Cash In On Your Foreign Earned Income Exclusion

And play catch Me If You Can

Most U.S. expats have heard that those who meet certain criteria may elect to exclude some or part of their foreign earned income from American federal income tax. This is the Foreign Earned Income Exclusion.  Indexed for inflation, the maximum exclusion amount for 2015 is $100,800.

taxadvice.jpgBut this exclusion is not automatic.  It is a so-called “election”.  In other words, one has to speak up, telling the IRS one wants to take advantage of this provision.  This is done by filing form 2555 (or its simpler “EZ” cousin) with one’s tax return.

Generously, there are five ways to accomplish this:

With an income tax return that is filed in a timely manner

With a properly filed 1040X form amending a filed return that was on time

With an original (but late) income tax return that is filed within one year after the due date of the return, or (drum roll),

With a really late income tax return, (along with form 2555), if the taxpayer owes no federal income tax after taking the exclusion into account, or

With a filed, really late income tax return (along with form 2555), if the taxpayer owes federal income tax after taking the exclusion into account, if the IRS does not catch you before you actually file it.

The last option is of great importance to non-filers who have earned income above the exclusion amounts and have not yet heard from the IRS.

The difference in tax (and penalties and interest) is huge. It is a meaningful incentive to become compliant.

Late last month, a Mrs. McDonald lost in tax court on that very issue.  She did not beat the IRS to the race.  The IRS noticed she had not filed  returns on time and it issued, “substitute for returns”.  That’s IRS speak for saying “gotcha”.

To be valid, these late returns must specifically state at the top of the return, (I recommend writing it in bold, red letters) the “open sesame”, “Filed Pursuant to Section 1.911-7(a)(2)(i)(D).” If you miss that, you blow it.

Now you know.  Beat the IRS to the race.  It’s well worth it.

Orlando Gotay is a California licensed tax attorney, (with a Master of Laws in Taxation), admitted to practice before the IRS, the U.S. Tax Court and other taxing agencies.  His love of things Mexican has led him to devote part of his practice to the tax matters of U.S. expats in Mexico.  He can be reached at