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Simple English definitions for legal terms
foreign-earned-income exclusion
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A quick definition of foreign-earned-income exclusion:
The foreign-earned-income exclusion is a rule that says people who earn money outside of the United States don't have to pay taxes on a certain amount of that money. They can choose to use this rule or a different one called the foreign tax credit. A tax credit is when the government takes money off of the amount of taxes you owe, instead of just taking it off of your income. There are other tax credits too, like one for people who take care of children or disabled family members, and one for low-income workers with kids. The foreign tax credit is important because it helps people who earn money in other countries avoid being taxed twice.A more thorough explanation:
The Foreign-Earned-Income Exclusion is a provision in the Internal Revenue Code that allows nonresident taxpayers to exclude a limited amount of income earned outside the United States from taxation. This means that if you earn money while living and working abroad, you may not have to pay taxes on a portion of that income.
For example, if you are a U.S. citizen working in Japan and earn $100,000 in a year, you may be able to exclude up to $107,600 of that income from U.S. taxation in 2020. This exclusion amount is adjusted annually for inflation.
It's important to note that you must elect between the Foreign-Earned-Income Exclusion and the Foreign Tax Credit, which is another way to reduce your U.S. tax liability on foreign income. You cannot claim both.
Overall, the Foreign-Earned-Income Exclusion is designed to help U.S. citizens and residents who work abroad avoid double taxation and reduce their overall tax burden.