One of the biggest myths about the Foreign Earned Income Exclusion is that income taxed above and beyond the FEIE is taxed at tax rates starting at 10%. Well, it’s not correct.
For instance, did you know that the United States has a progressive federal tax system, which means that depending on your tax owed, you will be taxed at marginal tax rate?
You ask, what is marginal tax rate? It is the rate which the remaining portion of your income is taxed at and in the US it starts at 10% and goes as follows: 15%, 25%, 28%, 33%, 35% or 39.6%.
Below you can find the 2017 Federal income tax table, which shows what the tax brackets are for each filing status. Check it out now and if you have any questions, don’t hesitate to contact us!
There is one BUT: it doesn’t matter which bracket you’re in because you won’t pay that rate on your entire 2017 income. Why? You
Reason #1: You get to subtract tax deductions and exemptions to determine your taxable income.
Reason #2: Each taxable income is divided into blocks according to these tax brackets and it gets taxed at the corresponding rate.
We advise you to take advantage of available deductions and tax credits as they can significantly reduce your taxable income and allow you to be in a lower bracket.