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Filing taxes 4. Filing taxes   Foreign Earned Income and Housing: Exclusion – Deduction Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Who Qualifies for the Exclusions and the Deduction? RequirementsTax Home in Foreign Country Bona Fide Residence Test Physical Presence Test Waiver of Time Requirements U. Filing taxes S. Filing taxes Travel Restrictions Foreign Earned Income Foreign Earned Income ExclusionLimit on Excludable Amount Choosing the Exclusion Foreign Housing Exclusion and DeductionHousing Amount Foreign Housing Exclusion Foreign Housing Deduction Married Couples Form 2555 and Form 2555-EZForm 2555-EZ Form 2555 Topics - This chapter discusses: Who qualifies for the foreign earned income exclusion, the foreign housing exclusion, and the foreign housing deduction, The requirements that must be met to claim either exclusion or the deduction, How to figure the foreign earned income exclusion, and How to figure the foreign housing exclusion and the foreign housing deduction. Filing taxes Useful Items - You may want to see: Publication 519 U. Filing taxes S. Filing taxes Tax Guide for Aliens 570 Tax Guide for Individuals With Income from U. Filing taxes S. Filing taxes Possessions 596 Earned Income Credit (EIC) Form (and Instructions) 1040X Amended U. Filing taxes S. Filing taxes Individual Income Tax Return 2555 Foreign Earned Income 2555-EZ Foreign Earned Income Exclusion See chapter 7 for information about getting these publications and forms. Filing taxes Who Qualifies for the Exclusions and the Deduction? If you meet certain requirements, you may qualify for the foreign earned income and foreign housing exclusions and the foreign housing deduction. Filing taxes If you are a U. Filing taxes S. Filing taxes citizen or a resident alien of the United States and you live abroad, you are taxed on your worldwide income. Filing taxes However, you may qualify to exclude from income up to $97,600 of your foreign earnings. Filing taxes In addition, you can exclude or deduct certain foreign housing amounts. Filing taxes See Foreign Earned Income Exclusion and Foreign Housing Exclusion and Deduction, later. Filing taxes You also may be entitled to exclude from income the value of meals and lodging provided to you by your employer. Filing taxes See Exclusion of Meals and Lodging, later. Filing taxes Requirements To claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, you must meet all three of the following requirements. Filing taxes Your tax home must be in a foreign country. Filing taxes You must have foreign earned income. Filing taxes You must be one of the following. Filing taxes A U. Filing taxes S. Filing taxes citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. Filing taxes A U. Filing taxes S. Filing taxes resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. Filing taxes A U. Filing taxes S. Filing taxes citizen or a U. Filing taxes S. Filing taxes resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months. Filing taxes See Publication 519 to find out if you are a U. Filing taxes S. Filing taxes resident alien for tax purposes and whether you keep that alien status when you temporarily work abroad. Filing taxes If you are a nonresident alien married to a U. Filing taxes S. Filing taxes citizen or resident alien, and both you and your spouse choose to treat you as a resident alien, you are a resident alien for tax purposes. Filing taxes For information on making the choice, see the discussion in chapter 1 under Nonresident Alien Spouse Treated as a Resident . Filing taxes Waiver of minimum time requirements. Filing taxes   The minimum time requirements for bona fide residence and physical presence can be waived if you must leave a foreign country because of war, civil unrest, or similar adverse conditions in that country. Filing taxes This is fully explained under Waiver of Time Requirements , later. Filing taxes   See Figure 4-A and information in this chapter to determine if you are eligible to claim either exclusion or the deduction. Filing taxes Tax Home in Foreign Country To qualify for the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, your tax home must be in a foreign country throughout your period of bona fide residence or physical presence abroad. Filing taxes Bona fide residence and physical presence are explained later. Filing taxes Tax Home Your tax home is the general area of your main place of business, employment, or post of duty, regardless of where you maintain your family home. Filing taxes Your tax home is the place where you are permanently or indefinitely engaged to work as an employee or self-employed individual. Filing taxes Having a “tax home” in a given location does not necessarily mean that the given location is your residence or domicile for tax purposes. Filing taxes If you do not have a regular or main place of business because of the nature of your work, your tax home may be the place where you regularly live. Filing taxes If you have neither a regular or main place of business nor a place where you regularly live, you are considered an itinerant and your tax home is wherever you work. Filing taxes You are not considered to have a tax home in a foreign country for any period in which your abode is in the United States. Filing taxes However, your abode is not necessarily in the United States while you are temporarily in the United States. Filing taxes Your abode is also not necessarily in the United States merely because you maintain a dwelling in the United States, whether or not your spouse or dependents use the dwelling. Filing taxes “Abode” has been variously defined as one's home, habitation, residence, domicile, or place of dwelling. Filing taxes It does not mean your principal place of business. Filing taxes “Abode” has a domestic rather than a vocational meaning and does not mean the same as “tax home. Filing taxes ” The location of your abode often will depend on where you maintain your economic, family, and personal ties. Filing taxes Example 1. Filing taxes You are employed on an offshore oil rig in the territorial waters of a foreign country and work a 28-day on/28-day off schedule. Filing taxes You return to your family residence in the United States during your off periods. Filing taxes You are considered to have an abode in the United States and do not satisfy the tax home test in the foreign country. Filing taxes You cannot claim either of the exclusions or the housing deduction. Filing taxes Example 2. Filing taxes For several years, you were a marketing executive with a producer of machine tools in Toledo, Ohio. Filing taxes In November of last year, your employer transferred you to London, England, for a minimum of 18 months to set up a sales operation for Europe. Filing taxes Before you left, you distributed business cards showing your business and home addresses in London. Filing taxes You kept ownership of your home in Toledo but rented it to another family. Filing taxes You placed your car in storage. Filing taxes In November of last year, you moved your spouse, children, furniture, and family pets to a home your employer rented for you in London. Filing taxes Shortly after moving, you leased a car and you and your spouse got British driving licenses. Filing taxes Your entire family got library cards for the local public library. Filing taxes You and your spouse opened bank accounts with a London bank and secured consumer credit. Filing taxes You joined a local business league and both you and your spouse became active in the neighborhood civic association and worked with a local charity. Filing taxes Your abode is in London for the time you live there. Filing taxes You satisfy the tax home test in the foreign country. Filing taxes Please click here for the text description of the image. Filing taxes Figure 4–A Can I Claim the Exclusion or Deduction? Temporary or Indefinite Assignment The location of your tax home often depends on whether your assignment is temporary or indefinite. Filing taxes If you are temporarily absent from your tax home in the United States on business, you may be able to deduct your away-from-home expenses (for travel, meals, and lodging), but you would not qualify for the foreign earned income exclusion. Filing taxes If your new work assignment is for an indefinite period, your new place of employment becomes your tax home and you would not be able to deduct any of the related expenses that you have in the general area of this new work assignment. Filing taxes If your new tax home is in a foreign country and you meet the other requirements, your earnings may qualify for the foreign earned income exclusion. Filing taxes If you expect your employment away from home in a single location to last, and it does last, for 1 year or less, it is temporary unless facts and circumstances indicate otherwise. Filing taxes If you expect it to last for more than 1 year, it is indefinite. Filing taxes If you expect it to last for 1 year or less, but at some later date you expect it to last longer than 1 year, it is temporary (in the absence of facts and circumstances indicating otherwise) until your expectation changes. Filing taxes Once your expectation changes, it is indefinite. Filing taxes Foreign Country To meet the bona fide residence test or the physical presence test, you must live in or be present in a foreign country. Filing taxes A foreign country includes any territory under the sovereignty of a government other than that of the United States. Filing taxes The term “foreign country” includes the country's airspace and territorial waters, but not international waters and the airspace above them. Filing