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Freefillableforms 4. Freefillableforms   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. Freefillableforms S. Freefillableforms 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. Freefillableforms Useful Items - You may want to see: Publication 519 U. Freefillableforms S. Freefillableforms Tax Guide for Aliens 570 Tax Guide for Individuals With Income from U. Freefillableforms S. Freefillableforms Possessions 596 Earned Income Credit (EIC) Form (and Instructions) 1040X Amended U. Freefillableforms S. Freefillableforms 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. Freefillableforms 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. Freefillableforms If you are a U. Freefillableforms S. Freefillableforms citizen or a resident alien of the United States and you live abroad, you are taxed on your worldwide income. Freefillableforms However, you may qualify to exclude from income up to $97,600 of your foreign earnings. Freefillableforms In addition, you can exclude or deduct certain foreign housing amounts. Freefillableforms See Foreign Earned Income Exclusion and Foreign Housing Exclusion and Deduction, later. Freefillableforms You also may be entitled to exclude from income the value of meals and lodging provided to you by your employer. Freefillableforms See Exclusion of Meals and Lodging, later. Freefillableforms 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. Freefillableforms Your tax home must be in a foreign country. Freefillableforms You must have foreign earned income. Freefillableforms You must be one of the following. Freefillableforms A U. Freefillableforms S. Freefillableforms citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. Freefillableforms A U. Freefillableforms S. Freefillableforms 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. Freefillableforms A U. Freefillableforms S. Freefillableforms citizen or a U. Freefillableforms S. Freefillableforms 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. Freefillableforms See Publication 519 to find out if you are a U. Freefillableforms S. Freefillableforms resident alien for tax purposes and whether you keep that alien status when you temporarily work abroad. Freefillableforms If you are a nonresident alien married to a U. Freefillableforms S. Freefillableforms 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. Freefillableforms For information on making the choice, see the discussion in chapter 1 under Nonresident Alien Spouse Treated as a Resident . Freefillableforms Waiver of minimum time requirements. Freefillableforms   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. Freefillableforms This is fully explained under Waiver of Time Requirements , later. Freefillableforms   See Figure 4-A and information in this chapter to determine if you are eligible to claim either exclusion or the deduction. Freefillableforms 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. Freefillableforms Bona fide residence and physical presence are explained later. Freefillableforms 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. Freefillableforms Your tax home is the place where you are permanently or indefinitely engaged to work as an employee or self-employed individual. Freefillableforms Having a “tax home” in a given location does not necessarily mean that the given location is your residence or domicile for tax purposes. Freefillableforms 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. Freefillableforms 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. Freefillableforms 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. Freefillableforms However, your abode is not necessarily in the United States while you are temporarily in the United States. Freefillableforms 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. Freefillableforms “Abode” has been variously defined as one's home, habitation, residence, domicile, or place of dwelling. Freefillableforms It does not mean your principal place of business. Freefillableforms “Abode” has a domestic rather than a vocational meaning and does not mean the same as “tax home. Freefillableforms ” The location of your abode often will depend on where you maintain your economic, family, and personal ties. Freefillableforms Example 1. Freefillableforms 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. Freefillableforms You return to your family residence in the United States during your off periods. Freefillableforms You are considered to have an abode in the United States and do not satisfy the tax home test in the foreign country. Freefillableforms You cannot claim either of the exclusions or the housing deduction. Freefillableforms Example 2. Freefillableforms For several years, you were a marketing executive with a producer of machine tools in Toledo, Ohio. Freefillableforms 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. Freefillableforms Before you left, you distributed business cards showing your business and home addresses in London. Freefillableforms You kept ownership of your home in Toledo but rented it to another family. Freefillableforms You placed your car in storage. Freefillableforms In November of last year, you moved your spouse, children, furniture, and family pets to a home your employer rented for you in London. Freefillableforms Shortly after moving, you leased a car and you and your spouse got British driving licenses. Freefillableforms Your entire family got library cards for the local public library. Freefillableforms You and your spouse opened bank accounts with a London bank and secured consumer credit. Freefillableforms 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. Freefillableforms Your abode is in London for the time you live there. Freefillableforms You satisfy the tax home test in the foreign country. Freefillableforms Please click here for the text description of the image. Freefillableforms 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. Freefillableforms 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. Freefillableforms 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. Freefillableforms 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. Freefillableforms 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. Freefillableforms If you expect it to last for more than 1 year, it is indefinite. Freefillableforms 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. Freefillableforms Once your expectation changes, it is indefinite. Freefillableforms 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. Freefillableforms A foreign country includes any territory under the sovereignty of a government other than that of the United States. Freefillableforms The term “foreign country” includes the country's airspace and territorial waters, but not international waters and the airspace above them. Freefillableforms 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. Freefillableforms The term “foreign country” does not include Antarctica or U. Freefillableforms S. Freefillableforms possessions such as Puerto Rico, Guam, the Commonwealth of the Northern Mariana Islands, the U. Freefillableforms S. Freefillableforms Virgin Islands, and Johnston Island. Freefillableforms 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. Freefillableforms American Samoa, Guam, and the Commonwealth of the Northern Mariana Islands Residence or presence in a U. Freefillableforms S. Freefillableforms possession does not qualify you for the foreign earned income exclusion. Freefillableforms You may, however, qualify for an exclusion of your possession income on your U. Freefillableforms S. Freefillableforms return. Freefillableforms American Samoa. Freefillableforms   There is a possession exclusion available to individuals who are bona fide residents of American Samoa for the entire tax year. Freefillableforms Gross income from sources within American Samoa may be eligible for this exclusion. Freefillableforms Income that is effectively connected with the conduct of a trade or business within American Samoa also may be eligible for this exclusion. Freefillableforms Use Form 4563, Exclusion of Income for Bona Fide Residents of American Samoa, to figure the exclusion. Freefillableforms Guam and the Commonwealth of the Northern Mariana Islands. Freefillableforms   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. Freefillableforms   For more information, see Publication 570. Freefillableforms Puerto Rico and U. Freefillableforms S. Freefillableforms Virgin Islands Residents of Puerto Rico and the U. Freefillableforms S. Freefillableforms Virgin Islands cannot claim the foreign earned income exclusion or the foreign housing exclusion. Freefillableforms Puerto Rico. Freefillableforms   Generally, if you are a U. Freefillableforms S. Freefillableforms citizen who is a bona fide resident of Puerto Rico for the entire tax year, you are not subject to U. Freefillableforms S. Freefillableforms tax on income from Puerto Rican sources. Freefillableforms This does not include amounts paid for services performed as an employee of the United States. Freefillableforms However, you are subject to U. Freefillableforms S. Freefillableforms tax on your income from sources outside Puerto Rico. Freefillableforms In figuring your U. Freefillableforms S. Freefillableforms tax, you cannot deduct expenses allocable to income not subject to tax. Freefillableforms 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. Freefillableforms You can use the bona fide residence test to qualify for the exclusions and the deduction only if you are either: A U. Freefillableforms S. Freefillableforms citizen, or A U. Freefillableforms S. Freefillableforms resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect. Freefillableforms You do not automatically acquire bona fide resident status merely by living in a foreign country or countries for 1 year. Freefillableforms 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. Freefillableforms 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. Freefillableforms Bona fide residence. Freefillableforms   To meet the bona fide residence test, you must have established a bona fide residence in a foreign country. Freefillableforms   Your bona fide residence is not necessarily the same as your domicile. Freefillableforms Your domicile is your permanent home, the place to which you always return or intend to return. Freefillableforms Example. Freefillableforms You could have your domicile in Cleveland, Ohio, and a bona fide residence in Edinburgh, Scotland, if you intend to return eventually to Cleveland. Freefillableforms The fact that you go to Scotland does not automatically make Scotland your bona fide residence. Freefillableforms 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. Freefillableforms 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. Freefillableforms You are clearly not a resident of Scotland in the first instance. Freefillableforms However, in the second, you are a resident because your stay in Scotland appears to be permanent. Freefillableforms 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. Freefillableforms Determination. Freefillableforms   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. Freefillableforms   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. Freefillableforms 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. Freefillableforms IRS cannot make this determination until you file Form 2555. Freefillableforms Statement to foreign authorities. Freefillableforms   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. Freefillableforms Special agreements and treaties. Freefillableforms   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. Freefillableforms 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. Freefillableforms Example 1. Freefillableforms You are a U. Freefillableforms S. Freefillableforms citizen employed in the United Kingdom by a U. Freefillableforms S. Freefillableforms employer under contract with the U. Freefillableforms S. Freefillableforms Armed Forces. Freefillableforms You are not subject to the North Atlantic Treaty Status of Forces Agreement. Freefillableforms You may be a bona fide resident of the United Kingdom. Freefillableforms Example 2. Freefillableforms You are a U. Freefillableforms S. Freefillableforms 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. Freefillableforms You are not a bona fide resident of the United Kingdom. Freefillableforms Example 3. Freefillableforms You are a U. Freefillableforms S. Freefillableforms citizen employed in Japan by a U. Freefillableforms S. Freefillableforms employer under contract with the U. Freefillableforms S. Freefillableforms Armed Forces. Freefillableforms You are subject to the agreement of the Treaty of Mutual Cooperation and Security between the United States and Japan. Freefillableforms Being subject to the agreement does not make you a bona fide resident of Japan. Freefillableforms Example 4. Freefillableforms You are a U. Freefillableforms S. Freefillableforms citizen employed as an “official” by the United Nations in Switzerland. Freefillableforms You are exempt from