Federal Foreign Income Exclusion

Taxpayers who live or work in a foreign country for at least a year may not have to pay federal tax on the income they earn outside the United States. Those who qualify can “exclude” this income by not reporting it as taxable income on their federal return.

Who Qualifies

You may qualify if both of these are true:

• You qualify for and claim the federal Foreign Earned Income Exclusion. Review eligibility and other details about the federal exclusion on the IRS website.
• You are not homesteading property in Minnesota. If you were, you notified the county within three months of leaving U.S. to revoke the homestead status on your property and it stays classified as “nonhomestead” while you’re away.

If you meet these requirements, you’re considered a nonresident for Minnesota tax purposes while you’re living outside the country. During this time, you generally do not have to pay Minnesota tax on foreign-earned and some other types of income.

Effect on Minnesota Filing Requirement

• Use Minnesota’s nonresident income rules to determine what (if any) income is taxable in the state. For details, review How Nonresident Income is Taxed by Minnesota.
• You must file a Minnesota tax return only if you meet the minimum filing requirements. For details, review Who Must File a Minnesota Income Tax Return.

• Depending on when you leave or return to Minnesota, you may be considered a part-year resident for that tax year. For details, review Part-Year Residents and Nonresidents.

Filing Requirement Example

Jeannie was assigned to work in Germany from January 2018 through June 2020. When she left, Jeannie was not homesteading any property in Minnesota, and she surrendered the lease on her St. Paul apartment. She spent fewer than 35 days in the United States each year and earned no Minnesota income during her visits.

Jeannie is considered a nonresident for Minnesota tax purposes during all of 2018 and 2019. She is not required to file a Minnesota return for those years.

For 2020, Jeannie will file as a part-year resident if she returns to Minnesota to reside. She will pay Minnesota tax on all taxable income she receives after July 1, 2020.

Note: Had Jeannie worked and lived abroad from June 2018 through June 2019, she would file each year’s Minnesota return as a part-year resident. She would pay Minnesota tax on all taxable income she received from January through May 2018, and from July through December 2019.