taxes It also includes the seabed and subsoil of those submarine areas adjacent to the country's territorial waters over which it has exclusive rights under international law to explore and exploit the natural resources. Filing taxes The term “foreign country” does not include Antarctica or U. Filing taxes S. Filing taxes possessions such as Puerto Rico, Guam, the Commonwealth of the Northern Mariana Islands, the U. Filing taxes S. Filing taxes Virgin Islands, and Johnston Island. Filing taxes For purposes of the foreign earned income exclusion, the foreign housing exclusion, and the foreign housing deduction, the terms “foreign,” “abroad,” and “overseas” refer to areas outside the United States and those areas listed or described in the previous sentence. Filing taxes American Samoa, Guam, and the Commonwealth of the Northern Mariana Islands Residence or presence in a U. Filing taxes S. Filing taxes possession does not qualify you for the foreign earned income exclusion. Filing taxes You may, however, qualify for an exclusion of your possession income on your U. Filing taxes S. Filing taxes return. Filing taxes American Samoa. Filing taxes   There is a possession exclusion available to individuals who are bona fide residents of American Samoa for the entire tax year. Filing taxes Gross income from sources within American Samoa may be eligible for this exclusion. Filing taxes Income that is effectively connected with the conduct of a trade or business within American Samoa also may be eligible for this exclusion. Filing taxes Use Form 4563, Exclusion of Income for Bona Fide Residents of American Samoa, to figure the exclusion. Filing taxes Guam and the Commonwealth of the Northern Mariana Islands. Filing taxes   An exclusion will be available to residents of Guam and the Commonwealth of the Northern Mariana Islands if, and when, new implementation agreements take effect between the United States and those possessions. Filing taxes   For more information, see Publication 570. Filing taxes Puerto Rico and U. Filing taxes S. Filing taxes Virgin Islands Residents of Puerto Rico and the U. Filing taxes S. Filing taxes Virgin Islands cannot claim the foreign earned income exclusion or the foreign housing exclusion. Filing taxes Puerto Rico. Filing taxes   Generally, if you are a U. Filing taxes S. Filing taxes citizen who is a bona fide resident of Puerto Rico for the entire tax year, you are not subject to U. Filing taxes S. Filing taxes tax on income from Puerto Rican sources. Filing taxes This does not include amounts paid for services performed as an employee of the United States. Filing taxes However, you are subject to U. Filing taxes S. Filing taxes tax on your income from sources outside Puerto Rico. Filing taxes In figuring your U. Filing taxes S. Filing taxes tax, you cannot deduct expenses allocable to income not subject to tax. Filing taxes Bona Fide Residence Test You meet the bona fide residence test if you are a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. Filing taxes You can use the bona fide residence test to qualify for the exclusions and the deduction only if you are either: A U. Filing taxes S. Filing taxes citizen, or A U. Filing taxes S. Filing taxes resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect. Filing taxes You do not automatically acquire bona fide resident status merely by living in a foreign country or countries for 1 year. Filing taxes If you go to a foreign country to work on a particular job for a specified period of time, you ordinarily will not be regarded as a bona fide resident of that country even though you work there for 1 tax year or longer. Filing taxes The length of your stay and the nature of your job are only two of the factors to be considered in determining whether you meet the bona fide residence test. Filing taxes Bona fide residence. Filing taxes   To meet the bona fide residence test, you must have established a bona fide residence in a foreign country. Filing taxes   Your bona fide residence is not necessarily the same as your domicile. Filing taxes Your domicile is your permanent home, the place to which you always return or intend to return. Filing taxes Example. Filing taxes You could have your domicile in Cleveland, Ohio, and a bona fide residence in Edinburgh, Scotland, if you intend to return eventually to Cleveland. Filing taxes The fact that you go to Scotland does not automatically make Scotland your bona fide residence. Filing taxes If you go there as a tourist, or on a short business trip, and return to the United States, you have not established bona fide residence in Scotland. Filing taxes But if you go to Scotland to work for an indefinite or extended period and you set up permanent quarters there for yourself and your family, you probably have established a bona fide residence in a foreign country, even though you intend to return eventually to the United States. Filing taxes You are clearly not a resident of Scotland in the first instance. Filing taxes However, in the second, you are a resident because your stay in Scotland appears to be permanent. Filing taxes If your residency is not as clearly defined as either of these illustrations, it may be more difficult to decide whether you have established a bona fide residence. Filing taxes Determination. Filing taxes   Questions of bona fide residence are determined according to each individual case, taking into account factors such as your intention, the purpose of your trip, and the nature and length of your stay abroad. Filing taxes   To meet the bona fide residence test, you must show the Internal Revenue Service (IRS) that you have been a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. Filing taxes The IRS decides whether you are a bona fide resident of a foreign country largely on the basis of facts you report on Form 2555. Filing taxes IRS cannot make this determination until you file Form 2555. Filing taxes Statement to foreign authorities. Filing taxes   You are not considered a bona fide resident of a foreign country if you make a statement to the authorities of that country that you are not a resident of that country, and the authorities: Hold that you are not subject to their income tax laws as a resident, or Have not made a final decision on your status. Filing taxes Special agreements and treaties. Filing taxes   An income tax exemption provided in a treaty or other international agreement will not in itself prevent you from being a bona fide resident of a foreign country. Filing taxes Whether a treaty prevents you from becoming a bona fide resident of a foreign country is determined under all provisions of the treaty, including specific provisions relating to residence or privileges and immunities. Filing taxes Example 1. Filing taxes You are a U. Filing taxes S. Filing taxes citizen employed in the United Kingdom by a U. Filing taxes S. Filing taxes employer under contract with the U. Filing taxes S. Filing taxes Armed Forces. Filing taxes You are not subject to the North Atlantic Treaty Status of Forces Agreement. Filing taxes You may be a bona fide resident of the United Kingdom. Filing taxes Example 2. Filing taxes You are a U. Filing taxes S. Filing taxes citizen in the United Kingdom who qualifies as an “employee” of an armed service or as a member of a “civilian component” under the North Atlantic Treaty Status of Forces Agreement. Filing taxes You are not a bona fide resident of the United Kingdom. Filing taxes Example 3. Filing taxes You are a U. Filing taxes S. Filing taxes citizen employed in Japan by a U. Filing taxes S. Filing taxes employer under contract with the U. Filing taxes S. Filing taxes Armed Forces. Filing taxes You are subject to the agreement of the Treaty of Mutual Cooperation and Security between the United States and Japan. Filing taxes Being subject to the agreement does not make you a bona fide resident of Japan. Filing taxes Example 4. Filing taxes You are a U. Filing taxes S. Filing taxes citizen employed as an “official” by the United Nations in Switzerland. Filing taxes You are exempt from Swiss taxation on the salary or wages paid to you by the United Nations. Filing taxes This does not prevent you from being a bona fide resident of Switzerland. Filing taxes Effect of voting by absentee ballot. Filing taxes   If you are a U. Filing taxes S. Filing taxes citizen living abroad, you can vote by absentee ballot in any election held in the United States without risking your status as a bona fide resident of a foreign country. Filing taxes   However, if you give information to the local election officials about the nature and length of your stay abroad that does not match the information you give for the bona fide residence test, the information given in connection with absentee voting will be considered in determining your status, but will not necessarily be conclusive. Filing taxes Uninterrupted period including entire tax year. Filing taxes   To meet the bona fide residence test, you must reside in a foreign country or countries for an uninterrupted period that includes an entire tax year. Filing taxes An entire tax year is from January 1 through December 31 for taxpayers who file their income tax returns on a calendar year basis. Filing taxes   During the period of bona fide residence in a foreign country, you can leave the country for brief or temporary trips back to the United States or elsewhere for vacation or business. Filing taxes To keep your status as a bona fide resident of a foreign country, you must have a clear intention of returning from such trips, without unreasonable delay, to your foreign residence or to a new bona fide residence in another foreign country. Filing