Will U.S. Citizens with Salary Income in Taiwan Be Subject to Double Taxation in Both the U.S. and Taiwan?

According to U.S. tax regulations, U.S. employers are required to issue a W-2 form to employees each year for reporting salary income. Salary income is classified as ordinary income when filing income tax returns, and it is subject to a progressive tax rate based on the taxpayer's income bracket.

Foreign Earned Income Exclusion (FEIE)

U.S. taxpayers who earn salary income from overseas may be eligible for tax benefits. The foreign earned income exclusion (FEIE) allows for a deduction of up to $126,500 (for 2024). This exclusion amount is adjusted annually, and the IRS publishes the exemption amount on its website each year.

Eligibility Criteria for FEIE

To claim FEIE on income tax returns, U.S. taxpayers must meet two key conditions:

1. Tax Home Test:

The taxpayer’s tax home must be in a foreign country. This means that the taxpayer’s primary place of business or employment is located abroad. To qualify, the taxpayer must reside in the foreign country for at least 330 days within a consecutive 12-month period. The calculation of the exact number of days and the qualifying period will be explained further below.

2. Bona Fide Residence Test or Physical Presence Test:

The Bona Fide Residence Test applies to U.S. citizens who are considered tax residents of a foreign country for an entire tax year (January 1 – December 31 for calendar-year filers). This test also applies to U.S. resident aliens if they reside in a country that has a tax treaty with the U.S. However, this test is based on the taxpayer’s intent and purpose of residing abroad. If the taxpayer only resides abroad for a short-term purpose and plans to return to the U.S. after completing that purpose, they may not qualify.

Alternatively, the Physical Presence Test can be used to determine FEIE eligibility. Under this test, a U.S. citizen or resident alien must be physically present in a foreign country for at least 330 full days within a consecutive 12-month period. The 330 days do not have to be consecutive, meaning short visits back to the U.S. are allowed as long as the total number of days spent abroad within the 12-month period reaches 330 days. Additionally, the 12-month period does not necessarily have to be from January 1 to December 31; it just needs to partially overlap with the tax year being reported.

How to Claim FEIE

To claim the FEIE, taxpayers must submit Form 2555 to the IRS. This form requires information about the employer, including the employer’s name and address, as well as details regarding the taxpayer’s entry and exit dates to and from the U.S., salary income, foreign tax residency status, and other relevant information. Once a taxpayer elects to use FEIE, they must continue using it in subsequent tax years unless they submit a written statement to the IRS to revoke the election. However, once revoked, the taxpayer cannot re-elect FEIE for the next five years unless approved by the IRS.

Tax Savings Example

Mr. A is a U.S. green card holder who has been living in Taiwan for an extended period. In 2024, he only returned to the U.S. for a brief 10-day family visit. His salary income in Taiwan for 2024 was $120,000, and he had an additional taxable income of $10,000 from other sources. When filing his U.S. tax return, Mr. A reports a total taxable income of $130,000 and submits Form 2555 to claim the FEIE. Since the FEIE exclusion limit for 2024 is $126,500, Mr. A can fully exclude his $120,000 foreign salary income, leaving only $10,000 of taxable income. If Mr. A is single and claims the standard deduction of $14,600 for 2024, his remaining taxable income becomes zero. As a result, his U.S. federal tax liability for 2024 is also zero.

By effectively utilizing the foreign earned income exclusion, taxpayers can legally minimize their tax liabilities. However, practical considerations such as foreign tax credits, the number of days spent abroad, and salary income levels should be carefully evaluated. It is advisable to consult a professional accountant to develop an optimal tax strategy.