Stephen C. Fox, CPA
U.S. International Tax
Stephen C. Fox, CPA, CMA
PO Box 880695
Port Saint Lucie,  FL  34988
+1(973) 610-5669
Foreign Earned Income Exclusion

The foreign earned income exclusion on Form 2555 significantly reduces U.S. Federal (and state, if applicable) income taxes for expats. If you are a U.S. citizen or green card holder living and working outside the U.S., you may be able to exclude from your U.S. taxable income $97,600 in 2013 ($99,200  in 2014) plus an amount for housing in excess of $42.78 per day in 2013 ($43.48 in 2014). U.S. government employees (including military and diplomatic personnel) and certain military contractors cannot qualify for this exclusion.

Basic Requirements
To qualify for the foreign earned income exclusion, your tax home must be outside the U.S. It need not be in the same country in which you work, just not in the U.S. Further, you do not qualify if your abode is in the U.S. (IRC section 911(d)(3)). The IRS position is that your tax home is your regular or principal place of business, employment, or post of duty, regardless of where you maintain your family residence. Many courts have held that your tax home is where you live. Therefore, if your principal workplace is outside the U.S. and you live outside the U.S., you should have a tax home outside the U.S.

In addition, you must meet either of two tests:
  • Physical presence test: you were outside of the U.S. 330 days out of any given 12 month period, or
  • Bona fide resident test: you were a bona fide resident of a foreign country for a period that includes a full U.S. tax year.

The bona fide resident test is only available to a U.S. citizen, not to a resident alien (green card holder). You also cannot meet that test if you declared to the foreign government (such as on a visa application or tax return) that you were not tax resident there.

Counting the Days
A day is a U.S. day if any part of it was spent in the U.S.

For both tests, you get to exclude income earned for a particular day if you met either test for that day. There can be multiple overlapping 12 month periods for the physical presence test. The bona fide resident test days include all days in a period of residence in a foreign country, not just the full year in the test.

This concept is easy to state, but hard to grasp. It is often best to draw a time line chart to see if you qualify. Here are two examples:

Fred lives in New York and rents an apartment in Hong Kong in August, 2008. He travels back and forth for a while, then gives up his apartment in New York in October. He lives in Hong Kong from then until March, 2010, when he moves to Texas. Fred files Hong Kong tax returns as a resident while he is there. Fred meets the bona fide resident test for every day from at least October, 2008, through March, 2010. Thus, all of his December, 2008, wages can qualify for the exclusion, even if he went to the U.S. for over 4 months.

Jane transfers from the Chicago office of her firm to London. She moves out of her U.S. house to a flat in London, departing O'Hare on April 7, 2009. She returns to Chicago on December 1, 2009, and leaves December 31, 2009. She again is in the U.S. July 1, 2010, through July 22, 2010. She spends no other days in the U.S. until she moves back to Chicago on December 20, 2010. She does not meet the bona fide resident test due to visa declarations. She does meet the physical presence test for all her days from April 7, 2009 until December 15, 2010. During the first qualifying period of April 7, 2009, until April 6, 2010, she was in the U.S. for 31 days, so all of those days qualify. During the last qualifying period of December 20, 2009 until December 19, 2010, she was in the U.S. for 35 days, so all of those days qualify. These two periods overlap. Thus, every day from April 7, 2009 through December 20, 2010, is a qualifying day. (Note how the travel days partly in the U.S. were U.S. days.)

Calculating the Foreign Earned Income Exclusion on Form 2555
The exclusion is the lesser of your foreign earned income or the maximum exclusion divided by the total number of days (365 or 366) in the year times the number of qualifying days. For 2009, Fred and Jane can each exclude up to $91,400 (the limit for 2009) plus the housing amount.

In addition to this basic foreign earned income exclusion, there is an additional exclusion or deduction for housing costs (the housing amount). This is also calculated based on qualifying days. The housing cost amount is housing costs (rent, utilities, insurance, etc.) you spent for those days in excess of the 16% of the base exclusion for that year ($40.11 in 2010). The housing amount is limited based on the location, and varies widely.  Who paid for the housing costs matters.

Get Help
If you are an American who worked and lived outside the U.S. all year and you made less than $95,100 in 2012, your return will be easy. File Forms 1040 and 2555-EZ and your tax bill likely will be zero. For more information, see IRS Publication 54.

If your situation is more complex, then get the personal, professional help you need by calling or e-mailing Steve Fox for help with the foreign earned income exclusion on Form 2555.

It's your business:  get personal.  Call Steve Fox at  1(973) 610-5669  or  email steve @ sfoxcpa .com
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