taxes Example 1. Filing taxes You arrived with your family in Lisbon, Portugal, on November 1, 2011. Filing taxes Your assignment is indefinite, and you intend to live there with your family until your company sends you to a new post. Filing taxes You immediately established residence there. Filing taxes You spent April of 2012 at a business conference in the United States. Filing taxes Your family stayed in Lisbon. Filing taxes Immediately following the conference, you returned to Lisbon and continued living there. Filing taxes On January 1, 2013, you completed an uninterrupted period of residence for a full tax year (2012), and you meet the bona fide residence test. Filing taxes Example 2. Filing taxes Assume the same facts as in Example 1, except that you transferred back to the United States on December 13, 2012. Filing taxes You would not meet the bona fide residence test because your bona fide residence in the foreign country, although it lasted more than a year, did not include a full tax year. Filing taxes You may, however, qualify for the foreign earned income exclusion or the housing exclusion or deduction under the physical presence test (discussed later). Filing taxes Bona fide resident for part of a year. Filing taxes   Once you have established bona fide residence in a foreign country for an uninterrupted period that includes an entire tax year, you are a bona fide resident of that country for the period starting with the date you actually began the residence and ending with the date you abandon the foreign residence. Filing taxes Your period of bona fide residence can include an entire tax year plus parts of 2 other tax years. Filing taxes Example. Filing taxes You were a bona fide resident of Singapore from March 1, 2011, through September 14, 2013. Filing taxes On September 15, 2013, you returned to the United States. Filing taxes Since you were a bona fide resident of a foreign country for all of 2012, you were also a bona fide resident of a foreign country from March 1, 2011, through the end of 2011 and from January 1, 2013, through September 14, 2013. Filing taxes Reassignment. Filing taxes   If you are assigned from one foreign post to another, you may or may not have a break in foreign residence between your assignments, depending on the circumstances. Filing taxes Example 1. Filing taxes You were a resident of Pakistan from October 1, 2012, through November 30, 2013. Filing taxes On December 1, 2013, you and your family returned to the United States to wait for an assignment to another foreign country. Filing taxes Your household goods also were returned to the United States. Filing taxes Your foreign residence ended on November 30, 2013, and did not begin again until after you were assigned to another foreign country and physically entered that country. Filing taxes Since you were not a bona fide resident of a foreign country for the entire tax year of 2012 or 2013 you do not meet the bona fide residence test in either year. Filing taxes You may, however, qualify for the foreign earned income exclusion or the housing exclusion or deduction under the physical presence test, discussed later. Filing taxes Example 2. Filing taxes Assume the same facts as in Example 1, except that upon completion of your assignment in Pakistan you were given a new assignment to Turkey. Filing taxes On December 1, 2013, you and your family returned to the United States for a month's vacation. Filing taxes On January 2, 2014, you arrived in Turkey for your new assignment. Filing taxes Because you did not interrupt your bona fide residence abroad, you meet the bona fide residence test. Filing taxes Physical Presence Test You meet the physical presence test if you are physically present in a foreign country or countries 330 full days during a period of 12 consecutive months. Filing taxes The 330 days do not have to be consecutive. Filing taxes Any U. Filing taxes S. Filing taxes citizen or resident alien can use the physical presence test to qualify for the exclusions and the deduction. Filing taxes The physical presence test is based only on how long you stay in a foreign country or countries. Filing taxes This test does not depend on the kind of residence you establish, your intentions about returning, or the nature and purpose of your stay abroad. Filing taxes 330 full days. Filing taxes   Generally, to meet the physical presence test, you must be physically present in a foreign country or countries for at least 330 full days during a 12-month period. Filing taxes You can count days you spent abroad for any reason. Filing taxes You do not have to be in a foreign country only for employment purposes. Filing taxes You can be on vacation. Filing taxes   You do not meet the physical presence test if illness, family problems, a vacation, or your employer's orders cause you to be present for less than the required amount of time. Filing taxes Exception. Filing taxes   You can be physically present in a foreign country or countries for less than 330 full days and still meet the physical presence test if you are required to leave a country because of war or civil unrest. Filing taxes See Waiver of Time Requirements, later. Filing taxes Full day. Filing taxes   A full day is a period of 24 consecutive hours, beginning at midnight. Filing taxes Travel. Filing taxes    When you leave the United States to go directly to a foreign country or when you return directly to the United States from a foreign country, the time you spend on or over international waters does not count toward the 330-day total. Filing taxes Example. Filing taxes You leave the United States for France by air on June 10. Filing taxes You arrive in France at 9:00 a. Filing taxes m. Filing taxes on June 11. Filing taxes Your first full day of physical presence in France is June 12. Filing taxes Passing over foreign country. Filing taxes   If, in traveling from the United States to a foreign country, you pass over a foreign country before midnight of the day you leave, the first day you can count toward the 330-day total is the day following the day you leave the United States. Filing taxes Example. Filing taxes You leave the United States by air at 9:30 a. Filing taxes m. Filing taxes on June 10 to travel to Kenya. Filing taxes You pass over western Africa at 11:00 p. Filing taxes m. Filing taxes on June 10 and arrive in Kenya at 12:30 a. Filing taxes m. Filing taxes on June 11. Filing taxes Your first full day in a foreign country is June 11. Filing taxes Change of location. Filing taxes   You can move about from one place to another in a foreign country or to another foreign country without losing full days. Filing taxes If any part of your travel is not within any foreign country and takes less than 24 hours, you are considered to be in a foreign country during that part of travel. Filing taxes Example 1. Filing taxes You leave Ireland by air at 11:00 p. Filing taxes m. Filing taxes on July 6 and arrive in Sweden at 5:00 a. Filing taxes m. Filing taxes on July 7. Filing taxes Your trip takes less than 24 hours and you lose no full days. Filing taxes Example 2. Filing taxes You leave Norway by ship at 10:00 p. Filing taxes m. Filing taxes on July 6 and arrive in Portugal at 6:00 a. Filing taxes m. Filing taxes on July 8. Filing taxes Since your travel is not within a foreign country or countries and the trip takes more than 24 hours, you lose as full days July 6, 7, and 8. Filing taxes If you remain in Portugal, your next full day in a foreign country is July 9. Filing taxes In United States while in transit. Filing taxes   If you are in transit between two points outside the United States and are physically present in the United States for less than 24 hours, you are not treated as present in the United States during the transit. Filing taxes You are treated as traveling over areas not within any foreign country. Filing taxes    Please click here for the text description of the image. Filing taxes Figure 4-B How to figure the 12-month period. Filing taxes   There are four rules you should know when figuring the 12-month period. Filing taxes Your 12-month period can begin with any day of the month. Filing taxes It ends the day before the same calendar day, 12 months later. Filing taxes Your 12-month period must be made up of consecutive months. Filing taxes Any 12-month period can be used if the 330 days in a foreign country fall within that period. Filing taxes You do not have to begin your 12-month period with your first full day in a foreign country or end it with the day you leave. Filing taxes You can choose the 12-month period that gives you the greatest exclusion. Filing taxes In determining whether the 12-month period falls within a longer stay in the foreign country, 12-month periods can overlap one another. Filing taxes Example 1. Filing taxes You are a construction worker who works on and off in a foreign country over a 20-month period. Filing taxes You might pick up the 330 full days in a 12-month period only during the middle months of the time you work in the foreign country because the first few and last few months of the 20-month period are broken up by long visits to the United States. Filing taxes Example 2. Filing taxes You work in New Zealand for a 20-month period from January 1, 2012, through August 31, 2013, except that you spend 28 days in February 2012 and 28 days in February 2013 on vacation in the United States. Filing taxes You are present in New Zealand for at least 330 full days during each of the following two 12-month periods: January 1, 2012 – December 31, 2012 and September 1, 2012 – August 31, 2013. Filing taxes By overlapping the 12-month periods in this way, you