Foreign Earned Income Exclusion
If you meet certain requirements, you may qualify for the foreign earned income and foreign housing exclusions and the foreign housing deduction.
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 an amount of your foreign earnings that is now adjusted for inflation ($91,400 for 2009, $91,500 for 2010, $92,900 for 2011, $95,100 for 2012). In addition, you can exclude or deduct certain foreign housing amounts.
You may also be entitled to exclude from income the value of meals and lodging provided to you by your employer. Refer to Exclusion of Meals and Lodging in Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad, and Publication 15-B, Employer’s Tax Guide to Fringe Benefits for more information.
Foreign Earned Income Exclusion – Requirements
To claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, you must have foreign earned income, your tax home must be in a foreign country, and you must be one of the following:
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,
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
A 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.
Changes in the Foreign Earned Income Exclusion
The maximum amount of the Foreign Earned Income Exclusion under Internal Revenue Code (IRC) section 911 is now indexed to inflation ($91,400 for 2009, $91,500 for 2010, $92,900 for 2011, $95,100 for 2012). In addition, Section 515 of the Tax Increase Prevention and Reconciliation Act of 2005 (P.L. 109-222) amends the computation of the Maximum Housing Amount Exclusion under IRC section 911. (Refer to Notice 2010-27)
Effective for tax years beginning after 2005, 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 nonexcluded income. The Tax Increase Prevention and Reconciliation Act of 2005 (P.L. 109-222) added a new section 911(f) to the Internal Revenue Code. In essence, an individual’s tax on any foreign earned income above the exclusion amount and on any unearned income is computed as if the foreign earned income exclusion was not claimed. The individual’s tax will be the excess of the tax that would be imposed if his or her taxable income were increased by the amount(s) excluded, and the tax that would be imposed if his or her taxable income were equal to the excluded amount(s). For this purpose, the excluded amount(s) will be reduced by the aggregate amount of any deductions or other exclusions otherwise disallowed. In many cases this will have the effect of increasing an individual’s U.S. federal income tax to an amount greater than it would have been under prior law.