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2025 Foreign Earned Income Exclusion | International Tax Lawyer & Attorney

The Foreign Earned Income Exclusion (“FEIE”) is a valuable tax strategy available to US tax residents who live and work abroad. It allows US citizens to exclude a certain amount of foreign earned income from their US taxable income. The IRS adjusts the precise amount every year.  In this article, I will discuss the 2025 Foreign Earned Income Exclusion.

2025 Foreign Earned Income Exclusion: Background Information

FEIE was born out of the fact that the US tax system is unique and taxes its citizens and even more broadly its residents on their worldwide income irrespective of where they reside. In many countries, such taxpayers are subject to local foreign income taxes on the same income. In order to alleviate the potential burden of double taxation, the US Congress enacted Section 911 of the Internal Revenue Code. This section codified FEIE.

Section 911 allows qualifying individuals to exclude a specified amount of foreign earned income from US taxable income. The IRS adjusts this amount every single year.  A taxpayer must use Form 2555 to claim FEIE.

2025 Foreign Earned Income Exclusion: Eligibility

In order to claim FEIE, a taxpayer must meet certain requirements set forth in IRC §911. I will provide only a brief outline of these requirements in this article. They are discussed in more detail in other articles on our website.

First of all, FEIE applies only to foreign earned income, not passive income and not US-source income.

Second, the taxpayer must maintain his tax home in a foreign country. “Tax Home” is a term of art that has its specific meaning.

Third, you must pass either the physical presence test or the bona fide residence test.

2025 Foreign Earned Income Exclusion: Additional Considerations

While FEIE brings a huge benefit of income exclusion, it often is not the best option for US taxpayers who reside overseas. Let’s focus on the four most important considerations.

First, FEIE limits and in some cases completely eliminates the ability to take Foreign Tax Credit (“FTC”). If you use FEIE, you cannot use the FTC to reduce US taxes on income already excluded under the FEIE.  The problem arises when FTC is actually higher than the US tax.  In this case, you may be losing a very important tax strategy to reduce your US taxes not only in the current year, but also in the future.

Second, FEIE may result in ineligibility to take other tax credits normally available to a taxpayer.

Third, despite the income tax exclusion, your tax bracket will still be the same as if you were taxed on the whole amount (i.e. as if you had not claimed the foreign earned income exclusion).

Finally, while not a tax consideration, usage of FEIE by US permanent residents may result in the abandonment of their green card. In other words, FEIE may present a huge risk to the immigration goals of a taxpayer.

2025 Foreign Earned Income Exclusion: Adjustment for 2025

On October 22, 2024, the IRS announced that the foreign earned income exclusion amount under §911(b)(2)(D)(i) is going to be $130,000 for the tax year 2025. This is up from $126,500 in the tax year 2024.

Contact Sherayzen Law Office for Professional Help with Foreign Earned Income Exclusion

The Foreign Earned Income Exclusion is a vital tax tool for US taxpayers working abroad, but it must be used cautiously and after careful consideration of all circumstances.  Hence, if you are a US taxpayer who lives abroad or you are planning to accept a job overseas, you need to secure the help of Sherayzen Law Office, a premier firm in US international tax compliance. We can help you navigate the complexities of FEIE, determine your eligibility for it and build a tax strategy to help you maximize the advantages offered by the Internal Revenue Code.

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Inbound Transactions: Non-US Person Definition | International Tax Attorney

In a previous article, I described the analytical framework for conducting tax analysis of inbound transactions. In this article, I will focus on the first issue of this framework – the Non-US Person definition.

Non-US Person Definition: Importance in the Context of Inbound Transactions

Before we delve into the issue of Non-US Person definition, we need to understand why this definition is so important in the context of inbound transactions.

The significance of this definition comes from the fact that the extent of exposure to US taxation depends on whether a person is classified as a US-Person or a Non-US Person. A US person is taxed on his worldwide income and may be subject to a huge array of US reporting requirements. A Non-US Person, however, may only be taxed by the IRS with respect to income earned from US investments or US businesses (even then, there are a number of exceptions). Hence, the classification of US Person versus Non-US Person may have a huge practical impact on a person’s US tax exposure.

Non-US Person Definition: Everyone Who Is Not a US-Person

There is no definition of “Non-US Person” in the Internal Revenue Code (“IRC”); there is not even a definition of a “foreign person”.