Swiss taxation on the salary or wages paid to you by the United Nations. Freefillableforms This does not prevent you from being a bona fide resident of Switzerland. Freefillableforms Effect of voting by absentee ballot. Freefillableforms   If you are a U. Freefillableforms S. Freefillableforms 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. Freefillableforms   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. Freefillableforms Uninterrupted period including entire tax year. Freefillableforms   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. Freefillableforms An entire tax year is from January 1 through December 31 for taxpayers who file their income tax returns on a calendar year basis. Freefillableforms   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. Freefillableforms 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. Freefillableforms Example 1. Freefillableforms You arrived with your family in Lisbon, Portugal, on November 1, 2011. Freefillableforms Your assignment is indefinite, and you intend to live there with your family until your company sends you to a new post. Freefillableforms You immediately established residence there. Freefillableforms You spent April of 2012 at a business conference in the United States. Freefillableforms Your family stayed in Lisbon. Freefillableforms Immediately following the conference, you returned to Lisbon and continued living there. Freefillableforms 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. Freefillableforms Example 2. Freefillableforms Assume the same facts as in Example 1, except that you transferred back to the United States on December 13, 2012. Freefillableforms 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. Freefillableforms You may, however, qualify for the foreign earned income exclusion or the housing exclusion or deduction under the physical presence test (discussed later). Freefillableforms Bona fide resident for part of a year. Freefillableforms   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. Freefillableforms Your period of bona fide residence can include an entire tax year plus parts of 2 other tax years. Freefillableforms Example. Freefillableforms You were a bona fide resident of Singapore from March 1, 2011, through September 14, 2013. Freefillableforms On September 15, 2013, you returned to the United States. Freefillableforms 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. Freefillableforms Reassignment. Freefillableforms   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. Freefillableforms Example 1. Freefillableforms You were a resident of Pakistan from October 1, 2012, through November 30, 2013. Freefillableforms On December 1, 2013, you and your family returned to the United States to wait for an assignment to another foreign country. Freefillableforms Your household goods also were returned to the United States. Freefillableforms 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. Freefillableforms 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. Freefillableforms You may, however, qualify for the foreign earned income exclusion or the housing exclusion or deduction under the physical presence test, discussed later. Freefillableforms Example 2. Freefillableforms 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. Freefillableforms On December 1, 2013, you and your family returned to the United States for a month's vacation. Freefillableforms On January 2, 2014, you arrived in Turkey for your new assignment. Freefillableforms Because you did not interrupt your bona fide residence abroad, you meet the bona fide residence test. Freefillableforms 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. Freefillableforms The 330 days do not have to be consecutive. Freefillableforms Any U. Freefillableforms S. Freefillableforms citizen or resident alien can use the physical presence test to qualify for the exclusions and the deduction. Freefillableforms The physical presence test is based only on how long you stay in a foreign country or countries. Freefillableforms 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. Freefillableforms 330 full days. Freefillableforms   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. Freefillableforms You can count days you spent abroad for any reason. Freefillableforms You do not have to be in a foreign country only for employment purposes. Freefillableforms You can be on vacation. Freefillableforms   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. Freefillableforms Exception. Freefillableforms   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. Freefillableforms See Waiver of Time Requirements, later. Freefillableforms Full day. Freefillableforms   A full day is a period of 24 consecutive hours, beginning at midnight. Freefillableforms Travel. Freefillableforms    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. Freefillableforms Example. Freefillableforms You leave the United States for France by air on June 10. Freefillableforms You arrive in France at 9:00 a. Freefillableforms m. Freefillableforms on June 11. Freefillableforms Your first full day of physical presence in France is June 12. Freefillableforms Passing over foreign country. Freefillableforms   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. Freefillableforms Example. Freefillableforms You leave the United States by air at 9:30 a. Freefillableforms m. Freefillableforms on June 10 to travel to Kenya. Freefillableforms You pass over western Africa at 11:00 p. Freefillableforms m. Freefillableforms on June 10 and arrive in Kenya at 12:30 a. Freefillableforms m. Freefillableforms on June 11. Freefillableforms Your first full day in a foreign country is June 11. Freefillableforms Change of location. Freefillableforms   You can move about from one place to another in a foreign country or to another foreign country without losing full days. Freefillableforms 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. Freefillableforms Example 1. Freefillableforms You leave Ireland by air at 11:00 p. Freefillableforms m. Freefillableforms on July 6 and arrive in Sweden at 5:00 a. Freefillableforms m. Freefillableforms on July 7. Freefillableforms Your trip takes less than 24 hours and you lose no full days. Freefillableforms Example 2. Freefillableforms You leave Norway by ship at 10:00 p. Freefillableforms m. Freefillableforms on July 6 and arrive in Portugal at 6:00 a. Freefillableforms m. Freefillableforms on July 8. Freefillableforms 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. Freefillableforms If you remain in Portugal, your next full day in a foreign country is July 9. Freefillableforms In United States while in transit. Freefillableforms   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. Freefillableforms You are treated as traveling over areas not within any foreign country. Freefillableforms    Please click here for the text description of the image. Freefillableforms Figure 4-B How to figure the 12-month period. Freefillableforms   There are four rules you should know when figuring the 12-month period. Freefillableforms Your 12-month period can begin with any day of the month. Freefillableforms It ends the day before the same calendar day, 12 months later. Freefillableforms Your 12-month period must be made up of consecutive months. Freefillableforms Any 12-month period can be used if the 330 days in a foreign country fall within that period. Freefillableforms 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. Freefillableforms You can choose the 12-month period that gives you the greatest exclusion. Freefillableforms In determining whether the 12-month period falls within a longer stay in the foreign country, 12-month periods can overlap one another. Freefillableforms Example 1. Freefillableforms You are a construction worker who works on and off in a foreign country over a 20-month period. Freefillableforms 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. Freefillableforms Example 2. Freefillableforms 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. Freefillableforms 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. Freefillableforms By overlapping the 12-month periods in this way, you meet the physical presence test for the whole 20-month period. Freefillableforms See Figure 4-B, on the previous page. Freefillableforms Waiver of Time Requirements Both the bona fide residence test and the physical presence test contain minimum time requirements. Freefillableforms 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. Freefillableforms You must be able to show that you reasonably could have expected to meet the minimum time requirements if not for the adverse conditions. Freefillableforms 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. Freefillableforms 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. Freefillableforms 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. Freefillableforms 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. Freefillableforms U. Freefillableforms S. Freefillableforms Travel Restrictions If you are present in a foreign country in violation of U. Freefillableforms S. Freefillableforms 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. Freefillableforms 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. Freefillableforms 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. Freefillableforms For 2013, the only country to which travel restrictions applied was Cuba. Freefillableforms The restrictions applied for the entire year. Freefillableforms However, individuals working at the U. Freefillableforms S. Freefillableforms Naval Base at Guantanamo Bay in Cuba are not in violation of U. Freefillableforms S. Freefillableforms law. Freefillableforms Personal service income earned by individuals at the base is eligible for the foreign earned income exclusion provided the other requirements are met. Freefillableforms 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. Freefillableforms Foreign earned income generally is income you receive for services you perform during a period in which you meet both of the following requirements. Freefillableforms Your tax home is in a foreign country. Freefillableforms You meet either the bona fide residence test or the physical presence test. Freefillableforms To determine whether your tax home is in a foreign country, see Tax Home in Foreign Country, earlier. Freefillableforms 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. Freefillableforms Foreign earned income does not include the following amounts. Freefillableforms 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. Freefillableforms Pension or annuity payments you receive, including social security benefits (see Pensions and annuities, later). Freefillableforms Pay you receive as an employee of the U. Freefillableforms S. Freefillableforms Government. Freefillableforms (See U. Freefillableforms S. Freefillableforms Government Employees, later. Freefillableforms ) Amounts you include in your income because of your employer's contributions to a nonexempt employee trust or to a nonqualified annuity contract. Freefillableforms 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. Freefillableforms Payments you receive after the end of the tax year following the tax year in which you performed the services that earned the income. Freefillableforms Earned income. Freefillableforms   This is pay for personal services performed, such as wages, salaries, or professional fees. Freefillableforms The list that follows classifies many types of income into three categories. Freefillableforms The column headed Variable Income lists income that may fall into either the earned income category, the unearned income category, or partly into both. Freefillableforms For more information on earned and unearned income, see Earned and Unearned Income, later. Freefillableforms 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. Freefillableforms Noncash income. Freefillableforms   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. Freefillableforms Allowances or reimbursements. Freefillableforms   Earned income includes allowances or reimbursements you receive, such as the following amounts. Freefillableforms    Cost-of-living allowances. Freefillableforms Overseas differential. Freefillableforms Family allowance. Freefillableforms Reimbursement for education or education allowance. Freefillableforms Home leave allowance. Freefillableforms Quarters allowance. Freefillableforms Reimbursement for moving or moving allowance (unless excluded from income as discussed later in Reimbursement of employee expenses under Earned and Unearned Income). Freefillableforms Source of Earned Income The source of your earned income is the place where you perform the services for which you received the income. Freefillableforms Foreign earned income is income you receive for working in a foreign country. Freefillableforms Where or how you are paid has no effect on the source of the income. Freefillableforms 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. Freefillableforms Example. Freefillableforms You are a U. Freefillableforms S. Freefillableforms citizen, a bona fide resident of Canada, and working as a mining engineer. Freefillableforms Your salary is $76,800 per year. Freefillableforms You also receive a $6,000 cost-of-living allowance, and a $6,000 education allowance. Freefillableforms Your employment contract did not indicate that you were entitled to these allowances only while outside the United States. Freefillableforms Your total income is $88,800. Freefillableforms You work a 5-day week, Monday through Friday. Freefillableforms After subtracting your vacation, you have a total of 240 workdays in the year. Freefillableforms You worked in the United States during the year for 6 weeks (30 workdays). Freefillableforms The following shows how to figure the part of your income that is for work done in Canada during the year. Freefillableforms   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. Freefillableforms Earned and Unearned Income Earned income was defined earlier as pay for personal services performed. Freefillableforms Some types of income are not easily identified as earned or unearned income. Freefillableforms Some of these types of income are further explained here. Freefillableforms Income from a sole proprietorship or partnership. Freefillableforms   Income from a business in which capital investment is an important part of producing the income may be unearned income. Freefillableforms 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. Freefillableforms Capital a factor. Freefillableforms   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. Freefillableforms   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. Freefillableforms Because you do not have a net profit, the 30% limit does not apply. Freefillableforms Example 1. Freefillableforms You are a U. Freefillableforms S. Freefillableforms citizen and meet the bona fide residence test. Freefillableforms You invest in a partnership based in Cameroon that is engaged solely in selling merchandise outside the United States. Freefillableforms You perform no services for the partnership. Freefillableforms At the end of the tax year, your share of the net profits is $80,000. Freefillableforms The entire $80,000 is unearned income. Freefillableforms Example 2. Freefillableforms Assume that in Example 1 you spend time operating the business. Freefillableforms Your share of the net profits is $80,000; 30% of your share of the profits is $24,000. Freefillableforms 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. Freefillableforms Capital not a factor. Freefillableforms   If capital is not an income-producing factor and personal services produce the business income, the 30% rule does not apply. Freefillableforms The entire amount of business income is earned income. Freefillableforms Example. Freefillableforms You and Lou Green are management consultants and operate as equal partners in performing services outside the United States. Freefillableforms Because capital is not an income- producing factor, all the income from the partnership is considered earned income. Freefillableforms Income from a corporation. Freefillableforms   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. Freefillableforms Any amount over what is considered a reasonable salary is unearned income. Freefillableforms Example 1. Freefillableforms You are a U. Freefillableforms S. Freefillableforms citizen and an officer and stockholder of a corporation in Honduras. Freefillableforms You perform no work or service of any kind for the corporation. Freefillableforms During the tax year you receive a $10,000 “salary” from the corporation. Freefillableforms The $10,000 clearly is not for personal services and is unearned income. Freefillableforms Example 2. Freefillableforms You are a U. Freefillableforms S. Freefillableforms citizen and work full time as secretary-treasurer of your corporation. Freefillableforms During the tax year you receive $100,000 as salary from the corporation. Freefillableforms If $80,000 is a reasonable allowance as pay for the work you did, then $80,000 is earned income. Freefillableforms Stock options. Freefillableforms   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. Freefillableforms   If your gain on the disposition of stock you got by exercising an option is treated as capital gain, your gain is unearned income. Freefillableforms   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. Freefillableforms 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. Freefillableforms Any part of the earned income that is due to work you did outside the United States is foreign earned income. Freefillableforms   See Publication 525, Taxable and Nontaxable Income, for a discussion of the treatment of stock options. Freefillableforms Pensions and annuities. Freefillableforms    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. Freefillableforms Royalties. Freefillableforms   Royalties from the leasing of oil and mineral lands and patents generally are a form of rent or dividends and are unearned income. Freefillableforms   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. Freefillableforms Rental income. Freefillableforms   Generally, rental income is unearned income. Freefillableforms 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. Freefillableforms Example. Freefillableforms Larry Smith, a U. Freefillableforms S. Freefillableforms citizen living in Australia, owns and operates a rooming house in Sydney. Freefillableforms 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. Freefillableforms 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. Freefillableforms It is all unearned income. Freefillableforms Professional fees. Freefillableforms   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. Freefillableforms Income of an artist. Freefillableforms   Income you receive from the sale of paintings you created is earned income. Freefillableforms Scholarships and fellowships. Freefillableforms   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. Freefillableforms 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. Freefillableforms    Certain scholarship and fellowship income may be exempt under other provisions. Freefillableforms See Publication 970, Tax Benefits for Education, chapter 1. Freefillableforms Use of employer's property or facilities. Freefillableforms   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. Freefillableforms 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. Freefillableforms Example. Freefillableforms You are privately employed and live in Japan all year. Freefillableforms You are paid a salary of $6,000 a month. Freefillableforms You live rent-free in a house provided by your employer that has a fair rental value of $3,000 a month. Freefillableforms The house is not provided for your employer's convenience. Freefillableforms You report on the calendar-year, cash basis. Freefillableforms 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. Freefillableforms Reimbursement of employee expenses. Freefillableforms   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. Freefillableforms   The expenses for which you are reimbursed are not considered allocable (related) to your earned income. Freefillableforms If expenses and reimbursement are equal, there is nothing to allocate to excluded income. Freefillableforms 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. Freefillableforms (See chapter 5. Freefillableforms ) 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. Freefillableforms   These rules do not apply to the following individuals. Freefillableforms Straight-commission salespersons. Freefillableforms 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. Freefillableforms Accountable plan. Freefillableforms   An accountable plan is a reimbursement or allowance arrangement that includes all three of the following rules. Freefillableforms The expenses covered under the plan must have a business connection. Freefillableforms The employee must adequately account to the employer for these expenses within a reasonable period of time. Freefillableforms The employee must return any excess reimbursement or allowance within a reasonable period of time. Freefillableforms Reimbursement of moving expenses. Freefillableforms   Reimbursement of moving expenses may be earned income. Freefillableforms 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. Freefillableforms This section discusses reimbursements that must be included in earned income. Freefillableforms Publication 521, Moving Expenses, discusses additional rules that apply to moving expense deductions and reimbursements. Freefillableforms   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. Freefillableforms   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. Freefillableforms 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. Freefillableforms Move from U. Freefillableforms S. Freefillableforms to foreign country. Freefillableforms   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. Freefillableforms 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. Freefillableforms   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. Freefillableforms To figure the amount earned in the year of the move, multiply the reimbursement by a fraction. Freefillableforms 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. Freefillableforms   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. Freefillableforms The part earned in each year is figured as shown in the following example. Freefillableforms Example. Freefillableforms You are a U. Freefillableforms S. Freefillableforms citizen working in the United States. Freefillableforms You were told in October 2012 that you were being transferred to a foreign country. Freefillableforms 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. Freefillableforms Your employer reimbursed you $2,000 in January 2013 for the part of the moving expense that you were not allowed to deduct. Freefillableforms 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. Freefillableforms You figure the part of the reimbursement for services performed in the foreign country in 2012 by multiplying the total reimbursement by a fraction. Freefillableforms 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. Freefillableforms The remaining part of the reimbursement is for services performed in the foreign country in 2013. Freefillableforms This computation is used only to determine when the reimbursement is considered earned. Freefillableforms You would include the amount of the reimbursement in income in 2013, the year you received it. Freefillableforms Move between foreign countries. Freefillableforms   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. Freefillableforms Move to U. Freefillableforms S. Freefillableforms   If you move to the United States, the moving expense reimbursement that you must include in income is generally considered to be U. Freefillableforms S. Freefillableforms source income. Freefillableforms   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. Freefillableforms 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. Freefillableforms 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. Freefillableforms   See the discussion under Move from U. Freefillableforms S. Freefillableforms to foreign country , earlier, to figure the amount of the includible reimbursement considered earned in the year of the move. Freefillableforms 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. Freefillableforms Example. Freefillableforms You are a U. Freefillableforms S. Freefillableforms citizen employed in a foreign country. Freefillableforms 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. Freefillableforms 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. Freefillableforms 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. Freefillableforms 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. Freefillableforms 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. Freefillableforms The fraction is the number of days of foreign residence during the year (90) divided by the number of days in the year (365). Freefillableforms The remaining part of the includible reimbursement is for services performed in the foreign country in 2012. Freefillableforms You report the amount of the includible reimbursement in 2013, the year you received it. Freefillableforms    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. Freefillableforms Storage expense reimbursements. Freefillableforms   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. Freefillableforms U. Freefillableforms S. Freefillableforms 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. Freefillableforms This includes amounts paid from both appropriated and nonappropriated funds. Freefillableforms 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. Freefillableforms United States Armed Forces exchanges. Freefillableforms Commissioned and noncommissioned officers' messes. Freefillableforms Armed Forces motion picture services. Freefillableforms Kindergartens on foreign Armed Forces installations. Freefillableforms Amounts paid by the United States or its agencies to persons who are not their employees may qualify for exclusion or deduction. Freefillableforms If you are a U. Freefillableforms S. Freefillableforms Government employee paid by a U. Freefillableforms S. Freefillableforms 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. Freefillableforms S. Freefillableforms Government and does not qualify for exclusion or deduction. Freefillableforms If you have questions about whether you are an employee or an independent contractor, get Publication 15-A, Employer's Supplemental Tax Guide. Freefillableforms American Institute in Taiwan. Freefillableforms   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. Freefillableforms If you are an employee of the American Institute in Taiwan, allowances you receive are exempt from U. Freefillableforms S. Freefillableforms tax up to the amount that equals tax-exempt allowances received by civilian employees of the U. Freefillableforms S. Freefillableforms Government. Freefillableforms Allowances. Freefillableforms   Cost-of-living and foreign-area allowances paid under certain acts of Congress to U. Freefillableforms S. Freefillableforms 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. Freefillableforms Post differentials are wages that must be included in gross income, regardless of the act of Congress under which they are paid. Freefillableforms More information. Freefillableforms   Publication 516, U. Freefillableforms S. Freefillableforms Government Civilian Employees Stationed Abroad, has more information for U. Freefillableforms S. Freefillableforms Government employees abroad. Freefillableforms 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. Freefillableforms The meals are furnished: On the business premises of your employer, and For the convenience of your employer. Freefillableforms The lodging is furnished: On the business premises of your employer, For the convenience of your employer, and As a condition of your employment. Freefillableforms 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. Freefillableforms Amounts you do not include in income because of these rules are not foreign earned income. Freefillableforms If you receive a Form W-2, excludable amounts should not be included in the total reported in box 1 as wages. Freefillableforms Family. Freefillableforms   Your family, for this purpose, includes only your spouse and your dependents. Freefillableforms Lodging. Freefillableforms   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. Freefillableforms Business premises of employer. Freefillableforms   Generally, the business premises of your employer is wherever you work. Freefillableforms 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. Freefillableforms 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. Freefillableforms Convenience of employer. Freefillableforms   Whether meals or lodging are provided for your employer's convenience must be determined from all the facts and circumstances. Freefillableforms 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. Freefillableforms   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. Freefillableforms Condition of employment. Freefillableforms   Lodging is provided as a condition of employment if you must accept the lodging to properly carry out the duties of your job. Freefillableforms 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. Freefillableforms Foreign camps. Freefillableforms   If the lodging is in a camp located in a foreign country, the camp is considered part of your employer's business premises. Freefillableforms 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. Freefillableforms 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. Freefillableforms Foreign earned income was defined earlier in this chapter. Freefillableforms You also can choose to exclude from your income a foreign housing amount. Freefillableforms This is explained later under Foreign Housing Exclusion. Freefillableforms If you choose to exclude a foreign housing amount, you must figure the foreign housing exclusion before you figure the foreign earned income exclusion. Freefillableforms Your foreign earned income exclusion is limited to your foreign earned income minus your foreign housing exclusion. Freefillableforms 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. Freefillableforms This includes any expenses, losses, and other normally deductible items allocable to the excluded income. Freefillableforms For more information about deductions and credits, see chapter 5 . Freefillableforms Limit on Excludable Amount You may be able to exclude up to $97,600 of your foreign earned income in 2013. Freefillableforms 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). Freefillableforms 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. Freefillableforms You do not both need to meet the same test. Freefillableforms Together, you and your spouse can exclude as much as $195,200. Freefillableforms Paid in year following work. Freefillableforms   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. Freefillableforms If you report your income on a cash basis, you report the income on your return for the year you receive it. Freefillableforms 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. Freefillableforms For an exception to this general rule, see Year-end payroll period, later. Freefillableforms Example. Freefillableforms You were a bona fide resident of Brazil for all of 2012 and 2013. Freefillableforms You report your income on the cash basis. Freefillableforms In 2012, you were paid $84,200 for work you did in Brazil during that year. Freefillableforms You excluded all of the $84,200 from your income in 2012. Freefillableforms In 2013, you were paid $117,300 for your work in Brazil. Freefillableforms $18,800 was for work you did in 2012 and $98,500 was for work you did in 2013. Freefillableforms You can exclude $10,900 of the $18,800 from your income in 2013. Freefillableforms This is the $95,100 maximum exclusion in 2012 minus the $84,200 actually excluded that year. Freefillableforms 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. Freefillableforms You can exclude $97,600 of the $98,500 you were paid for work you did in 2013 from your 2013 income. Freefillableforms 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). Freefillableforms 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). Freefillableforms Year-end payroll period. Freefillableforms   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. Freefillableforms 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. Freefillableforms The period for which the payment is made is a normal payroll period of your employer that regularly applies to you. Freefillableforms The payroll period includes the last day of your tax year (December 31 if you figure your taxes on a calendar-year basis). Freefillableforms The payroll period is not longer than 16 days. Freefillableforms 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. Freefillableforms Example. Freefillableforms You are paid twice a month. Freefillableforms 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. Freefillableforms 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. Freefillableforms Because all of the above conditions are met, the pay you received on January 1, 2013, is considered earned in 2013. Freefillableforms Income earned over more than 1 year. Freefillableforms   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. Freefillableforms For example, a bonus may be based on work you did over several years. Freefillableforms You determine the amount of the bonus that is considered earned in a particular year in two steps. Freefillableforms Divide the bonus by the number of calendar months in the period when you did the work that resulted in the bonus. Freefillableforms Multiply the result of (1) by the number of months you did the work during the year. Freefillableforms This is the amount that is subject to the exclusion limit for that tax year. Freefillableforms Income received more than 1 year after it was earned. Freefillableforms   You cannot exclude income you receive after the end of the year following the year you do the work to earn it. Freefillableforms Example. Freefillableforms   You were a bona fide resident of Sweden for 2011, 2012, and 2013. Freefillableforms You report your income on the cash basis. Freefillableforms 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. Freefillableforms You excluded all the income on your 2011 and 2012 returns. Freefillableforms   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. Freefillableforms 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. Freefillableforms You must include the $10,000 in income. Freefillableforms You can exclude all of the $82,000 received for work you did in 2013. Freefillableforms Community income. Freefillableforms   The maximum exclusion applies separately to the earnings of spouses. Freefillableforms Ignore any community property laws when you figure your limit on the foreign earned income exclusion. Freefillableforms Part-year exclusion. Freefillableforms   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. Freefillableforms 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. Freefillableforms   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. Freefillableforms 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. Freefillableforms Example. Freefillableforms 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. Freefillableforms You can exclude a maximum of 75/365 of $97,600, or $20,055, of your foreign earned income for 2013. Freefillableforms 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. Freefillableforms Physical presence test. Freefillableforms   Under the physical presence test, a 12-month period can be any period of 12 consecutive months that includes 330 full days. Freefillableforms 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. Freefillableforms Example. Freefillableforms 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. Freefillableforms You figure the maximum exclusion for 2012 as follows. Freefillableforms Beginning with June 1, 2012, count forward 330 full days. Freefillableforms Do not count the 16 days you spent in the United States. Freefillableforms The 330th day, May 12, 2013, is the last day of a 12-month period. Freefillableforms Count backward 12 months from May 11, 2013, to find the first day of this 12-month period, May 12, 2012. Freefillableforms This 12-month period runs from May 12, 2012, through May 11, 2013. Freefillableforms Count the total days during 2012 that fall within this 12-month period. Freefillableforms This is 234 days (May 12, 2012 – December 31, 2012). Freefillableforms Multiply $95,100 (the maximum exclusion for 2012) by the fraction 234/366 to find your maximum exclusion for 2012 ($60,802). Freefillableforms You figure the maximum exclusion for 2013 in the opposite manner. Freefillableforms Beginning with your last full day, September 30, 2013, count backward 330 full days. Freefillableforms Do not count the 16 days you spent in the United States. Freefillableforms That day, October 20, 2012, is the first day of a 12-month period. Freefillableforms Count forward 12 months from October 20, 2012, to find the last day of this 12-month period, October 19, 2013. Freefillableforms This 12-month period runs from October 20, 2012, through October 19, 2013. Freefillableforms Count the total days during 2013 that fall within this 12-month period. Freefillableforms This is 292 days (January 1, 2013 – October 19, 2013). Freefillableforms Multiply $97,600, the maximum limit, by the fraction 292/365 to find your maximum exclusion for 2013 ($78,080). Freefillableforms Choosing the Exclusion The foreign earned income exclusion is voluntary. Freefillableforms You can choose the exclusion by completing the appropriate parts of Form 2555. Freefillableforms 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. Freefillableforms A return filed by the due date (including any extensions). Freefillableforms A return amending a timely-filed return. Freefillableforms 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. Freefillableforms A return filed within 1 year from the original due date of the return (determined without regard to any extensions). Freefillableforms Filing after the above periods. Freefillableforms   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. Freefillableforms 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. Freefillableforms 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. Freefillableforms 911-7(a)(2)(i)(D). Freefillableforms ” 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. Freefillableforms You must request a private letter ruling under Income Tax Regulation 301. Freefillableforms 9100-3 and Revenue Procedure 2013-1, 2013-1 I. Freefillableforms R. Freefillableforms B. Freefillableforms 1, available at www. Freefillableforms irs. Freefillableforms gov/irb/2013-01_IRB/ar06. Freefillableforms html. Freefillableforms 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. Freefillableforms Foreign tax credit or deduction. Freefillableforms  
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