meet the physical presence test for the whole 20-month period. Filing taxes See Figure 4-B, on the previous page. Filing taxes Waiver of Time Requirements Both the bona fide residence test and the physical presence test contain minimum time requirements. Filing taxes The minimum time requirements can be waived, however, if you must leave a foreign country because of war, civil unrest, or similar adverse conditions in that country. Filing taxes You must be able to show that you reasonably could have expected to meet the minimum time requirements if not for the adverse conditions. Filing taxes To qualify for the waiver, you must actually have your tax home in the foreign country and be a bona fide resident of, or be physically present in, the foreign country on or before the beginning date of the waiver. Filing taxes Early in 2014, the IRS will publish in the Internal Revenue Bulletin a list of the only countries that qualify for the waiver for 2013 and the effective dates. Filing taxes If you left one of the countries on or after the date listed for each country, you can meet the bona fide residence test or physical presence test for 2013 without meeting the minimum time requirement. Filing taxes However, in figuring your exclusion, the number of your qualifying days of bona fide residence or physical presence includes only days of actual residence or presence within the country. Filing taxes U. Filing taxes S. Filing taxes Travel Restrictions If you are present in a foreign country in violation of U. Filing taxes S. Filing taxes law, you will not be treated as a bona fide resident of a foreign country or as physically present in a foreign country while you are in violation of the law. Filing taxes Income that you earn from sources within such a country for services performed during a period of violation does not qualify as foreign earned income. Filing taxes Your housing expenses within that country (or outside that country for housing your spouse or dependents) while you are in violation of the law cannot be included in figuring your foreign housing amount. Filing taxes For 2013, the only country to which travel restrictions applied was Cuba. Filing taxes The restrictions applied for the entire year. Filing taxes However, individuals working at the U. Filing taxes S. Filing taxes Naval Base at Guantanamo Bay in Cuba are not in violation of U. Filing taxes S. Filing taxes law. Filing taxes Personal service income earned by individuals at the base is eligible for the foreign earned income exclusion provided the other requirements are met. Filing taxes Foreign Earned Income To claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, you must have foreign earned income. Filing taxes Foreign earned income generally is income you receive for services you perform during a period in which you meet both of the following requirements. Filing taxes Your tax home is in a foreign country. Filing taxes You meet either the bona fide residence test or the physical presence test. Filing taxes To determine whether your tax home is in a foreign country, see Tax Home in Foreign Country, earlier. Filing taxes To determine whether you meet either the bona fide residence test or the physical presence test, see Bona Fide Residence Test and Physical Presence Test, earlier. Filing taxes Foreign earned income does not include the following amounts. Filing taxes The value of meals and lodging that you exclude from your income because the meals and lodging were furnished for the convenience of your employer. Filing taxes Pension or annuity payments you receive, including social security benefits (see Pensions and annuities, later). Filing taxes Pay you receive as an employee of the U. Filing taxes S. Filing taxes Government. Filing taxes (See U. Filing taxes S. Filing taxes Government Employees, later. Filing taxes ) Amounts you include in your income because of your employer's contributions to a nonexempt employee trust or to a nonqualified annuity contract. Filing taxes Any unallowable moving expense deduction that you choose to recapture as explained under Moving Expense Attributable to Foreign Earnings in 2 Years in chapter 5. Filing taxes Payments you receive after the end of the tax year following the tax year in which you performed the services that earned the income. Filing taxes Earned income. Filing taxes   This is pay for personal services performed, such as wages, salaries, or professional fees. Filing taxes The list that follows classifies many types of income into three categories. Filing taxes The column headed Variable Income lists income that may fall into either the earned income category, the unearned income category, or partly into both. Filing taxes For more information on earned and unearned income, see Earned and Unearned Income, later. Filing taxes Earned Income Unearned Income Variable Income Salaries and wages Dividends Business profits Commissions Interest Royalties Bonuses Capital gains Rents Professional fees Gambling winnings Scholarships and fellowships Tips Alimony     Social security benefits     Pensions     Annuities     In addition to the types of earned income listed, certain noncash income and allowances or reimbursements are considered earned income. Filing taxes Noncash income. Filing taxes   The fair market value of property or facilities provided to you by your employer in the form of lodging, meals, or use of a car is earned income. Filing taxes Allowances or reimbursements. Filing taxes   Earned income includes allowances or reimbursements you receive, such as the following amounts. Filing taxes    Cost-of-living allowances. Filing taxes Overseas differential. Filing taxes Family allowance. Filing taxes Reimbursement for education or education allowance. Filing taxes Home leave allowance. Filing taxes Quarters allowance. Filing taxes Reimbursement for moving or moving allowance (unless excluded from income as discussed later in Reimbursement of employee expenses under Earned and Unearned Income). Filing taxes Source of Earned Income The source of your earned income is the place where you perform the services for which you received the income. Filing taxes Foreign earned income is income you receive for working in a foreign country. Filing taxes Where or how you are paid has no effect on the source of the income. Filing taxes For example, income you receive for work done in Austria is income from a foreign source even if the income is paid directly to your bank account in the United States and your employer is located in New York City. Filing taxes Example. Filing taxes You are a U. Filing taxes S. Filing taxes citizen, a bona fide resident of Canada, and working as a mining engineer. Filing taxes Your salary is $76,800 per year. Filing taxes You also receive a $6,000 cost-of-living allowance, and a $6,000 education allowance. Filing taxes Your employment contract did not indicate that you were entitled to these allowances only while outside the United States. Filing taxes Your total income is $88,800. Filing taxes You work a 5-day week, Monday through Friday. Filing taxes After subtracting your vacation, you have a total of 240 workdays in the year. Filing taxes You worked in the United States during the year for 6 weeks (30 workdays). Filing taxes The following shows how to figure the part of your income that is for work done in Canada during the year. Filing taxes   Number of days worked in Canada during the year (210) × Total income ($88,800) = $77,700     Number of days of work during the year for which payment was made (240)   Your foreign source earned income is $77,700. Filing taxes Earned and Unearned Income Earned income was defined earlier as pay for personal services performed. Filing taxes Some types of income are not easily identified as earned or unearned income. Filing taxes Some of these types of income are further explained here. Filing taxes Income from a sole proprietorship or partnership. Filing taxes   Income from a business in which capital investment is an important part of producing the income may be unearned income. Filing taxes If you are a sole proprietor or partner and your personal services are also an important part of producing the income, the part of the income that represents the value of your personal services will be treated as earned income. Filing taxes Capital a factor. Filing taxes   If capital investment is an important part of producing income, no more than 30% of your share of the net profits of the business is earned income. Filing taxes   If you have no net profits, the part of your gross profit that represents a reasonable allowance for personal services actually performed is considered earned income. Filing taxes Because you do not have a net profit, the 30% limit does not apply. Filing taxes Example 1. Filing taxes You are a U. Filing taxes S. Filing taxes citizen and meet the bona fide residence test. Filing taxes You invest in a partnership based in Cameroon that is engaged solely in selling merchandise outside the United States. Filing taxes You perform no services for the partnership. Filing taxes At the end of the tax year, your share of the net profits is $80,000. Filing taxes The entire $80,000 is unearned income. Filing taxes Example 2. Filing taxes Assume that in Example 1 you spend time operating the business. Filing taxes Your share of the net profits is $80,000; 30% of your share of the profits is $24,000. Filing taxes If the value of your services for the year is $15,000, your earned income is limited to the value of your services, $15,000. Filing taxes Capital not a factor. Filing taxes   If capital is not an income-producing factor and personal services produce the business income, the 