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U.S. citizens and resident aliens living outside the United States generally are allowed the same deductions as citizens and residents living in the United States.

If you choose to exclude foreign earned income or housing amounts, 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 that are allocable to the excluded income. You can deduct only those expenses connected with earning includible income.

These rules apply only to items definitely related to the excluded earned income and they do not apply to other items that are not definitely related to any particular type of gross income. These rules do not apply to items such as:

• Personal exemptions,
• Qualified retirement contributions,
• Alimony payments,
• Charitable contributions,
• Medical expenses,
• Mortgage interest, or
• Real estate taxes on your personal residence.

For purposes of these rules, your housing deduction is not treated as allocable to your excluded income, but the deduction for self-
employment tax is.

If you receive foreign earned income in a tax year after the year in which you earned it, you may have to file an amended return for the earlier year to properly adjust the amounts of deductions, credits, or exclusions allocable to your foreign earned income and housing exclusions.

In 2010, you had $86,000 of foreign earned income and $9,500 of deductions allocable to your foreign earned income. You did not have a housing exclusion. Because you excluded all of your foreign earned income, you would not have been able to claim any of the deductions on your 2010 return.

In 2011, you received a $12,000 bonus for work you did abroad in 2010. You can exclude $5,500 of the bonus because the limit on the foreign earned income exclusion for 2010 was $91,500 and you have already excluded $86,000. Since you must include $6,500 of the bonus ($12,000 − $5,500) for work you did in 2010 in income, you can file an amended return for 2010 to claim $630 of the deductions. This is the deductions allocable to the foreign earned income ($9,500) multiplied by the includible portion of the foreign earned income ($6,500) and divided by the total foreign earned income for 2010 ($98,000).