Publication 54 |
2000 Tax Year |
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. Foreign earned income is defined earlier. You cannot deduct
expenses directly connected with the earning of excluded income. See
chapter 5.
You can also choose to exclude from your income a foreign housing
amount. This is explained later. If you choose to exclude a foreign
housing amount, you must figure the foreign housing exclusion first.
Your foreign earned income exclusion is limited to your foreign earned
income minus your foreign housing exclusion.
Limit on Excludable Amount
You may be able to exclude up to $76,000 of income earned in 2000.
See Table 4.2 for the maximum amount excludable for other
years.
Limits.
For 2000, you cannot exclude more than the smaller of:
- $76,000, or
- Your foreign earned income (discussed earlier) for the tax
year minus your foreign housing exclusion (discussed later).
If both you and your spouse work abroad and you each meet either
the bona fide residence test or the physical presence test, you can
each choose the foreign earned income exclusion. It is possible for a
married couple together to exclude as much as $152,000.
These limits apply to the foreign earned income exclusion only; you
may also qualify for the foreign housing exclusion.
If you perform services one year but do not get paid for those
services until the following year, the income is generally considered
earned in the year you performed the services. If you report your
income on the cash basis, you report the income on your return for the
year you receive it. You can exclude as much of the income in the year
you receive it as you could have excluded in the year you performed
the services had you received the income that year.
Example.
You qualify as a bona fide resident of a foreign country for all of
last year and this year. You report your income on the cash basis. You
received $65,000 last year for services you performed last year in the
foreign country. You can exclude all of the $65,000.
This year you will receive $87,000: $10,000 for services performed
in the foreign country last year and $77,000 for services performed in
the foreign country this year. You can exclude $9,000 of the $10,000
received for services performed last year. This is the $74,000 maximum
exclusion allowable last year minus the $65,000 you excluded last
year. You must include the remaining $1,000 in income (this year)
because you could not have excluded that income last year had you
received it then. You can also exclude $76,000 of the $77,000 received
for services performed during this year.
Your total foreign earned income excluded on your return for this
year would be $85,000 ($9,000 attributable to last year and $76,000
attributable to this year). You would have $2,000 of includible
income.
Table 4.2. The maximum amount you can exclude depends on
the calendar year.
Year |
Maximum Excludable Amount |
1997 and earlier |
$70,000 |
1998 |
$72,000 |
1999 |
$74,000 |
2000 |
$76,000 |
2001 |
$78,000 |
2002 and later |
$80,000 |
Year-end payroll period.
There is an exception to the rule that you exclude income in the
year you earn it. If you are a cash basis taxpayer, a salary or wage
payment that you receive after the end of the tax year in which you
perform the services is considered earned entirely in the year you
receive it if all four of the following apply.
- The period for which the payment is made is a normal payroll
period of your employer that regularly applies to you.
- The payroll period includes the last day of your tax
year.
- The payroll period is not longer than 16 days.
- 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.
Income earned over more than 1 year.
Regardless of when you actually receive income, you must credit it
to the tax year in which you earned it in figuring your excludable
amount for that year. For example, a bonus that you receive in 1 year
may be based on services you performed over several tax years. You
determine the amount of the bonus that is considered earned in a
particular tax year by dividing the bonus by the number of calendar
months in the period when you performed the services that resulted in
the bonus and then multiplying the result by the number of months you
performed these services during the tax year. This is the amount that
is subject to the exclusion limit for that tax year.
Income received more than 1 year after it was earned.
You cannot exclude income you receive after the end of the tax year
following the tax year in which you perform the services that earned
it.
Example.
You qualify as a bona fide resident of a foreign country for 1998,
1999, and 2000. You report your income on the cash basis. You received
$65,000 for 1998 and $70,000 for 1999 for services performed in the
foreign country. You excluded $65,000 on your 1998 federal income tax
return and $70,000 for your 1999 return.
In 2000 you receive $90,000; $80,000 for services performed in the
foreign country during 2000, and $10,000 for services performed in the
foreign country in 1998. You cannot exclude any of the $10,000
received for services performed in 1998 because you received it after
the year following the year in which you earned it. You must include
the $10,000 in income. You can exclude $76,000 of the $80,000 received
for services performed in 2000.
Community income.
The maximum
exclusion applies individually to
the earnings of a husband and wife. Ignore any community property laws
when you figure your limit on the foreign earned income exclusion.
Part-year
exclusion.
If you qualify under either the bona fide residence test or the
physical presence test for only part of the tax year, you must adjust
the maximum limit based on the number of qualifying days in your tax
year. The number of qualifying days in your tax year is the number of
days within the period on which you both have your tax home in a
foreign country and meet either test.
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. 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 your tax year.
Example.