30% rule does not apply. Filing taxes The entire amount of business income is earned income. Filing taxes Example. Filing taxes You and Lou Green are management consultants and operate as equal partners in performing services outside the United States. Filing taxes Because capital is not an income- producing factor, all the income from the partnership is considered earned income. Filing taxes Income from a corporation. Filing taxes   The salary you receive from a corporation is earned income only if it represents a reasonable allowance as compensation for work you do for the corporation. Filing taxes Any amount over what is considered a reasonable salary is unearned income. Filing taxes Example 1. Filing taxes You are a U. Filing taxes S. Filing taxes citizen and an officer and stockholder of a corporation in Honduras. Filing taxes You perform no work or service of any kind for the corporation. Filing taxes During the tax year you receive a $10,000 “salary” from the corporation. Filing taxes The $10,000 clearly is not for personal services and is unearned income. Filing taxes Example 2. Filing taxes You are a U. Filing taxes S. Filing taxes citizen and work full time as secretary-treasurer of your corporation. Filing taxes During the tax year you receive $100,000 as salary from the corporation. Filing taxes If $80,000 is a reasonable allowance as pay for the work you did, then $80,000 is earned income. Filing taxes Stock options. Filing taxes   You may have earned income if you disposed of stock that you got by exercising a stock option granted to you under an employee stock purchase plan. Filing taxes   If your gain on the disposition of stock you got by exercising an option is treated as capital gain, your gain is unearned income. Filing taxes   However, if you disposed of the stock less than 2 years after you were granted the option or less than 1 year after you got the stock, part of the gain on the disposition may be earned income. Filing taxes It is considered received in the year you disposed of the stock and earned in the year you performed the services for which you were granted the option. Filing taxes Any part of the earned income that is due to work you did outside the United States is foreign earned income. Filing taxes   See Publication 525, Taxable and Nontaxable Income, for a discussion of the treatment of stock options. Filing taxes Pensions and annuities. Filing taxes    For purposes of the foreign earned income exclusion, the foreign housing exclusion, and the foreign housing deduction, amounts received as pensions or annuities are unearned income. Filing taxes Royalties. Filing taxes   Royalties from the leasing of oil and mineral lands and patents generally are a form of rent or dividends and are unearned income. Filing taxes   Royalties received by a writer are earned income if they are received: For the transfer of property rights of the writer in the writer's product, or Under a contract to write a book or series of articles. Filing taxes Rental income. Filing taxes   Generally, rental income is unearned income. Filing taxes If you perform personal services in connection with the production of rent, up to 30% of your net rental income can be considered earned income. Filing taxes Example. Filing taxes Larry Smith, a U. Filing taxes S. Filing taxes citizen living in Australia, owns and operates a rooming house in Sydney. Filing taxes If he is operating the rooming house as a business that requires capital and personal services, he can consider up to 30% of net rental income as earned income. Filing taxes On the other hand, if he just owns the rooming house and performs no personal services connected with its operation, except perhaps making minor repairs and collecting rents, none of his net income from the house is considered earned income. Filing taxes It is all unearned income. Filing taxes Professional fees. Filing taxes   If you are engaged in a professional occupation (such as a doctor or lawyer), all fees received in the performance of these services are earned income. Filing taxes Income of an artist. Filing taxes   Income you receive from the sale of paintings you created is earned income. Filing taxes Scholarships and fellowships. Filing taxes   Any portion of a scholarship or fellowship grant that is paid to you for teaching, research or other services is considered earned income if you must include it in your gross income. Filing taxes If the payer of the grant is required to provide you with a Form W-2, Wage and Tax Statement, these amounts will be listed as wages. Filing taxes    Certain scholarship and fellowship income may be exempt under other provisions. Filing taxes See Publication 970, Tax Benefits for Education, chapter 1. Filing taxes Use of employer's property or facilities. Filing taxes   If you receive fringe benefits in the form of the right to use your employer's property or facilities, the fair market value of that right is earned income. Filing taxes Fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being required to buy or sell, and both having reasonable knowledge of all the necessary facts. Filing taxes Example. Filing taxes You are privately employed and live in Japan all year. Filing taxes You are paid a salary of $6,000 a month. Filing taxes You live rent-free in a house provided by your employer that has a fair rental value of $3,000 a month. Filing taxes The house is not provided for your employer's convenience. Filing taxes You report on the calendar-year, cash basis. Filing taxes You received $72,000 salary from foreign sources plus $36,000 fair rental value of the house, or a total of $108,000 of earned income. Filing taxes Reimbursement of employee expenses. Filing taxes   If you are reimbursed under an accountable plan (defined below) for expenses you incur on your employer's behalf and you have adequately accounted to your employer for the expenses, do not include the reimbursement for those expenses in your earned income. Filing taxes   The expenses for which you are reimbursed are not considered allocable (related) to your earned income. Filing taxes If expenses and reimbursement are equal, there is nothing to allocate to excluded income. Filing taxes If expenses are more than the reimbursement, the unreimbursed expenses are considered to have been incurred in producing earned income and must be divided between your excluded and included income in determining the amount of unreimbursed expenses you can deduct. Filing taxes (See chapter 5. Filing taxes ) If the reimbursement is more than the expenses, no expenses remain to be divided between excluded and included income and the excess reimbursement must be included in earned income. Filing taxes   These rules do not apply to the following individuals. Filing taxes Straight-commission salespersons. Filing taxes Employees who have arrangements with their employers under which taxes are not withheld on a percentage of the commissions because the employers consider that percentage to be attributable to the employees' expenses. Filing taxes Accountable plan. Filing taxes   An accountable plan is a reimbursement or allowance arrangement that includes all three of the following rules. Filing taxes The expenses covered under the plan must have a business connection. Filing taxes The employee must adequately account to the employer for these expenses within a reasonable period of time. Filing taxes The employee must return any excess reimbursement or allowance within a reasonable period of time. Filing taxes Reimbursement of moving expenses. Filing taxes   Reimbursement of moving expenses may be earned income. Filing taxes You must include as earned income: Any reimbursements of, or payments for, nondeductible moving expenses, Reimbursements that are more than your deductible expenses and that you do not return to your employer, Any reimbursements made (or treated as made) under a nonaccountable plan (any plan that does not meet the rules listed above for an accountable plan), even if they are for deductible expenses, and Any reimbursement of moving expenses you deducted in an earlier year. Filing taxes This section discusses reimbursements that must be included in earned income. Filing taxes Publication 521, Moving Expenses, discusses additional rules that apply to moving expense deductions and reimbursements. Filing taxes   The rules for determining when the reimbursement is considered earned or where the reimbursement is considered earned may differ somewhat from the general rules previously discussed. Filing taxes   Although you receive the reimbursement in one tax year, it may be considered earned for services performed, or to be performed, in another tax year. Filing taxes You must report the reimbursement as income on your return in the year you receive it, even if it is considered earned during a different year. Filing taxes Move from U. Filing taxes S. Filing taxes to foreign country. Filing taxes   If you move from the United States to a foreign country, your moving expense reimbursement is generally considered pay for future services to be performed at the new location. Filing taxes The reimbursement is considered earned solely in the year of the move if you qualify for the exclusion for a period that includes at least 120 days during that tax year. Filing taxes   If you are neither a bona fide resident of nor physically present in a foreign country or countries for a period that includes 120 days during the year of the move, a portion of the reimbursement is considered earned in the year of the move and a portion is considered earned in the year following the year of the move. Filing taxes To figure the amount earned in the year of