Items Related to Excluded Income

U.S. citizens and resident aliens living outside the United States generally are allowed the same deductions as citizens and residents living in the United States.

If you choose to exclude foreign earned income or housing amounts, 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 that are allocable to the excluded income. You can deduct only those expenses connected with earning includible income.

These rules apply only to items definitely related to the excluded earned income and they do not apply to other items that are not definitely related to any particular type of gross income. These rules do not apply to items such as:

• Personal exemptions,
• Qualified retirement contributions,
• Alimony payments,
• Charitable contributions,
• Medical expenses,
• Mortgage interest, or
• Real estate taxes on your personal residence.

For purposes of these rules, your housing deduction is not treated as allocable to your excluded income, but the deduction for self-employment tax is.

If you receive foreign earned income in a tax year after the year in which you earned it, you may have to file an amended return for the earlier year to properly adjust the amounts of deductions, credits, or exclusions allocable to your foreign earned income and housing exclusions.

Example. If you excluded all of your $76,000 foreign earned income in 2000, you would not have been able to claim any deductions allocable to that excluded income. If you then receive a bonus of $10,000 in 2001 for work you did abroad in 2000, you cannot exclude it because it exceeds the foreign earned income exclusion limit in effect for 2000. (You have no housing exclusion.) But, you can file an amended return for 2000 to claim the $1,163 of your allocable deductions that are now allowable ($10,000 included foreign earned income over $86,000 total foreign earned income).

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