Rather, one needs to look at the IRC §7701(a) to look for identification of categories of persons who are considered “domestic”. Anyone who is not a “domestic person” is a foreign person or, for our purposes, a Non-US Person.

Non-US Person Definition: What Does “Person” Mean

Before we analyze who is considered to be a “US Person”, we should first clarify who a “person” is. Under §7701(a)(1), a person “shall be construed to mean and include an individual, a trust, estate, partnership, association, company or corporation”. In other words, a “person” may mean not only an individual, but also a business entity, trust or estate.

Non-US Person Definition: General Definition of US Person

Under §7701(a)(30), a “US Person” means a US citizen, US resident alien, domestic partnership, domestic corporation, any estate that is not a foreign estate and a trust that satisfies both condition of §7701(a)(30)(E). Almost each of these categories is highly complex and needs a special definition. I will not cover here every detail, but I will provide certain general definitions with respect to each category.

Non-US Person Definition: Individuals Who Are US Persons

As I stated above, all US citizens and US resident aliens are considered US Persons. In the vast majority of cases, it is fairly easy to determine who is a US citizen; most complications occur with “accidental Americans” and Americans with only one parent who is a US citizen.

A US resident alien is a more complex term. It includes not only US Permanent Residents (i.e. “green card” holders), but also all persons who satisfied the Substantial Presence Test and all persons who declared themselves as US tax residents. This means that a person may be a US resident for tax purposes, but not for immigration purposes. This situation creates a lot of confusion among people who marry US persons or who come to the United States to work; many of them believe themselves to be Non-US Persons, but in reality they are US tax residents.

Non-US Person Definition: Domestic Corporations & Partnerships

Under §7701(a)(4), corporations and partnerships are considered US Persons if they are created or organized in the United States or under the laws of the United States or any of its states. In the case of partnerships, the IRS may issue regulations that provide otherwise, but the IRS has not done so yet. Conversely, a corporation or a partnership is a Non-US Person if it is not organized in the United States.

Pursuant to §7701(a)(9), the definition of the United States for the purposes of §7701(a)(4) includes only the 50 States and the District of Columbia. In other words, §7701(a)(9) excludes all US territories and possessions from the definition of the United States. For example, a corporation formed in Guam is a Non-US Person!

Non-US Person Definition: Domestic Trust

A trust is a US Person if it satisfies both tests contained in §7701(a)(30)(E). The first test is a “court test”: a court within the United States must be able to exercise primary supervisorial administration. The second test is a “control test”: one or more US persons must have the authority to control all substantial decisions of the trust. Failure to meet either test will result in the trust being a Non-US Person with huge implications for US tax purposes.

Non-US Person Definition: Domestic Estate

While all other definitions described above define a domestic entity and state that a foreign entity is not a domestic one, it is exactly the opposite with estates. Under §7701(a)(30)(D), an estate is a US Person if it is not a foreign estate described in §7701(a)(31). §7701(a)(31)(A) defines a foreign estate as: “the income of which, from sources without the United States which is not effectively connected with the conduct of a trade or business within the United States, is not includible in gross income under subtitle A”.

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§318 Sidewise Attribution Limitation | US International Tax Attorney

This article explores the third main limitation on the general IRC (Internal Revenue Code) §318 corporate stock re-attribution rules – §318 Sidewise Attribution Limitation.

§318 Sidewise Attribution Limitation: What is “Sidewise Attribution”?

A sidewise attribution occurs when corporate stock owned by an owner of a business entity (or a beneficiary of a trust or estate) is first attributed to this business entity (or estate or trust) and then re-attributed again to another owner of the same business entity (or another beneficiary of the same trust or estate). In other words, stock deemed to be owned by an entity due to the ownership of that stock by an owner or beneficiary of the entity is re-attributed “sidewise” to another owner or beneficiary of the same entity.

Sidewise attribution may have far-reaching income tax and tax reporting consequences, because it may result in a person with no real ownership of a corporation being treated as an owner of this corporation’s stock simply because a member of another entity (in which the first person also has an ownership interest) happens to own corporate stock of this corporation.

§318 Sidewise Attribution Limitation: §318(a)(5)(C) Prohibition

§318(a)(5)(C) describes the §318 Sidewise Attribution Limitation. Under §318(a)(5)(C), stock constructively owned by a partnership, estate, trust or corporation pursuant to §318(a)(3) is not treated as owned by this partnership, estate, trust or corporation for the purpose of treating a partner, beneficiary, or shareholder as owner of the stock. In other words, the sidewise attribution limitation prevents re-attribution of corporate stock to an owner of an entity where such stock is constructively-owned by an entity solely by virtue of ownership of this stock by another owner of the entity.

Let’s look at the following example to illustrate the §318 Sidewise Attribution Limitation: A and B are unrelated persons, they equally own a partnership P and A owns 100 shares of corporation X’s stock. In this situation, partnership P is a constructive owner of A’s 100 shares of X under §318(a)(3)(A). Without any sideways limitation, B would have been also treated as an owner of these 100 shares of X due to §318(a)(2)(A). Under §318(a)(5)(C), however, none of these stocks are attributed to B.

§318 Sidewise Attribution Limitation: Attribution from Actual Ownership Not Affected

It is important to emphasize that §318(a)(5)(C) applies only to the re-attribution of stock constructively owned as a result of the application of §318(a)(3). This prohibition does not affect the §318(a)(2) attribution of stock actually owned by an entity to its beneficiary, partner, or shareholder.

§318 Sidewise Attribution Limitation: Re-Attribution Under Other Rules

Additionally, stock constructively owned under §318(a)(3) may still be re-attributed under an attribution rule other than §318(a)(2). In other words, stock constructively owned under §318(a)(3) may still be re-attributed under the upstream corporate attribution rules or the option attribution rules of §318(a)(4) (see Treas. Reg. §1.318-4(c)(2)).

Moreover, re-attribution under the §318 family attribution rules still possible. A potential situation for such re-attribution would arise in a situation where corporate stock is attributed from an entity to its member and from this member to a qualified family member of the same entity. Berenbaum v. Commissioner, 369 F.2d 337 (10th Cir. 1966), rev’g T.C. Memo 1965-147.

Let’s look at a couple of examples to understand better the interaction between the §318 Sidewise Attribution Limitation and the re-attribution rules other than §318(a)(2).

Here is the first hypothetical fact pattern: A is a beneficiary of a trust T, B is another beneficiary of T, T is a beneficiary of an estate, and A owns 100 shares of a C-corporation X. Under §318(a)(3)(B), T is a constructive owner of 100 shares of X. Since T is a constructive owner of A’s shares of X, these shares are re-attributed to the estate under §318(a)(3)(A); §318(a)(5)(C) does not apply to this type of a re-attribution since it is not a sidewise attribution. On the other hand, the §318 Sidewise Attribution Limitation would prevent the re-attribution of A’s shares of X to B that otherwise would have occurred under §318(a)(2)(B).

Note, however, that, if B is A’s son (or other qualified relative under the §318 family attribution rules), then the re-attribution of A’s stocks of X to B is possible under §318(a)(1)(A).

Let’s now look at another fact pattern to understand the power of the option rule attribution vis-a-vis §318(a)(5)(C): A and B are beneficiaries of a trust T; T has an option to buy corporate stock from A. The most important point to understand here is the fact that T is considered here as an owner of A’s stock not under the upstream trust attribution rules of §318(a)(3)(B), but under the option attribution rules of §318(a)(4). Hence, the sidewise attribution limitation under §318(a)(5)(C) does not apply and B becomes a constructive owner of a his proportional part of A’s stock under the downstream trust attribution rules of §318(a)(2)(B).

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§318 Upstream Estate Attribution | International Tax Lawyer & Attorney

This article continues a series of articles concerning the constructive ownership rules of the Internal Revenue Code (“IRC”) §318. Today’s focus is on the §318 upstream estate attribution rules.

§318 Estate Attribution Rules: Downstream Attribution vs. Upstream Attribution

There are two types of the IRC §318 estate attribution rules: downstream and upstream. In a previous article, I discussed the downstream attribution rules concerning attribution of ownership of corporate stocks held by an estate to its beneficiaries. This brief article focuses on the upstream attribution rules, which means rules governing the attribution to the estate of corporate stocks held by its beneficiaries.

§318 Upstream Estate Attribution: Main Rule

The IRC §318(a)(3)(A) states the general rule for the upstream estate attribution of beneficiaries’ corporate stock: irrespective of the proportion of his beneficiary interest in the estate, all corporate stocks owned directly or indirectly by a beneficiary are deemed to be owned by the estate.