the move, multiply the reimbursement by a fraction. Filing taxes The numerator (top number) is the number of days in your qualifying period that fall within the year of the move, and the denominator (bottom number) is the total number of days in the year of the move. Filing taxes   The difference between the total reimbursement and the amount considered earned in the year of the move is the amount considered earned in the year following the year of the move. Filing taxes The part earned in each year is figured as shown in the following example. Filing taxes Example. Filing taxes You are a U. Filing taxes S. Filing taxes citizen working in the United States. Filing taxes You were told in October 2012 that you were being transferred to a foreign country. Filing taxes You arrived in the foreign country on December 15, 2012, and you are a bona fide resident for the remainder of 2012 and all of 2013. Filing taxes Your employer reimbursed you $2,000 in January 2013 for the part of the moving expense that you were not allowed to deduct. Filing taxes Because you did not qualify for the exclusion under the bona fide residence test for at least 120 days in 2012 (the year of the move), the reimbursement is considered pay for services performed in the foreign country for both 2012 and 2013. Filing taxes You figure the part of the reimbursement for services performed in the foreign country in 2012 by multiplying the total reimbursement by a fraction. Filing taxes The fraction is the number of days during which you were a bona fide resident in 2012 (the year of the move) divided by 366. Filing taxes The remaining part of the reimbursement is for services performed in the foreign country in 2013. Filing taxes This computation is used only to determine when the reimbursement is considered earned. Filing taxes You would include the amount of the reimbursement in income in 2013, the year you received it. Filing taxes Move between foreign countries. Filing taxes   If you move between foreign countries, any moving expense reimbursement that you must include in income will be considered earned in the year of the move if you qualify for the foreign earned income exclusion for a period that includes at least 120 days in the year of the move. Filing taxes Move to U. Filing taxes S. Filing taxes   If you move to the United States, the moving expense reimbursement that you must include in income is generally considered to be U. Filing taxes S. Filing taxes source income. Filing taxes   However, if under either an agreement between you and your employer or a statement of company policy that is reduced to writing before your move to the foreign country, your employer will reimburse you for your move back to the United States regardless of whether you continue to work for the employer, the includible reimbursement is considered compensation for past services performed in the foreign country. Filing taxes The includible reimbursement is considered earned in the year of the move if you qualify for the foreign earned income exclusion for a period that includes at least 120 days during that year. Filing taxes Otherwise, you treat the includible reimbursement as received for services performed in the foreign country in the year of the move and the year immediately before the year of the move. Filing taxes   See the discussion under Move from U. Filing taxes S. Filing taxes to foreign country , earlier, to figure the amount of the includible reimbursement considered earned in the year of the move. Filing taxes The amount earned in the year before the year of the move is the difference between the total includible reimbursement and the amount earned in the year of the move. Filing taxes Example. Filing taxes You are a U. Filing taxes S. Filing taxes citizen employed in a foreign country. Filing taxes You retired from employment with your employer on March 31, 2013, and returned to the United States after having been a bona fide resident of the foreign country for several years. Filing taxes A written agreement with your employer entered into before you went abroad provided that you would be reimbursed for your move back to the United States. Filing taxes In April 2013, your former employer reimbursed you $4,000 for the part of the cost of your move back to the United States that you were not allowed to deduct. Filing taxes Because you were not a bona fide resident of a foreign country or countries for a period that included at least 120 days in 2013 (the year of the move), the includible reimbursement is considered pay for services performed in the foreign country for both 2013 and 2012. Filing taxes You figure the part of the moving expense reimbursement for services performed in the foreign country for 2013 by multiplying the total includible reimbursement by a fraction. Filing taxes The fraction is the number of days of foreign residence during the year (90) divided by the number of days in the year (365). Filing taxes The remaining part of the includible reimbursement is for services performed in the foreign country in 2012. Filing taxes You report the amount of the includible reimbursement in 2013, the year you received it. Filing taxes    In this example, if you met the physical presence test for a period that included at least 120 days in 2013, the moving expense reimbursement would be considered earned entirely in the year of the move. Filing taxes Storage expense reimbursements. Filing taxes   If you are reimbursed for storage expenses, the reimbursement is for services you perform during the period of time for which the storage expenses are incurred. Filing taxes U. Filing taxes S. Filing taxes Government Employees For purposes of the foreign earned income exclusion, the foreign housing exclusion, and the foreign housing deduction, foreign earned income does not include any amounts paid by the United States or any of its agencies to its employees. Filing taxes This includes amounts paid from both appropriated and nonappropriated funds. Filing taxes The following organizations (and other organizations similarly organized and operated under United States Army, Navy, or Air Force regulations) are integral parts of the Armed Forces, agencies, or instrumentalities of the United States. Filing taxes United States Armed Forces exchanges. Filing taxes Commissioned and noncommissioned officers' messes. Filing taxes Armed Forces motion picture services. Filing taxes Kindergartens on foreign Armed Forces installations. Filing taxes Amounts paid by the United States or its agencies to persons who are not their employees may qualify for exclusion or deduction. Filing taxes If you are a U. Filing taxes S. Filing taxes Government employee paid by a U. Filing taxes S. Filing taxes agency that assigned you to a foreign government to perform specific services for which the agency is reimbursed by the foreign government, your pay is from the U. Filing taxes S. Filing taxes Government and does not qualify for exclusion or deduction. Filing taxes If you have questions about whether you are an employee or an independent contractor, get Publication 15-A, Employer's Supplemental Tax Guide. Filing taxes American Institute in Taiwan. Filing taxes   Amounts paid by the American Institute in Taiwan are not foreign earned income for purposes of the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction. Filing taxes If you are an employee of the American Institute in Taiwan, allowances you receive are exempt from U. Filing taxes S. Filing taxes tax up to the amount that equals tax-exempt allowances received by civilian employees of the U. Filing taxes S. Filing taxes Government. Filing taxes Allowances. Filing taxes   Cost-of-living and foreign-area allowances paid under certain acts of Congress to U. Filing taxes S. Filing taxes civilian officers and employees stationed in Alaska and Hawaii or elsewhere outside the 48 contiguous states and the District of Columbia can be excluded from gross income. Filing taxes Post differentials are wages that must be included in gross income, regardless of the act of Congress under which they are paid. Filing taxes More information. Filing taxes   Publication 516, U. Filing taxes S. Filing taxes Government Civilian Employees Stationed Abroad, has more information for U. Filing taxes S. Filing taxes Government employees abroad. Filing taxes Exclusion of Meals and Lodging You do not include in your income the value of meals and lodging provided to you and your family by your employer at no charge if the following conditions are met. Filing taxes The meals are furnished: On the business premises of your employer, and For the convenience of your employer. Filing taxes The lodging is furnished: On the business premises of your employer, For the convenience of your employer, and As a condition of your employment. Filing taxes If these conditions are met, do not include the value of the meals or lodging in your income, even if a law or your employment contract says that they are provided as compensation. Filing taxes Amounts you do not include in income because of these rules are not foreign earned income. Filing taxes If you receive a Form W-2, excludable amounts should not be included in the total reported in box 1 as wages. Filing taxes Family. Filing taxes   Your family, for this purpose, includes only your spouse and your dependents. Filing taxes Lodging. Filing taxes   The value of lodging includes the cost of heat, electricity, gas, water, sewer service, and similar items needed to make the lodging fit to live in. Filing taxes Business premises of employer. Filing taxes   Generally, the business premises of your employer is wherever you work. Filing taxes For example, if you work as a housekeeper, meals and lodging provided in your employer's home are provided on the business premises of your employer. Filing taxes Similarly, meals provided to cowhands while herding cattle on land leased or owned by their employer are considered provided on the premises of their employer. Filing taxes Convenience of employer. Filing taxes   Whether meals or lodging are provided for your employer's convenience must be determined from all the facts and circumstances. Filing taxes Meals furnished at no charge are considered provided for your employer's convenience if there is a good business reason for providing them, other than to give you more pay. Filing taxes   On the other hand, if your employer provides meals to you or your family as a means of giving you more pay, and there is no other business reason for providing them, their value is extra income to you because they are not furnished for the convenience of your employer. Filing taxes Condition of employment. Filing taxes   Lodging is provided as a condition of employment if you must accept the lodging to properly carry out the duties of your job. Filing taxes You must accept lodging to properly carry out your duties if, for example, you must be available for duty at all times or you could not perform your duties if the lodging was not furnished. Filing taxes Foreign camps. Filing taxes   If the lodging is in a camp located in a foreign country, the camp is considered part of your employer's business premises. Filing taxes The camp must be: Provided for your employer's convenience because the place where you work is in a remote area where satisfactory housing is not available to you on the open market within a reasonable commuting distance, Located as close as reasonably possible in the area where you work, and Provided in a common area or enclave that is not available to the general public for lodging or accommodations and that normally houses at least ten employees. Filing taxes Foreign Earned Income Exclusion If your tax home is in a foreign country and you meet the bona fide residence test or the physical presence test, you can choose to exclude from your income a limited amount of your foreign earned income. Filing taxes Foreign earned income was defined earlier in this chapter. Filing taxes You also can choose to exclude from your income a foreign housing amount. Filing taxes This is explained later under Foreign Housing Exclusion. Filing taxes If you choose to exclude a foreign housing amount, you must figure the foreign housing exclusion before you figure the foreign earned income exclusion. Filing taxes Your foreign earned income exclusion is limited to your foreign earned income minus your foreign housing exclusion. Filing taxes If you choose to exclude foreign earned income, you cannot deduct, exclude, or claim a credit for any item that can be allocated to or charged against the excluded amounts. Filing taxes This includes any expenses, losses, and other normally deductible items allocable to the excluded income. Filing taxes For more information about deductions and credits, see chapter 5 . Filing taxes Limit on Excludable Amount You may be able to exclude up to $97,600 of your foreign earned income in 2013. Filing taxes You cannot exclude more than the smaller of: $97,600, or Your foreign earned income (discussed earlier) for the tax year minus your foreign housing exclusion (discussed later). Filing taxes If both you and your spouse work abroad and each of you meets either the bona fide residence test or the physical presence test, you can each choose the foreign earned income exclusion. Filing taxes You do not both need to meet the same test. Filing taxes Together, you and your spouse can exclude as much as $195,200. Filing taxes Paid in year following work. Filing taxes   Generally, you are considered to have earned income in the year in which you do the work for which you receive the income, even if you work in one year but are not paid until the following year. Filing taxes If you report your income on a cash basis, you report the income on your return for the year you receive it. Filing taxes If you work one year, but are not paid for that work until the next year, the amount you can exclude in the year you are paid is the amount you could have excluded in the year you did the work if you had been paid in that year. Filing taxes For an exception to this general rule, see Year-end payroll period, later. Filing taxes Example. Filing taxes You were a bona fide resident of Brazil for all of 2012 and 2013. Filing taxes You report your income on the cash basis. Filing taxes In 2012, you were paid $84,200 for work you did in Brazil during that year. Filing taxes You excluded all of the $84,200 from your income in 2012. Filing taxes In 2013, you were paid $117,300 for your work in Brazil. Filing taxes $18,800 was for work you did in 2012 and $98,500 was for work you did in 2013. Filing taxes You can exclude $10,900 of the $18,800 from your income in 2013. Filing taxes This is the $95,100 maximum exclusion in 2012 minus the $84,200 actually excluded that year. Filing taxes You must include the remaining $7,900 in income in 2013 because you could not have excluded that income in 2012 if you had received it that year. Filing taxes You can exclude $97,600 of the $98,500 you were paid for work you did in 2013 from your 2013 income. Filing taxes Your total foreign earned income exclusion for 2013 is $108,500 ($10,900 for work you did in 2012 and $97,600 for work you did in 2013). Filing taxes You would include in your 2013 income $8,800 ($7,900 for the work you did in 2012 and $900 for the work you did in 2013). Filing taxes Year-end payroll period. Filing taxes   There is an exception to the general rule that income is considered earned in the year you do the work for which you receive the income. Filing taxes If you are a cash-basis taxpayer, any salary or wage payment you receive after the end of the year in which you do the work for which you receive the pay is considered earned entirely in the year you receive it if all four of the following apply. Filing taxes The period for which the payment is made is a normal payroll period of your employer that regularly applies to you. Filing taxes The payroll period includes the last day of your tax year (December 31 if you figure your taxes on a calendar-year basis). Filing taxes The payroll period is not longer than 16 days. Filing taxes The payday comes at the same time in relation to the payroll period that it would normally come and it comes before the end of the next payroll period. Filing taxes Example. Filing taxes You are paid twice a month. Filing taxes For the normal payroll period that begins on the first of the month and ends on the fifteenth of the month, you are paid on the sixteenth day of the month. Filing taxes For the normal payroll period that begins on the sixteenth of the month and ends on the last day of the month, you are paid on the first day of the following month. Filing taxes Because all of the above conditions are met, the pay you received on January 1, 2013, is considered earned in 2013. Filing taxes Income earned over more than 1 year. Filing taxes   Regardless of when you actually receive income, you must apply it to the year in which you earned it in figuring your excludable amount for that year. Filing taxes For example, a bonus may be based on work you did over several years. Filing taxes You determine the amount of the bonus that is considered earned in a particular year in two steps. Filing taxes Divide the bonus by the number of calendar months in the period when you did the work that resulted in the bonus. Filing taxes Multiply the result of (1) by the number of months you did the work during the year. Filing taxes This is the amount that is subject to the exclusion limit for that tax year. Filing taxes Income received more than 1 year after it was earned. Filing taxes   You cannot exclude income you receive after the end of the year following the year you do the work to earn it. Filing taxes Example. Filing taxes   You were a bona fide resident of Sweden for 2011, 2012, and 2013. Filing taxes You report your income on the cash basis. Filing taxes In 2011, you were paid $69,000 for work you did in Sweden that year and in 2012 you were paid $74,000 for that year's work in Sweden. Filing taxes You excluded all the income on your 2011 and 2012 returns. Filing taxes   In 2013, you were paid $92,000; $82,000 for your work in Sweden during 2013, and $10,000 for work you did in Sweden in 2011. Filing taxes You cannot exclude any of the $10,000 for work done in 2011 because you received it after the end of the year following the year in which you earned it. Filing taxes You must include the $10,000 in income. Filing taxes You can exclude all of the $82,000 received for work you did in 2013. Filing taxes Community income. Filing taxes   The maximum exclusion applies separately to the earnings of spouses. Filing taxes Ignore any community property laws when you figure your limit on the foreign earned income exclusion. Filing taxes Part-year exclusion. Filing taxes   If the period for which you qualify for the foreign earned income exclusion includes only part of the year, you must adjust the maximum limit based on the number of qualifying days in the year. Filing taxes The number of qualifying days is the number of days in the year within the period on which you both: Have your tax home in a foreign country, and Meet either the bona fide residence test or the physical presence test. Filing taxes   For this purpose, you can count as qualifying days all days within a period of 12 consecutive months once you are physically present and have your tax home in a foreign country for 330 full days. Filing taxes To figure your maximum exclusion, multiply the maximum excludable amount for the year by the number of your qualifying days in the year, and then divide the result by the number of days in the year. Filing taxes Example. Filing taxes You report your income on the calendar-year basis and you qualified for the foreign earned income exclusion under the bona fide residence test for 75 days in 2013. Filing taxes You can exclude a maximum of 75/365 of $97,600, or $20,055, of your foreign earned income for 2013. Filing taxes If you qualify under the bona fide residence test for all of 2014, you can exclude your foreign earned income up to the 2014 limit. Filing taxes Physical presence test. Filing taxes   Under the physical presence test, a 12-month period can be any period of 12 consecutive months that includes 330 full days. Filing taxes If you qualify for the foreign earned income exclusion under the physical presence test for part of a year, it is important to carefully choose the 12-month period that will allow the maximum exclusion for that year. Filing taxes Example. Filing taxes You are physically present and have your tax home in a foreign country for a 16-month period from June 1, 2012, through September 30, 2013, except for 16 days in December 2012 when you were on vacation in the United States. Filing taxes You figure the maximum exclusion for 2012 as follows. Filing taxes Beginning with June 1, 2012, count forward 330 full days. Filing taxes Do not count the 16 days you spent in the United States. Filing taxes The 330th day, May 12, 2013, is the last day of a 12-month period. Filing taxes Count backward 12 months from May 11, 2013, to find the first day of this 12-month period, May 12, 2012. Filing taxes This 12-month period runs from May 12, 2012, through May 11, 2013. Filing taxes Count the total days during 2012 that fall within this 12-month period. Filing taxes This is 234 days (May 12, 2012 – December 31, 2012). Filing taxes Multiply $95,100 (the maximum exclusion for 2012) by the fraction 234/366 to find your maximum exclusion for 2012 ($60,802). Filing taxes You figure the maximum exclusion for 2013 in the opposite manner. Filing taxes Beginning with your last full day, September 30, 2013, count backward 330 full days. Filing taxes Do not count the 16 days you spent in the United States. Filing taxes That day, October 20, 2012, is the first day of a 12-month period. Filing taxes Count forward 12 months from October 20, 2012, to find the last day of this 12-month period, October 19, 2013. Filing taxes This 12-month period runs from October 20, 2012, through October 19, 2013. Filing taxes Count the total days during 2013 that fall within this 12-month period. Filing taxes This is 292 days (January 1, 2013 – October 19, 2013). Filing taxes Multiply $97,600, the maximum limit, by the fraction 292/365 to find your maximum exclusion for 2013 ($78,080). Filing taxes Choosing the Exclusion The foreign earned income exclusion is voluntary. Filing taxes You can choose the exclusion by completing the appropriate parts of Form 2555. Filing taxes When You Can Choose the Exclusion Your initial choice of the exclusion on Form 2555 or Form 2555-EZ generally must be made with one of the following returns. Filing taxes A return filed by the due date (including any extensions). Filing taxes A return amending a timely-filed return. Filing taxes Amended returns generally must be filed by the later of 3 years after the filing date of the original return or 2 years after the tax is paid. Filing taxes A return filed within 1 year from the original due date of the return (determined without regard to any extensions). Filing taxes Filing after the above periods. Filing taxes   You can choose the exclusion on a return filed after the periods described above if you owe no federal income tax after taking into account the exclusion. Filing taxes If you owe federal income tax after taking into account the exclusion, you can choose the exclusion on a return filed after the periods described earlier if you file before the IRS discovers that you failed to choose the exclusion. Filing taxes Whether or not you owe federal income tax after taking the exclusion into account, if you file your return after the periods described earlier, you must type or legibly print at the top of the first page of the Form 1040 “Filed pursuant to section 1. Filing taxes 911-7(a)(2)(i)(D). Filing taxes ” If you owe federal income tax after taking into account the foreign earned income exclusion and the IRS discovered that you failed to choose the exclusion, you may still be able to choose the exclusion. Filing taxes You must request a private letter ruling under Income Tax Regulation 301. Filing taxes 9100-3 and Revenue Procedure 2013-1, 2013-1 I. Filing taxes R. Filing taxes B. Filing taxes 1, available at www. Filing taxes irs. Filing taxes gov/irb/2013-01_IRB/ar06. Filing taxes html. Filing taxes Effect of Choosing the Exclusion Once you choose to exclude your foreign earned income, that choice remains in effect for that year and all later years unless you revoke it. Filing taxes Foreign tax credit or deduction. Filing taxes  
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The Filing Taxes

Filing taxes Part Four -   Adjustments to Income The three chapters in this part discuss some of the adjustments to income that you can deduct in figuring your adjusted gross income. Filing taxes These chapters cover: Contributions you make to traditional individual retirement arrangements (IRAs) — chapter 17, Alimony you pay — chapter 18, and Student loan interest you pay — chapter 19. Filing taxes Other adjustments to income are discussed elsewhere. Filing taxes See Table V below. Filing taxes Table V. Filing taxes Other Adjustments to Income  Use this table to find information about other adjustments to income not covered in this part of the publication. Filing taxes IF you are looking for more information about the deduction for. Filing taxes . Filing taxes . Filing taxes THEN see. Filing taxes . Filing taxes . Filing taxes Certain business expenses of reservists, performing artists, and fee-basis officials Chapter 26. Filing taxes Contributions to a health savings account Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans. Filing taxes Moving expenses Publication 521, Moving Expenses. Filing taxes Part of your self-employment tax Chapter 22. Filing taxes Self-employed health insurance Chapter 21. Filing taxes Payments to self-employed SEP, SIMPLE, and qualified plans Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans). Filing taxes Penalty on the early withdrawal of savings Chapter 7. Filing taxes Contributions to an Archer MSA Publication 969. Filing taxes Reforestation amortization or expense Chapters 7 and 8 of Publication 535, Business Expenses. Filing taxes Contributions to Internal Revenue Code section 501(c)(18)(D) pension plans Publication 525, Taxable and Nontaxable Income. Filing taxes Expenses from the rental of personal property Chapter 12. Filing taxes Certain required repayments of supplemental unemployment benefits (sub-pay) Chapter 12. Filing taxes Foreign housing costs Chapter 4 of Publication 54, Tax Guide for U. Filing taxes S. Filing taxes Citizens and Resident Aliens Abroad. Filing taxes Jury duty pay given to your employer Chapter 12. Filing taxes Contributions by certain chaplains to Internal Revenue Code section 403(b) plans Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers. Filing taxes Attorney fees and certain costs for actions involving certain unlawful discrimination claims or awards to whistleblowers Publication 525. Filing taxes Domestic production activities deduction Form 8903, Domestic Production Activities Deduction. Filing taxes Table of Contents 17. Filing taxes   Individual Retirement Arrangements (IRAs)What's New Reminders Introduction Useful Items - You may want to see: Traditional IRAsWho Can Open a Traditional IRA? When and How Can a Traditional IRA Be Opened? How Much Can Be Contributed? When Can Contributions Be Made? How Much Can You Deduct? Nondeductible Contributions Inherited IRAs Can You Move Retirement Plan Assets? When Can You Withdraw or Use IRA Assets? When Must You Withdraw IRA Assets? (Required Minimum Distributions) Are Distributions Taxable? What Acts Result in Penalties or Additional Taxes? Roth IRAsWhat Is a Roth IRA? When Can a Roth IRA Be Opened? Can You Contribute to a Roth IRA? Can You Move Amounts Into a Roth IRA? Are Distributions Taxable? 18. Filing taxes   AlimonyIntroductionSpouse or former spouse. Filing taxes Divorce or separation instrument. Filing taxes Useful Items - You may want to see: General RulesMortgage payments. Filing taxes Taxes and insurance. Filing taxes Other payments to a third party. Filing taxes Instruments Executed After 1984Payments to a third party. Filing taxes Exception. Filing taxes Substitute payments. Filing taxes Specifically designated as child support. Filing taxes Contingency relating to your child. Filing taxes Clearly associated with a contingency. Filing taxes How To Deduct Alimony Paid How To Report Alimony Received Recapture Rule 19. Filing taxes   Education- Related AdjustmentsIntroduction Useful Items - You may want to see: Student Loan Interest DeductionStudent Loan Interest Defined Can You Claim the Deduction How Much Can You Deduct How Do You Figure the Deduction Tuition and Fees DeductionCan You Claim the Deduction What Expenses Qualify Who Is an Eligible Student Who Can Claim a Dependent's Expenses How Much Can You Deduct Educator Expenses Prev  Up  Next   Home   More Online Publications