For 2016, the maximum exclusion has increased to $101,300.
The foreign earned income exclusion is voluntary. You can choose the foreign earned income exclusion and the foreign housing exclusion by completing the appropriate parts of Form 2555.
If you are a U.S. citizen or a resident alien of the United States and you live abroad, you are taxed on your worldwide income. However, you may qualify to exclude from income up to $101,300 (2016) of your foreign earnings.
Foreign earned income for this purpose means wages, salaries, professional fees, and other compensation received for personal services you performed in a foreign country during the period for which you meet the tax home test and either the bona-fide residence test or the physical presence test. It also includes non-cash income (such as a home or car) and allowances or reimbursements.
It does not include pensions and annuities (including Social Security benefits), interests, dividends, capital gains, alimony, or amounts paid to you by the U.S. Government or any of its agencies if you were an employee of the U.S. Government or any of its agencies.
To claim the foreign earned income exclusion, you must:
- have foreign earned income as defined above,
- be a U.S. citizen who is a bona-fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year,
- be a U.S. 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, or
- be U.S. citizen or a U.S. 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.
- request the exclusion (form 2555)
- file timely, or amend a timely filed return
- file a late-filed return within 1 year from the original due date of the return (determined without regard to any extensions).
The amount of foreign earned income (and foreign housing costs) excluded from an individual’s gross income will be used for purposes of determining the rate of income tax and alternative minimum tax (AMT) that applies to his or her non-excluded income.
Once you choose to exclude either foreign earned income or foreign housing costs, you cannot take a foreign tax credit for taxes on income you exclude. However, you can choose to take the foreign tax credit on any amount of foreign income which has not been excluded under the foreign earned income exclusion or the foreign housing exclusion.
I created this blog to help understand certain basic aspects of U.S. tax law. Of course, each situation is unique and nothing that is on this site will ever replace the expert advice of a tax professional.
Please do not hesitate to contact me should you have any question