Publication 54 |
2001 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 can also choose to exclude from your income a foreign housing
amount. This is explained later under Foreign Housing Exclusion.
If you choose to exclude a foreign housing amount, you must
figure the foreign housing exclusion before you figure the foreign
earned income exclusion. Your foreign earned income exclusion is
limited to your foreign earned income minus your foreign housing
exclusion.
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. This includes any expenses,
losses, and other normally deductible items allocable to the excluded
income. For more information about deductions and credits, see chapter
5.
Limit on Excludable Amount
You may be able to exclude up to $78,000 of income earned in 2001.
The table below shows the maximum amount excludable for other years.
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 |
For 2001, you cannot exclude more than the smaller of:
- $78,000, 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 and your spouse
meet either the bona fide residence test or the physical presence
test, you can each choose the foreign earned income exclusion. You do
not both need to meet the same test. Together, you and your spouse can
exclude as much as $156,000.
Paid in year following work.
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. If you
report your income on a cash basis, you report the income on your
return for the year you receive it. 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. For an
exception to this general rule, see Year-end payroll period,
later.
Example.
You qualify as a bona fide resident of Brazil for all of 2000 and
2001. You report your income on the cash basis. In 2000, you were paid
$65,000 for work you did in Brazil during that year. You excluded all
of the $65,000 from your income in 2000.
In 2001, you were paid $91,000 for your work in Brazil. $12,000 was
for work you did in 2000 and $79,000 was for work you did in 2001. You
can exclude $11,000 of the $12,000 from your income in 2001. This is
the $76,000 maximum exclusion allowable in 2000 minus the $65,000 you
actually excluded that year. You must include the remaining $1,000 in
income in 2001 because you could not have excluded that income in 2000
if you had received it that year. You can exclude $78,000 of the
$79,000 you were paid for work you did in 2001 from your 2001 income.
Your total foreign earned income exclusion for 2001 is $89,000
($11,000 of the pay received in 2001 for work you did in 2000 and
$78,000 of the pay you received in 2001 for work you did in 2001). You
would include in your 2001 income $2,000 of the pay you received in
2001 ($1,000 of the pay received in 2001 for the work you did in 2000
and $1,000 of the pay received in 2001 for the work you did in 2001).
Year-end payroll period.
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.
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.
- 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
(December 31 if you figure your taxes on a calendar-year
basis).
- 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 apply it
to the year in which you earned it in figuring your excludable amount
for that year. For example, a bonus may be based on work you did over
several years. You determine the amount of the bonus that is
considered earned in a particular year in two steps.
- Divide the bonus by the number of calendar months in the
period when you did the work that resulted in the bonus.
- Multiplying the result of step 1) by the number of months
you did the work during the 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 year
following the year you do the work to earn it.
Example.
You qualify as a bona fide resident of Sweden for 1999, 2000, and
2001. You report your income on the cash basis. In 1999, you were paid
$65,000 for work you did in Sweden that year and in 2000 you were paid
$70,000 for that year's work in Sweden. You excluded $65,000 on your
1999 federal income tax return and $70,000 for your 2000 return.
In 2001, you were paid $90,000; $80,000 for your work in Sweden
during 2001, and $10,000 for work you did in Sweden in 1999. You
cannot exclude any of the $10,000 for work done in 1999 because you
received it after the end of the year following the year in which you
earned it. That is, you received it after 2000. You must include the
$10,000 in income. You can exclude $78,000 of the $80,000 received for
work you did in 2001.
Community income.
The maximum
exclusion applies separately 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 year, you must adjust the
maximum limit based on the number of qualifying days in the year. 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.
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 the year.
Example.
You report your income on the calendar-year basis and you qualified
under the bona fide residence test for 75 days in 2001. You can
exclude a maximum of 75/365 of $78,000, or $16,027, of your foreign
earned income for 2001. If you qualify under the bona fide residence
test for all of 2002, you can exclude your foreign earned income up to
the full $80,000 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 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, 2000, through September 29,
2001, except for 15 days in December 2000 when you were on vacation in
the United States. You figure the maximum exclusion for 2000 as
follows.
- Beginning with June 1, 2000, count forward 330 full days. Do
not count the 15 days you spent in the United States. The 330th day,
May 11, 2001, is the last day of a 12-month period.
- Count backward 12 months from May 11, 2001, to find the
first day of this 12-month period, May 12, 2000. This 12-month period
runs from May 12, 2000, through May 11, 2001.
- Count the total days during 2000 that fall within this
12-month period. This is 235 days (May 11, 2000 - December 31,
2000).
- Multiply $76,000 by the fraction 235/365 to find your
maximum exclusion for 2000 ($48,932).
You figure the maximum exclusion for 2001 in the opposite manner.
- Beginning with your last full day, September 29, 2001, count
backward 330 full days. Do not count the 15 days you spent in the
United States. That day, October 20, 2000, is the first day of a
12-month period.
- Count forward 12 months from October 20, 2000, to find the
last day of this 12-month period, October 19, 2001. This 12-month
period runs from October 20, 2000, through October 19, 2001.
- Count the total days during 2001 that fall within this
12-month period. This is 292 days (January 1, 2001--October 19,
2001).
- Multiply $78,000, the maximum limit, by the fraction 292/365
to find your maximum exclusion for 2001 ($62,400).
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 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 years again wish to choose the
same exclusion, you must apply for IRS approval. You do this by
requesting a ruling from the IRS.
|
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. |
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 2001-1,
which is published in Internal Revenue Bulletin No.
2001-1.
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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