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.
Minnesota matches this federal “exclusion” for state residents who meet both of the following requirements:
- You qualify for – and claim – the federal Foreign Earned Income Exclusion. See eligibility and other details about the federal exclusion on the IRS website.
- You aren’t 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 gone.
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 don’t have to pay Minnesota tax on foreign-earned and some other types of income.
If you qualify for the foreign income exclusion:
- Use Minnesota’s nonresident income rules to determine what (if any) income is taxable in the state. For details, see How Nonresident Income is Taxed by Minnesota.
- You’re required to file a Minnesota tax return only if you meet the minimum filing requirements. For details, see 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, see Part-Year Residents and Nonresidents.
Example
Jeannie was assigned to work in Germany from January 2015 through June 2017. When she left, Jeannie wasn’t 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 taxes during all of 2015 and 2016. She isn’t required to file a Minnesota return for those years.
For 2017, 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, 2017.
Note: Had Jeannie worked and lived abroad from June 2015 through June 2016, 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 2015, and from July through December 2016.