Non-US citizen moved to US - can I use the Foreign Earned Income Exclusion?

Hi,

I trawled through both this site and the web in general and couldn't find an answer.

I moved from the UK to the US half way through 2013. I'm not a US citizen. I got my US green card to (obviously) coincide with my move to the US, i.e. half way through last year. In 2013 I had UK income in the UK before I moved to the US, and US income thereafter.

Can I use the Foreign Earned Income Exclusion on my US 2013 tax return?

My green card makes me a US resident, and I know that the FEIE is available to US residents if they meet the physical presence test (330 days abroad out of a calendar year). I easily meet the physical presence test - I had lived in the UK for many years before moving to the US - I just don't meet it WHILE I was a US resident (i.e. from the moment I received my green card).

So: does the FEIE test require that you are a US resident (or citizen) THROUGHOUT the physical presence test period, or just when you claim it (i.e. when I file the tax return)?

If I can't use the FEIE, I could only get a tax credit for the UK tax paid, which would leave me with a much higher tax burden.

Really grateful for any light anyone can shed on this!

Thanks very much.

It sounds like you're a Dual Status Alien - which is the IRS's term for being a nonresident alien for the first half of the year and a resident alien for the second half.

You can choose to be treated as a resident alien for the entire year. If you do this you can use the FEIE, but the stacking rule penalizes those who move into or out of the US midway through the tax year because the US income is effectively taxed at a higher rate than it otherwise would have been. For this reason you should seriously look at using FTC for the year of the move.

You can also choose to file a dual-status return, in which case you can't use the FEIE, but you probably don't need it anyway because during your nonresident period you are only taxed on US source income. This seems like the numbers might work out better for you anyway.

Thank you very much, some interesting points there.

Is it true that if I chose to be a resident alien for the entire year, I could use the FEIE? This comes back to my question whether the FEIE requirement that one is a resident alien (or US citizen) applies in respect of the physical presence period (330 days out of a calendar year) or in respect of the tax year for which one is submitting the tax return.
- If the former, then I would have thought even electing to be a resident alien for the entire year (2013) wouldn't do the trick, since the last year during which I would have met the physical presence test was 2012 (in 2013 I left the UK in August/September, i.e. before the 330 days had passed).
- If the latter, why do you then think it's necessary to be a resident alien during the entire tax year 2013 to be able to qualify for FEIE - wouldn't it be enough to be a resident alien by the end of that year?

I hadn't been aware of the stacking rule. That might, as you suggest, remove the attractiveness of trying to use the FEIE exemption anyway. I wanted to use the FEIE instead of the FTC because with the FTC my UK income gets counted as if it were US income, and although I get a credit for UK tax paid (which is enough to cover the US tax I would have owed on the UK income), the total of US+UK income pushes me into a high tax bracket. With the FEIE I thought I could stay in the low US tax bracket because my UK income would have never made it into the US tax calculation, but it sounds like the stacking rule prevents this advantage from being available.

I think the duel status option helps me only up to a point. I got my green card during spring of 2013 and I understand that from that point on I am subject to US tax, even though I only moved to the US in September. Much of my 2013 UK income was during the period between the issuance of my green card and my move to the US, so I think for that income my only options are FEIE or FTC.

Thanks again for your input, and if you or others have any further comments I'd be very interested to see them.

You can get the FEIE in respect of any 12-month period - it does not have to be the calendar year. If it overlaps the tax year you prorate the exclusion accordingly, e.g. if you qualified for the FEIE from 1 Sept 2012 - 31 Aug 2013 you'd get 2/3 of the exclusion amount for the 2013 tax year and you could exclude money you earned from 1 Jan-31 Aug 2013.

Having read the instructions, I can't see any requirement to be a resident alien during the entire qualifying period so I think if you use the dual status option you can claim the FEIE in respect of the resident alien part of the year. Using the above example, let's say you got your green card on 1 May 2013 and you moved to the US on 1 September 2013, you could claim a prorated FEIE covering May-August (1/3 of the year). I am not 100% certain of this so you might want to contact the IRS international division in Philadelphia for confirmation.

Don't automatically assume the dual status option is the best. If using FEIE it will reduce your exclusion limit, and if using FTC it will disallow foreign tax that you paid during the nonresident period. So do the math for all these combinations and see what works out best using your own facts and circumstances. I personally got hammered by the stacking rule when relocating in the middle of the year so I urge others not to automatically assume FEIE is the best option ...