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