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. Foreign earned income was defined earlier in this chapter.
You can also choose to exclude from your income a foreign housing amount. This is explained later under Foreign Housing Exclusion. If you choose to exclude a foreign housing amount, you must figure the foreign housing exclusion before you figure the foreign earned income exclusion. Your foreign earned income exclusion is limited to your foreign earned income minus your foreign housing exclusion.
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. This includes any expenses, losses, and other normally deductible items allocable to the excluded income. For more information about deductions and credits, see chapter 5. taxmap/pubs/p54-011.htm#en_us_publink100047499
You may be able to exclude up to $87,600 of your foreign earned income in 2008.
You cannot exclude more than the smaller of:
- $87,600, or
- Your foreign earned income (discussed earlier) for the tax year minus your foreign housing exclusion (discussed later).
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. You do not both need to meet the same test. Together, you and your spouse can exclude as much as $175,200. taxmap/pubs/p54-011.htm#en_us_publink100047500
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. If you report your income on a cash basis, you report the income on your return for the year you receive it. 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. For an exception to this general rule, see Year-end payroll period, later. taxmap/pubs/p54-011.htm#en_us_publink100047501
You were a bona fide resident of Brazil for all of 2007 and 2008. You report your income on the cash basis. In 2007, you were paid $76,000 for work you did in Brazil during that year. You excluded all of the $76,000 from your income in 2007.
In 2008, you were paid $101,400 for your work in Brazil. $13,000 was for work you did in 2007 and $88,400 was for work you did in 2008. You can exclude $9,700 of the $13,000 from your income in 2008. This is the $85,700 maximum exclusion in 2007 minus the $76,000 actually excluded that year. You must include the remaining $3,300 in income in 2008 because you could not have excluded that income in 2007 if you had received it that year. You can exclude $87,600 of the $88,400 you were paid for work you did in 2008 from your 2008 income.
Your total foreign earned income exclusion for 2008 is $97,300 ($9,700 of the pay received in 2008 for work you did in 2007 and $87,600 for work you did in 2008). You would include in your 2008 income $4,100 ($3,300 for the work you did in 2007 and $800 for the work you did in 2008). taxmap/pubs/p54-011.htm#en_us_publink100047502
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. 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.
- The period for which the payment is made is a normal payroll period of your employer that regularly applies to you.
- The payroll period includes the last day of your tax year (December 31 if you figure your taxes on a calendar-year basis).
- The payroll period is not longer than 16 days.
- 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.
You are paid twice a month. For the normal payroll period which 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. 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. Because all of the above conditions are met, the pay you received on January 1, 2008, is considered earned in 2008.taxmap/pubs/p54-011.htm#en_us_publink100047504
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. For example, a bonus may be based on work you did over several years. You determine the amount of the bonus that is considered earned in a particular year in two steps.
- Divide the bonus by the number of calendar months in the period when you did the work that resulted in the bonus.
- Multiply the result of (1) by the number of months you did the work during the year. This is the amount that is subject to the exclusion limit for that tax year.
You cannot exclude income you receive after the end of the year following the year you do the work to earn it. taxmap/pubs/p54-011.htm#en_us_publink100047506
You were a bona fide resident of Sweden for 2006, 2007, and 2008. You report your income on the cash basis. In 2006, you were paid $69,000 for work you did in Sweden that year and in 2007 you were paid $74,000 for that year's work in Sweden. You excluded all the income on your 2006 and 2007 returns.
In 2008, you were paid $92,000; $82,000 for your work in Sweden during 2008, and $10,000 for work you did in Sweden in 2006. You cannot exclude any of the $10,000 for work done in 2006 because you received it after the end of the year following the year in which you earned it. You must include the $10,000 in income. You can exclude all of the $82,000 received for work you did in 2008. taxmap/pubs/p54-011.htm#en_us_publink100047507
The maximum exclusion applies separately to the earnings of a husband and wife. Ignore any community property laws when you figure your limit on the foreign earned income exclusion. taxmap/pubs/p54-011.htm#en_us_publink100047508
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. 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.
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. 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. taxmap/pubs/p54-011.htm#en_us_publink100047509
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 2008. You can exclude a maximum of 75/366 of $87,600, or $17,951, of your foreign earned income for 2008. If you qualify under the bona fide residence test for all of 2009, you can exclude your foreign earned income up to the 2009 limit.taxmap/pubs/p54-011.htm#en_us_publink100047510
Under the physical presence test, a 12-month period can be any period of 12 consecutive months that includes 330 full days. 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. taxmap/pubs/p54-011.htm#en_us_publink100047511
You are physically present and have your tax home in a foreign country for a 16-month period from June 1, 2007, through September 29, 2008, except for 16 days in December 2007 when you were on vacation in the United States. You figure the maximum exclusion for 2007 as follows.
- Beginning with June 1, 2007, count forward 330 full days. Do not count the 16 days you spent in the United States. The 330th day, May 11, 2008, is the last day of a 12-month period.
- Count backward 12 months from May 10, 2008, to find the first day of this 12-month period, May 11, 2007. This 12-month period runs from May 11, 2007, through May 10, 2008.
- Count the total days during 2007 that fall within this 12-month period. This is 235 days (May 11, 2007 – December 31, 2007).
- Multiply $85,700 (the maximum exclusion for 2007) by the fraction 235/365 to find your maximum exclusion for 2007 ($55,177).
You figure the maximum exclusion for 2008 in the opposite manner.
- Beginning with your last full day, September 29, 2008, count backward 330 full days. Do not count the 16 days you spent in the United States. That day, October 20, 2007, is the first day of a 12-month period.
- Count forward 12 months from October 20, 2007, to find the last day of this 12-month period, October 19, 2008. This 12-month period runs from October 20, 2007, through October 19, 2008.
- Count the total days during 2008 that fall within this 12-month period. This is 293 days (January 1, 2008 – October 19, 2008).
- Multiply $87,600, the maximum limit, by the fraction 293/366 to find your maximum exclusion for 2008 ($70,128).
The foreign earned income exclusion is voluntary. You can choose the exclusion by completing the appropriate parts of Form 2555.taxmap/pubs/p54-011.htm#en_us_publink100047513
Your initial choice of the exclusion on Form 2555 or Form 2555-EZ generally must be made with one of the following returns.
- A return filed by the due date (including any extensions).
- A return amending a timely-filed return. 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.
- A return filed within 1 year from the original due date of the return (determined without regard to any extensions).
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.
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 above if you file before IRS discovers that you failed to choose the exclusion. You must type or legibly print at the top of the first page of the Form 1040 "Filed pursuant to section 1.911-7(a)(2)(i)(D)."
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. You must request a private letter ruling under Income Tax Regulation 301.9100-3 and Revenue Procedure 2008-1.
Revenue procedures are published in the Internal Revenue Bulletin (I.R.B.) and in the Cumulative Bulletin (C.B.), which are volumes containing official matters of the Internal Revenue Service. The I.R.B. is available on the Internet at www.irs.gov
. To access Revenue Procedure 2008-1, enter Rev. Proc. 2008-1 in the search box.
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. taxmap/pubs/p54-011.htm#en_us_publink100047515
Once you choose to exclude foreign earned income, you cannot take a foreign tax credit or deduction for taxes on income you can exclude. If you do take a credit or deduction for any of those taxes, your choice to exclude foreign earned income may be considered revoked. See Publication 514, Foreign Tax Credit for Individuals, for more information. taxmap/pubs/p54-011.htm#en_us_publink100047516
If you claim the foreign earned income exclusion, you will not qualify for the earned income credit for the year. For more information on this credit, see Publication 596. taxmap/pubs/p54-011.htm#en_us_publink100047517
If you claim the foreign earned income exclusion, the housing exclusion (discussed later), or both, you must figure the tax on your nonexcluded income using the tax rates that would have applied had you not claimed the exclusions. See the instructions for Form 1040 and complete the Foreign Earned Income Tax Worksheet to figure the amount of tax to enter on Form 1040, line 44. If you must attach Form 6251, Alternative Minimum Tax — Individuals, to your return, use the Foreign Earned Income Tax Worksheet provided in the instructions for Form 6251.taxmap/pubs/p54-011.htm#en_us_publink100047518
You can revoke your choice for any year. You do this by attaching a statement that you are revoking one or more previously made choices to the return or amended return for the first year that you do not wish to claim the exclusion(s). You must specify which choice(s) you are revoking. You must revoke separately a choice to exclude foreign earned income and a choice to exclude foreign housing amounts.
If you revoked a choice and within 5 years again wish to choose the same exclusion, you must apply for IRS approval. You do this by requesting a ruling from the IRS.
Mail your request for a ruling, in duplicate, to:
Associate Chief Counsel (International)
Internal Revenue Service
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044
Because requesting a ruling can be complex, you may need professional help. Also, the IRS charges a fee for issuing these rulings. For more information, see Revenue Procedure 2008-1, which is published in Internal Revenue Bulletin No. 2008-1.
In deciding whether to give approval, the IRS will consider any facts and circumstances that may be relevant. These may include a period of residence in the United States, a move from one foreign country to another foreign country with different tax rates, a substantial change in the tax laws of the foreign country of residence or physical presence, and a change of employer.