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See the requirements here: http://www.irs.gov/Individuals/International-Taxpayers/Foreign-Earned-Income-Exclusion---Requirements

I'm currently living in Costa Rica. Assuming I live out of the US at least 330 days a year, can I qualify for the foreign earned income exclusion? I have a single member LLC currently based in the US (although I could change that). Assume my income comes completely as 1099 from other businesses (clients), and/or from Apples App Store.

Do I qualify? Is there something I can change so I do?

I was advised by my accountant before leaving that I could get out of state income tax but not federal. However, my friend has succesfully used the exclusion on income earned from ads on his websites, was told by his accountant that it was correct, and was not corrected by the IRS. Who is right?

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"While you're in the foreign lands - the income is not. If you get 1099 income - its a US-sourced income. You cannot say income you got from the US is foreign sourced just because you were abroad when you got it."

I believe this is incorrect. If you pass the physical or bona fide resident test, the income is considered foriegn earned. Just because you got paid by an american company does not mean it is US sourced for tax purposes.

  • This is what my accountant has said in the past as well. What matters is where you are when you were performing the work, not where the entity that is paying you is located. However, I am just passing on what he said and am in position to add any authority to this opinion. – Krystian Cybulski Jan 6 '15 at 14:33
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The IRS code provides that if you performed the services in a foreign country, and you were not employed by the US government, you are eligible. The fact that the payment came from a US company doesn't matter.

You do qualify, and you can claim the exclusion for work you performed while overseas, if you meet the 330 day requirement or the residency requirement.

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While you're in the foreign lands - the income is not. If you get 1099 income - its a US-sourced income. You cannot say income you got from the US is foreign sourced just because you were abroad when you got it.


Adding based on your additions to the question:

I was advised by my accountant before leaving that I could get out of state income tax but not federal.

That is generally correct, but verify with the State re the residency rules. They're different from state to state, and some states are more aggressive than others on enforcing them.

However, my friend has succesfully used the exclusion on income earned from ads on his websites

That doesn't mean much.

was told by his accountant that it was correct, and was not corrected by the IRS. Who is right?

The fact that the IRS didn't audit the return doesn't mean the return is correct necessarily. IRS only audits about 1% of the individual tax returns, it doesn't mean that all the rest 99% are perfect.

The accountant said it was correct, I'm guessing, based on the facts and circumstances of that specific instance. It doesn't necessarily mean that it would be correct in your case.

But go to that accountant, present him with your situation and ask him to write down a plan of what and how you should be doing for that to be correct for you as well. Then follow that plan to the letter. If in the end it will be deemed is inappropriate by the IRS, the fact that you were following an advice from a licensed professional will help you avoid penalties. In any case, do not just blindly do "what my friend told me", that is the best way to get in trouble.

  • What about the App Store income? Or say income from selling ad space on my website? Is there some way to structure that so it isn't taxable in the US? – Sean Clark Hess Jul 1 '13 at 17:09
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    @seanhess for tax planning please consult a licensed professional - a US licensed CPA or attorney. – littleadv Jul 1 '13 at 17:12
  • I did before I left. My CPA said it wasn't possible but either he or my friend's accountant is mistaken. Which one is? – Sean Clark Hess Jul 1 '13 at 17:20
  • the statement "You cannot say income you got from the US is foreign sourced just because you were abroad when you got it" is incorrect. this answer suggests there is a test for "US-based income" whichc simply doesn't exist in the tax code. – J. Win. Apr 22 '18 at 7:56

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