign household in the instructions . . . . . . . . . . . . . . . Yes No
b If “Yes,” enter city and country of the separate foreign residence. Also, enter the number of days during your tax year that you maintained a second household at that address.
9 List your tax home(s) during your tax year and date(s) established
Next, complete either Part II or Part III. If an item doesn’t apply, enter “N/A.” If you don’t give the information asked for, any exclusion or deduction you claim may be disallowed.
Part II Taxpayers Qualifying Under Bona Fide Residence Test Note: Only U.S. citizens and resident aliens who are citizens or nationals of U.S. treaty countries can use this test.
Part III Taxpayers Qualifying Under Physical Presence Test Note: U.S. citizens and all resident aliens can use this test. See instructions
Note: Enter on lines 19 through 23 all income, including noncash income, you earned and actually or constructively received during your 2025 tax year for services you performed in a foreign country. If any of the foreign earned income received this tax year was earned in a prior tax year, or will be earned in a later tax year (such as a bonus), see the instructions. Don’t include income from line 14, column (d), or line 18, column (f). Report amounts in U.S. dollars, using the exchange rates in effect when you actually or constructively received the income. If you are a cash basis taxpayer, report on Form 1040 or 1040-SR all income you received in 2025, no matter when you performed the service.
What are the details of foreign earned income? (from the form itself)
2025 foreign earned income
19 Total wages, salaries, bonuses, commissions, etc. . . . . . . . . . . . . . . . . .
20 Allowable share of income for personal services performed (see instructions): a In a business (including farming) or profession . . . . . . . . . . . . . . . . . . .
20a b In a partnership. List partnership’s name and address and type of income.
21 Noncash income (market value of property or facilities furnished by employer—attach statement showing how it was determined):
a. Home (lodging) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
b. Meals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
c. Car . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
d. Other property or facilities. List type and amount.
22 Allowances, reimbursements, or expenses paid on your behalf for services you performed:
a. Cost of living and overseas differential . . . . . . . . . . . . .
b. Family . . . . . . . . . . . . . . . . . . . . . . . .
c. Education . . . . . . . . . . . . . . . . . . . . . . .
d. Home leave . . . . . . . . . . . . . . . . . . . . . .
e. Quarters . . . . . . . . . . . . . . . . . . . . . . .
f. For any other purpose. List type and amount.
g. Add lines 22a through 22f . . . . . . . . . . . . . . . . . . . . . . . . .
23 Other foreign earned income. List type and amount.
24 Add lines 19 through 21d, line 22g, and line 23 . . . . . . . . . . . . . . . . . .
25 Total amount of meals and lodging included on line 24 that is excludable (see instructions) . . . .
26 Subtract line 25 from line 24. Enter the result here and on line 27 on page 3.
This is your 2025 foreign earned income.
(Intentionally, full coverage given since a sum of $130000 coverage under this exclusion from payment of taxes involved. A huge exclusion in deed)
Part V All Taxpayers
Part VI Taxpayers Claiming the Housing Exclusion and/or Deduction
Part VII Taxpayers Claiming the Foreign Earned Income Exclusion
Part VIII Taxpayers Claiming the Housing Exclusion, Foreign Earned Income Exclusion, or Both
Part IX Taxpayers Claiming the Housing Deduction—Complete this part only if (a) line 33 is more than line 36, and (b) line 27 is more than line 43.
Item no 50. Housing deduction. Add lines 48 and 49. Enter the total here and on Schedule 1 (Form 1040), line 24j. Complete the Foreign Earned Income Tax Worksheet in the Instructions for Form 1040 if you enter an amount on this line.
Foreign tax credit
If you paid or accrued foreign taxes to a foreign country or U.S. possession and are subject to U.S. tax on the same income, you may be able to take either a credit or an itemized deduction for those taxes.
Qualifying foreign taxes
You can claim a credit only for foreign taxes that are imposed on you by a foreign country or U.S. possession. Generally, only income, war profits and excess profits taxes qualify for the credit. See Foreign Taxes that Qualify For The Foreign Tax Credit for more information.
Taken as a deduction, foreign income taxes reduce your U.S. taxable income. Deduct foreign taxes on Schedule A (Form 1040), Itemized Deductions
Taken as a credit, foreign income taxes reduce your U.S. tax liability. In most cases, it is to your advantage to take foreign income taxes as a tax credit.
If you elect to exclude either foreign earned income or foreign housing costs, you cannot take a foreign tax credit for taxes on income you exclude. If you do take the credit, one or both of the elections may be considered revoked.
How to claim foreign tax credit?
File Form 1116, Foreign Tax Credit, to claim the foreign tax credit if you are an individual, estate or trust, and you paid or accrued certain foreign taxes to a foreign country or U.S. possession.
Corporations file Form 1118, Foreign Tax Credit—Corporations, to claim a foreign tax credit.
Forms 1116, and 1118 are appended below”
Form no.1116
https://www.irs.gov/pub/irs-pdf/f1116.pdf
Form No. 1118 Foreign tax credit, Corporations
https://www.irs.gov/pub/irs-pdf/f1118.pdf
Forms That Must Be Filed with the IRS Separately
From Form 1040 Form, 3520. U.S. persons (and executors of estates of U.S. decedents) file,
Form 3520, Annual Return To Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, to report:
- Certain transactions with foreign trusts,
- Ownership of foreign trusts under the rules of Internal Revenue Code sections 671 through 679, and
- Receipt of certain large gifts or bequests from certain foreign persons. For more information, go to IRS.gov/Form3520.
Form 3520-A. A foreign trust with at least one U.S. owner files Form 3520-A, Annual Information Return of Foreign Trust with a U.S. Owner, annually to provide information about:
- The trust,
- Its U.S. beneficiaries, and
- Any U.S. person who is treated as an owner of any portion of the foreign trust.
For more information, go to IRS.gov/Form3520A
Conclusion
You earn $130,000 and live abroad, and pay no taxes by claiming the exclusion of foreign earned income or claim foreign tax credit by paying taxes in a foreign country where you live being a USA citizen or a U.S. resident if you were a lawful permanent resident of the United States. A largest number of residents of India, U.K., Canada, Australia or EU residents do fall under this category. Youngsters hop between nations, and fail to pay global income tax in U.S.A.
I have copiously quoted from IRS website, explained in simple terms the tenets of the taxes to be paid.
Caution
I do not intend to be a legal consultant or a tax consultant for this topic foreign earned income and you must consult a legally qualified CPA or an equivalent advocate for filing of the tax returns.
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