Your tax home is the general area of your main place of business, employment, or post of duty, regardless of where you maintain your family home. Your tax home is the place where you are permanently or indefinitely engaged to work as an employee or self-employed individual. Having a “tax home” in a given location does not necessarily mean that the given location is your residence or domicile for tax purposes.

If you do not have a regular or main place of business because of the nature of your work, your tax home may be the place where you regularly live. If you have neither a regular or main place of business nor a place where you regularly live, you are considered an itinerant and your tax home is wherever you work.

You are not considered to have a tax home in a foreign country for any period in which your abode is in the United States. However, your abode is not necessarily in the United States while you are temporarily in the United States. Your abode is also not necessarily in the United States merely because you maintain a dwelling in the United States, whether or not your spouse or dependents use the dwelling.

“Abode” has been variously defined as one's home, habitation, residence, domicile, or place of dwelling. It does not mean your principal place of business. “Abode” has a domestic rather than a vocational meaning and does not mean the same as “tax home.” The location of your abode often will depend on where you maintain your economic, family, and personal ties.

The location of your tax home often depends on whether your assignment is temporary or indefinite. If you are temporarily absent from your tax home in the United States on business, you may be able to deduct your away-from-home expenses (for travel, meals, and lodging), but you would not qualify for the foreign earned income exclusion. If your new work assignment is for an indefinite period, your new place of employment becomes your tax home and you would not be able to deduct any of the related expenses that you have in the general area of this new work assignment. If your new tax home is in a foreign country and you meet the other requirements, your earnings may qualify for the foreign earned income exclusion.

If you expect your employment away from home in a single location to last, and it does last, for 1 year or less, it is temporary unless facts and circumstances indicate otherwise. If you expect it to last for more than 1 year, it is indefinite. If you expect it to last for 1 year or less, but at some later date you expect it to last longer than 1 year, it is temporary (in the absence of facts and circumstances indicating otherwise) until your expectation changes.

To meet the bona fide residence test or the physical presence test, you must live in or be present in a foreign country. A foreign country usually is any territory (including the air space and territorial waters) under the sovereignty of a government other than that of the United States.

The term “foreign country” includes the seabed and subsoil of those submarine areas adjacent to the territorial waters of a foreign country and over which the foreign country has exclusive rights under international law to explore and exploit the natural resources.

The term “foreign country” does not include Puerto Rico, Guam, the Commonwealth of the Northern Mariana Islands, the U.S. Virgin Islands, or U.S. possessions such as Johnston Island. For purposes of the foreign earned income exclusion, the foreign housing exclusion, and the foreign housing deduction, the terms “foreign,” “abroad,” and “overseas” refer to areas outside the United States, American Samoa, Guam, the Commonwealth of the Northern Mariana Islands, Puerto Rico, the U.S. Virgin Islands, and the Antarctic region.

Residence or presence in a U.S. possession does not qualify you for the foreign earned income exclusion. You may, however, qualify for an exclusion of your possession income on your U.S. return.

Residents of Puerto Rico and the Virgin Islands cannot claim the foreign earned income exclusion or the foreign housing exclusion.

Bona fide residence.   To meet the bona fide residence test, you must have established such a residence in a foreign country.

  Your bona fide residence is not necessarily the same as your domicile. Your domicile is your permanent home, the place to which you always return or intend to return.

Determination.   Questions of bona fide residence are determined according to each individual case, taking into account factors such as your intention, the purpose of your trip, and the nature and length of your stay abroad.

  You must show the Internal Revenue Service (IRS) that you have been a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. The IRS decides whether you qualify as a bona fide resident of a foreign country largely on the basis of facts you report on Form 2555. IRS cannot make this determination until you file Form 2555.

Statement to foreign authorities.   You are not considered a bona fide resident of a foreign country if you make a statement to the authorities of that country that you are not a resident of that country, and the authorities:

Special agreements and treaties.   An income tax exemption provided in a treaty or other international agreement will not in itself prevent you from being a bona fide resident of a foreign country. Whether a treaty prevents you from becoming a bona fide resident of a foreign country is determined under all provisions of the treaty, including specific provisions relating to residence or privileges and immunities.

Effect of voting by absentee ballot.   If you are a U.S. citizen living abroad, you can vote by absentee ballot in any election held in the United States without risking your status as a bona fide resident of a foreign country.

  However, if you give information to the local election officials about the nature and length of your stay abroad that does not match the information you give for the bona fide residence test, the information given in connection with absentee voting will be considered in determining your status, but will not necessarily be conclusive.

Uninterrupted period including entire tax year.   To qualify for bona fide residence, you must reside in a foreign country for an uninterrupted period that includes an entire tax year. An entire tax year is from January 1 through December 31 for taxpayers who file their income tax returns on a calendar year basis.

  During the period of bona fide residence in a foreign country, you can leave the country for brief or temporary trips back to the United States or elsewhere for vacation or business. To keep your status as a bona fide resident of a foreign country, you must have a clear intention of returning from such trips, without unreasonable delay, to your foreign residence or to a new bona fide residence in another foreign country.

Bona fide resident for part of a year.   Once you have established bona fide residence in a foreign country for an uninterrupted period that includes an entire tax year, you will qualify as a bona fide resident for the period starting with the date you actually began the residence and ending with the date you abandon the foreign residence. You could qualify as a bona fide resident for an entire tax year plus parts of 1 or 2 other tax years.

Reassignment.   If you are assigned from one foreign post to another, you may or may not have a break in foreign residence between your assignments, depending on the circumstances.

330 full days.   Generally, to meet the physical presence test, you must be physically present in a foreign country or countries for at least 330 full days during a 12-month period. You can count days you spent abroad for any reason. You do not have to be in a foreign country only for employment purposes. You can be on vacation time.

  You do not meet the physical presence test if illness, family problems, a vacation, or your employer's orders cause you to be present for less than the required amount of time.

Exception.   You can be physically present in a foreign country or countries for less than 330 full days and still meet the physical presence test if you are required to leave a country because of war or civil unrest. See Waiver of Time Requirements, later.

Full day.   A full day is a period of 24 consecutive hours, beginning at midnight.

Travel.    When you leave the United States to go directly to a foreign country or when you return directly to the United States from a foreign country, the time you spend on or over international waters does not count toward the 330-day total.

Passing over foreign country.   If, in traveling from the United States to a foreign country, you pass over a foreign country before midnight of the day you leave, the first day you can count toward the 330-day total is the day following the day you leave the United States.

Change of location.   You can move about from one place to another in a foreign country or to another foreign country without losing full days. If any part of your travel is not within any foreign country and takes less than 24 hours, you are considered to be in a foreign country during that part of travel.

In United States while in transit.   If you are in transit between two points outside the United States and are physically present in the United States for less than 24 hours, you are not treated as present in the United States during the transit. You are treated as traveling over areas not within any foreign country.

How to figure the 12-month period.    There are four rules you should know when figuring the 12-month period.

Both the bona fide residence test and the physical presence test contain minimum time requirements. The minimum time requirements can be waived, however, if you must leave a foreign country because of war, civil unrest, or similar adverse conditions in that country. You also must be able to show that you reasonably could have expected to meet the minimum time requirements if not for the adverse conditions. To qualify for the waiver, you must actually have your tax home in the foreign country and be a bona fide resident of, or be physically present in, the foreign country on or before the beginning date of the waiver.

Early in 2006, the IRS will publish in the Internal Revenue Bulletin a list of countries qualifying for the waiver for 2005 and the effective dates. If you left one of the countries on or after the date listed for each country, you can qualify for the bona fide residence test or physical presence test for 2005 without meeting the minimum time requirement. However, in figuring your exclusion, the number of your qualifying days of bona fide residence or physical presence includes only days of actual residence or presence within the country.

You can read the Internal Revenue Bulletin on the Internet at www.irs.gov. