Jerry recently sold his home in Michigan and bought a condo in Panama. He plans to live in Panama and make trips back to the U.S. to visit friends and family. Will he still need to file U.S. tax returns?
Because the U.S. taxes citizens on their worldwide income, Jerry will need to file a tax return regardless of where he lives. But he may be able to exclude some income if he’s gone long enough.
Jerry may qualify for the foreign earned income exclusion (FEIE) if he is out of the country for at least 330 days during a 12-month period. This physical presence test doesn’t require the 330 days to be consecutive, but he will need to keep track of the days he is in the U.S. — even if they are partial days.
The FEIE allows Jerry to exclude wages, commissions and professional fees earned while in Panama—even if working for an American company. But this doesn’t include unearned income, such as dividends, interest, or capital gains.
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