FEIE but not paying taxes?

[virginiac]

I live in Italy and have an EU research fellowship that I don’t pay Italian taxes on, just 30% in social security (grants are tax-free in Italy). If I claim the foreign earned income exclusion on my US taxes this year, will I be liable for any US taxes still?

I did contact a tax adviser here who claims to work on Italian and US tax-related cases but he said I should still be on the hook to the IRS because I’m not paying taxes here. But from what I’ve read, it doesn’t sound like it should matter as long as I am earning the money from and residing in a foreign country.

I haven’t lived in the US for almost 3 years. I had German residency and now I’m working on my Italian residency. In that time I’ve only been to the US once for two weeks. I make less than $100k per year with my grant and don’t have any other income. I have a foreign bank account, foreign drivers license, apartment here, etc. I’m married but filing separately and he takes the foreign earned tax credit. So should I expect to owe anything?

 

[genenco]

@virginiac Yeah, the whole point of the FEIE vs. the FTC is that it doesn’t need to be offset with foreign tax paid. As long as you’re under the limit and meet the requirements (e.g. physical presence test), you shouldn’t have lability in the US

 

[virginiac]

@genenco Thank you! I really thought the same but the tax adviser made me question myself

 

[genenco]

@virginiac Generally, don’t trust professionals in country x who claim to be competent in the tax rules of country y. You need a person in the US who knows US law back to front but is also familiar with working with expats

 

[sarukan65]

@virginiac I am in a similar situation (not paying local taxes due to status) and I recently consulted with two CPAs because there is conflicting guidance out there. Both CPAs said I would qualify based on the physical presence test, which both regarded as clear cut. One said I would also qualify as bona fide (pay rent, own car in foreign country, do not own home in US), the other thought that bona fide required paying taxes is the host country while physical presence didn’t. For most years I am outside of U.S. enough to not even worry but for 2024 due to family events and other things I will actually start tracking days closely to be safe.

 

[virginiac]

@sarukan65 Can you pick the bona fide residence test one year and physical presence the next? Or you have to pick the same test every year you use the tax credit? I’m asking because this year for sure I would qualify for presence since I was only in the US for two weeks…but other years in the future maybe I would want to visit multiple times. I’m quite sure I should count as a resident because I live here and don’t own a home in the US. But as you said it seems more complicated to prove

 

[sarukan65]

@virginiac This gives you some insight into the factors in determining bona fide, it also depends on your visa type and limitations. https://www.irs.gov/pub/int_practice_units/JTO9431_06_14.pdf

 

[rob_roy]

@virginiac The FEIE is not a tax credit. Its an income exclusion (or think of it as a deduction if easier).

And yes, you can switch from one test to another. But keep in mind, I would normally expect someone to use the Physical Presence test the 1st year (because they didn't yet qualify under the Bonafide Residence test), and then switch to the other. Switching from the Bonafide Residence test to the Physical Presence test just raises the question, why? In other words, you said you were a bonafide resident last year, but now you're not? What gives?

Just be careful though, the FEIE doesn't apply if your move abroad is not "indefinite". To be clear, "indefinite" does not mean "permanent". You can go abroad with the intention to eventually move home, and still qualify for the FEIE. But, it does mean that your move abroad can not come with a fixed expectation that you will come back after X years. And for many research fellowships positions, I am assuming they are designed for a fixed period of time, no? So if you took this position, knowing that is will end at a specific date, then you probably do not meet the requirements for the FEIE.

 

[virginiac]

@rob_roy What would the evidence be that I’m moving home after? I mean the purpose of the program is to train researchers to eventually fill research jobs in Europe, but yes the contract is 3 years fixed. Possibility for a post-doc in the same institute after. I also did my masters degree in Europe and stayed so I’m not sure the length of the program really speaks to my intent? It’s not like I have a job lined up in the US after graduation or something. I’m genuinely considering staying here forever…I guess I just don’t really understand how something like that could be proven based on contract length