Does claiming the foreign earned income exclusion mean I stop filing?
No. The exclusion is an election, and an election has to be made on a filed return. Until the return is filed the income sits there unexcluded, which is why people who assumed the exclusion covered them are often the ones with a run of unfiled years behind them. Two consequences follow. The filing obligation is unchanged by the election, so the return is prepared in full and the exclusion applied within it. And the election is not as automatic as people assume: once made it continues, but it can be lost or revoked, and a revocation closes the door for a period unless the tax authority consents to an earlier return to it.
What income actually counts as foreign earned income?
Earned means paid for services you performed. Salary, wages, bonuses, professional fees and the earnings of a trade carried on personally qualify, provided the services were performed in a foreign country. What does not qualify is everything that comes from capital or from past service: interest, dividends, rent, capital gains, pensions and annuities. Two points catch people out. The place the money is paid from is irrelevant, so a salary paid into a home-country bank account by a home-country employer is still foreign earned income if the work was done abroad. And where a single package covers work in two countries, it has to be split by where the services were performed rather than by where the payslip was issued.
Can I claim the exclusion and a foreign tax credit together?
Yes, but not on the same income twice. Income you exclude is out of the domestic tax base, so there is no domestic tax on it for a credit to reduce, and the foreign tax paid on that slice of income is not creditable either. What remains creditable is the foreign tax attributable to earnings above the cap and to income the exclusion never reached, such as investment income. The practical work is the allocation: foreign tax paid on a whole salary has to be apportioned between the excluded part and the taxable part before any credit is computed. Getting that apportionment wrong in either direction is a frequent error on returns we are asked to review.
Does the exclusion reduce self-employment tax as well?
No. The exclusion works on income tax. Social security contributions on self-employment earnings are a separate charge with their own base, and excluded income is still in that base, so a self-employed filer abroad can owe nothing in income tax and still face a contributions bill. The route out, where one exists, is not the exclusion but a social security agreement between the two countries, under which a person contributing to one system can be relieved from the other on the same earnings. That is a separate claim, made with a certificate of coverage from the system that keeps you, and it turns on where you are insured rather than on where you are taxed.
Is the exclusion or the foreign tax credit better for me?
It depends on the tax rate where you live and on what else is in your return. Where local tax is low or nil, the exclusion removes income the credit could not have sheltered, because there is little foreign tax to credit. Where local tax is high, the credit may cover the whole domestic liability and leave carryover for later years, which the exclusion never generates. Mixed cases are the hard ones, and they turn on the earnings above the cap, on investment income, and on whether excluding earnings strands foreign tax that would otherwise have been creditable. It is a calculation on your own figures over several years, not a rule of thumb.
How does the exclusion work if I moved abroad mid-year?
The qualifying period does not have to match the tax year, and for a mid-year move it usually does not. Whichever of the two qualifying tests you rely on, the period established can straddle two tax years. What the tax year then controls is the amount: the cap is reduced in proportion to the part of the year covered by the qualifying period, so a move late in the year leaves only a fraction of the full cap available against that year. Two things follow. Earnings from the part of the year you were still at home are not foreign earned income at all. And the same move can produce a prorated cap in the first year and a full one in the second.
Does the Foreign Earned Income Exclusion apply to self-employment tax?
No — it does not reduce self-employment tax at all. The exclusion removes income from income tax only, so a US self-employed person abroad can exclude the profit for income-tax purposes and still owe self-employment tax on it. What can relieve that is a totalization agreement with the country where you actually work, which assigns you to one social-security system instead of both. See totalization agreements.
Can I claim the child tax credit if I live abroad?
Partly, and the split matters. The non-refundable part can reduce US tax if the child meets the identification requirement in time. The refundable part is calculated on earned income, so excluding your salary with the foreign earned income exclusion removes the very figure it is built on — which is one of the clearest cases where the exclusion costs more than the credit route. Modelling both is the only way to know. See exclusion against credit.