Notice the difference here between the downstream and the upstream estate attribution rules. §318 downstream estate attribution rules attribute the ownership of corporate stock proportionately from an estate to its beneficiaries. The upstream attribution rules under §318, however, completely disregard the proportionality rule; instead, all of the stocks of a beneficiary are attributed to the estate even if he has only 1% interest in the estate.

For example, let’s suppose that W owns 100 shares in corporation X; then, H dies and leaves one-tenth of his property to W. Due to the fact that W is a beneficiary of H’s estate, the estate constructively owns all of W’s 100 shares in X.

§318 Upstream Estate Attribution: No Re-Attribution

I already stated this rule in another article on estate attribution, but it is also important to re-state it here. §318 estate attribution rules contain a prohibition on re-attribution of stocks. Under §318(a)(5)(C), a beneficiary’s stock constructively owned by an estate through the operation of the §318 estate attribution rules cannot be attributed to another beneficiary.

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If you have questions concerning US business tax in general and US international business tax law specifically, contact Sherayzen Law Office for professional help. We are a highly-experienced tax law firm that specializes in US international tax law, including offshore voluntary disclosures, US international tax compliance for businesses and individuals and US international tax planning.

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§318 Estate Beneficiary Definition | US International Tax Law Firm

The Internal Revenue Code (“IRC”) §318 contains corporate stock attribution rules between an estate and its beneficiaries. In order to apply these rules correctly, one must understand how §318 defines “beneficiary” for the purposes of upstream and downstream estate attribution rules. This articles will introduce the readers to this §318 estate beneficiary definition.

§318 Estate Beneficiary Definition: General Rule

Treas. Regs. §1.318-3(a) defines “beneficiary” for the purposes of §318 attribution rules (on a separate note, pursuant to Rev. Rul. 71-353, the attribution rules for the personal holding company provisions, collapsible corporation provisions (now repealed), and affiliated group provisions also use this definition of a beneficiary).

Treas. Regs. §1.318-3(a) states that “the term beneficiary includes any person entitled to receive property of a decedent pursuant to a will or pursuant to laws of descent and distribution.” Hence, in order to be considered a beneficiary under §318 , a person must have a direct present interest in the property of the estate or in income generated by that property.

Moreover, a person entitled to property not subject to administration by the executor is not a beneficiary for purposes of the §318 estate attribution rules unless the property is subject to the executor’s claim for a share of the federal estate tax.

§318 Estate Beneficiary Definition: Certain Specific Cases

This definition of beneficiary produces interesting results in some specific cases which are actually quite common.

Let’s first see the result of the application of the §318 estate beneficiary definition to life estates. A person with a life estate in estate property is a beneficiary. On the other hand, if a person owns only a remainder interest (i.e. an interest that vests only after the death of the life tenant), then he is not a beneficiary.

A beneficiary of life insurance proceeds is not considered a beneficiary for the §318 estate attribution rule purposes. This is because this is not a property subject to administration by the executor.

Similarly, an executor or administrator is usually not a beneficiary simply by virtue of occupying either of these positions. The main exception to this rule is a situation where an executor or administrator is otherwise considered a beneficiary.

Finally, a residuary testamentary trust presents a very interesting and complex issue. Under Rev. Rul. 67-24, it may be treated as a beneficiary of an estate before the residue of the estate is actually transferred to it. Moreover, it appears that such a trust (in that case, it was an unfunded testamentary trust) needs to worry about the §318(a)(3)(B) trust attribution rules.

§318 Estate Beneficiary Definition: Cessation of Beneficiary Status

It is important to note that §318 estate attribution rules cease to operate with respect to a person who stops being a beneficiary. See Tres. Reg. §1.318-3(a). There is an exception to this rule though: pursuant to Rev. Rul. 60-18, a residuary legatee does not stop being a beneficiary until the estate is closed. “Residual legatee” is a person named in a will to receive any residue left in an estate after the bequests of specific items are made.

When does a person stop being a beneficiary for the purposes of §318? Treas. Reg. Reg. §1.318-3(a) sets forth the following criteria that must be met for a person to no longer be considered a beneficiary: (a) the person has received all property to which he is entitled; (b) ”when he no longer has a claim against the estate arising out of having been a beneficiary”; and (c) “when there is only a remote possibility that it will be necessary for the estate to seek the return of property or to seek payment from him by contribution or otherwise to satisfy claims against the estate or expenses of administration”.

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