You report your income on the calendar-year basis and you qualified
under the bona fide residence test for 75 days in 2000. You can
exclude a maximum of 75/366 of $76,000, or $15,574, of your foreign
earned income for 2000. If you qualify under the bona fide residence
test for all of 2001, you can exclude your foreign earned income up to
the full $78,000 limit.
Physical presence test.
Under
the physical presence
test, a 12-month period can be any period of 12 consecutive
months that includes 330 full days. If you qualify under the physical
presence test for part of a tax year, it is important to carefully
choose the 12-month period that will allow the maximum exclusion for
that year.
Example.
You are physically present and have your tax home in a foreign
country for a 16-month period from June 1, 1999, through September 29,
2000, except for 15 days in December 1999 when you were on vacation in
the United States. You figure the maximum exclusion for 1999 as
follows:
- Beginning with June 1, 1999, count forward 330 full days. Do
not count the 15 days you spent in the United States. The 330th day,
May 10, 2000, is the last day of a 12-month period.
- Count backward 12 months from May 10, 2000, to find the
first day of this 12-month period, May 11, 1999. This 12-month period
runs from May 11, 1999, through May 10, 2000.
- Count the total days during 1999 that fall within this
12-month period. This is 235 days (May 11, 1999--December 31,
1999).
- Multiply $74,000 by the fraction 235/365 to find your
maximum exclusion for 1999 ($47,644).
You figure the maximum exclusion for 2000 in the opposite manner:
- Beginning with your last full day, September 29, 2000, count
backward 330 full days. Do not count the 15 days you spent in the
United States. That day, October 21, 1999, is the first day of a
12-month period.
- Count forward 12 months from October 21, 1999, to find the
last day of this 12-month period, October 20, 2000. This 12-month
period runs from October 21, 1999, through October 20, 2000.
- Count the total days during 2000 that fall within this
12-month period. This is 294 days (January 1, 2000--October 20,
2000).
- Multiply $76,000, the maximum limit, by the fraction 294/366
to find your maximum exclusion for 2000 ($61,049).
Choosing the Exclusion
The foreign earned income exclusion is voluntary. You can
separately choose the foreign earned income exclusion and the foreign
housing exclusion by completing the appropriate parts of Form 2555.
Your initial choice of the exclusions on Form 2555 or Form
2555-EZ generally must be made with a timely filed return
(including any extensions), a return amending a timely filed return,
or a late-filed return filed within 1 year from the original due date
of the return (determined without regard to any extensions).
You can choose the exclusion on a return filed after the periods
described above provided you owe no federal income tax after taking
into account the exclusion. 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 above provided you file before IRS
discovers that you failed to choose the exclusion. You must type or
legibly print at the top of the first page of the Form 1040 "FILED
PURSUANT TO SECTION 1.911-7(a)(2)(i)(D)." 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 must request a private letter ruling under Revenue
Procedure 92-85 (as modified by Revenue Procedure 93-28).
Revenue procedures are published in the Internal Revenue
Bulletin (I.R.B.) and in the Cumulative Bulletin
(C.B.), which are volumes containing official matters of the
Internal Revenue Service. You can buy the C.B. containing a particular
revenue procedure from the Superintendent of Documents, U.S.
Government Printing Office, Washington, DC 20402.
Once you choose to exclude your foreign earned income or housing
amount, that choice remains in effect for that year and all later
years unless you revoke it.
Revocation.
You can revoke
your choice for any tax year. You do this by attaching a statement
that you are revoking one or more previously made choices to the
return or amended return for the first year that you do not wish to
claim the exclusion(s). You must specify which choice(s) you are
revoking. You must revoke separately a choice to exclude foreign
earned income and a choice to exclude foreign housing amounts.
If you revoked a choice and within 5 tax years again wish to choose
the same exclusion, you must apply for IRS approval. You do this by
requesting a ruling from the Internal Revenue Service.
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Mail your request for a ruling in duplicate to:
Associate Chief Counsel (International)
Internal Revenue Service
CC:INTL
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044.
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Because requesting a ruling can be complex, you may need
professional help. Also, the IRS charges a fee for issuing these
rulings. For more information, see Revenue Procedure 2000-1,
which is published in Internal Revenue Bulletin No. 2000-1.
In deciding whether to give approval, the IRS will consider any
facts and circumstances that may be relevant. These may include a
period of residence in the United States, a move from one foreign
country to another foreign country with different tax rates, a
substantial change in the tax laws of the foreign country of residence
or physical presence, and a change of employer.
Foreign tax credit.
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 can exclude. If you do take the credit, one or both of the
choices may be considered revoked. See Credit for Foreign Income
Taxes in chapter 5
for more information.
Earned income credit.
You will not qualify for the earned income credit if you claim the
foreign earned income exclusion, the foreign housing exclusion, or the
foreign housing deduction for the year. For more information on this
credit, see Publication 596.
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