Welcome to Singapore! As a new expat in this vibrant city-state, navigating US tax laws can be a complex affair, especially when it comes to the foreign earned income exclusion or "FEIE" under section 911 of the Internal Revenue Code. For this post, I assume that you expect to be employed in Singapore for an indefinite, rather than temporary, period of time.
Although Singapore is the focus of this article, the principles discussed are applicable to any foreign country where the effective income tax rates are lower than those in the US, like Singapore's. This means the concepts are broadly relevant for expats living in countries with comparatively lower tax rates than the US. If you live in a foreign country with higher effective income tax rates, you would probably be better off using foreign tax credits instead of the FEIE. Any competent US accountant should be able to help you calculate whether foreign tax credits or the FEIE would save the most taxes.
Understanding the FEIE: The FEIE allows expats to exclude a portion of their foreign earned income from U.S. taxation. For 2023, the exclusion amount was US$120,000. For 2024, the exclusion amount is US$126,500. This means if you earn under that US$126,500 for 2024 (assuming you were working in Singapore for the whole calendar), you would not owe any US income taxes.
However, qualifying for the FEIE requires meeting a specific requirement discussed below.
Common question I get asked is if self-employment income can qualify for the FEIE. The answer is yes! If you're self-employed and working abroad, you can use the FEIE to lower your regular income tax on earnings from self-employment. However, this exclusion doesn't reduce the self-employment tax you may owe. This means while your overall income tax may be lower, the amount you pay for self-employment tax remains unchanged.
Physical Presence Test: Generally, for expats that move to Singapore on any date other than Jan 1st, the main way to qualify for the FEIE for your first year in Singapore is through the Physical Presence Test. This means being physically present in a foreign country, like Singapore, for at least 330 full days in a 12-month period. These days don't have to be consecutive but must fall within the same 12 months.
Scenario for New Expats: If you moved to Singapore on December 1, 2023, and aim to qualify for the FEIE under the Physical Presence Test, you must be physically present in a foreign country for 330 full days within a 12-month period. Since the test is based on a 12-month frame, not the calendar year, if you moved on December 1, 2023, you wouldn't meet the 330-day requirement by the time you have to file your on October 15, 2024 (assuming you request for the automatic 6-month extension). Because of the timing issue, the IRS has created a special extension for this situation via Form 2350. This form allows you to extend the tax filing due date until you can meet the Physical Presence Test. This is very important because if you file your tax return before you meet the Physical Presence Test, you would forfeit the FEIE for that year.
However, the exclusion amount is prorated. This means you get only a portion of the full exclusion based on the time you were in the foreign country. For example, if the full annual FEIE is US$120,000 and you only spent half of 2023 in Singapore, you could exclude up to $60,000 of your foreign earned income (half of the annual limit).
Note that the extensions only extend the tax filing due date and not the tax payment date in April.
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