The Foreign Earned Income Exclusion (FEIE) is a federal tax provision that allows eligible taxpayers to exclude foreign income from their U.S. tax returns. Unfortunately, there are some stark differences between state and federal laws that can make claiming the FEIE confusing – especially in California. If you’re a U.S. taxpayer with offshore income, continue reading to learn how California treats the FEIE – and how it might affect your filing obligations. If you need help filing a state or federal tax return, or if you have questions about foreign tax credits and income exclusions, contact Cook CPA Group for a free consultation about our tax preparation services in Roseville and Sacramento.
What is the Federal Foreign Earned Income Exclusion (FEIE)?
The Foreign Earned Income Exclusion (FEIE) was designed to help taxpayers who have foreign income avoid the financial burden of double-taxation, or being taxed by two countries on the same source of income. In the United States, federal tax laws allow qualified taxpayers to use the FEIE to exclude specified amounts, adjusted for inflation every year, from their U.S. income tax returns. These maximum amounts are as follows:
- 2011 – Up to $92,900
- 2012 – Up to $95,100
- 2013 – Up to $97,600
- 2014 – Up to $99,200
- 2015 – Up to $100,800
- 2016 – Up to $101,300
- 2017 – Up to $102,100
- 2018 – Up to $104,100
By claiming the FEIE, qualified taxpayers – including U.S. citizens and resident aliens – can dramatically shrink their tax bill. However, there can be obstacles to claiming the FEIE successfully – particularly in California. Keep reading to learn about California’s rules for the Foreign Earned Income Exclusion.
Does California Allow Taxpayers to Claim the Foreign Earned Income Exclusion?
Alongside Massachusetts, New Jersey, Pennsylvania, Alabama, and Hawaii, California belongs to a handful of states which do not permit taxpayers to claim the FEIE on their state tax returns. This rule is clearly established by the California Franchise Tax Board (FTB), which explicitly states in its Guidelines for Determining Resident Status that “California does not allow a foreign tax credit or a foreign earned income exclusion.”
This brings up two important questions for California taxpayers: what should you do if you claimed the FEIE on your federal income tax return, and are there any alternative solutions?
If you previously claimed the FEIE on your federal tax return, you would have filed Form 2555 (Foreign Earned Income) with the Internal Revenue Service (IRS). Obtaining this form for reference will make it simpler to file your state taxes with accuracy and precision.
Under state law, California will add the amount of your exclusion (e.g. a maximum amount of $101,300 for 2016) back onto your California tax return. However, this does not occur automatically. Instead, you must indicate the appropriate amount using Schedule CA (540 NR) (California Adjustments — Nonresidents or Part-Year Residents). The amount should be entered in Column C of the schedule (“Additions”) at Line 21f, which provides a space for taxpayers to describe “other” sources of income (alongside lottery winnings, disaster loss deductions, federal net operating losses, net operating loss deductions, and other net operating losses).
California’s Safe Harbor Rule
Even though California does not allow taxpayers to claim the FEIE on their state tax returns, relief may be available in the form of California’s “safe harbor” rules, which apply to a portion of taxpayers who are “leaving California under employment-related contracts.” Under safe harbor laws, a California resident may, with some exceptions, be treated as a nonresident if his or her employment contract overseas lasted for 546 consecutive days or longer (equivalent to about 1.5 years). If the taxpayer is a nonresident of California, he or she does not need to file a California tax return. Our Roseville tax accountants can help you understand and fulfill your California tax filing obligations in a timely manner, minimizing your losses while lowering the risk of receiving costly penalties.
Sacramento CPA Firm Serving U.S. Expats and International Taxpayers
At Cook CPA Group, we are knowledgeable and experienced California tax accountants with more than 20 years of experience helping U.S. citizens and residents to navigate the rules contained in state and federal tax codes. Our tax team works with all types of clients, including business owners and high net worth individuals, to help California residents avoid unnecessary losses while improving their tax compliance.
We are proud to serve taxpayers throughout the Sacramento and Roseville areas. If you need help completing and filing a tax return, or have questions about the Foreign Earned Income Exclusion, we invite you to contact our law offices online, or call (916) 910-0323 to get started with a free consultation about the services our Sacramento CPA firm provides.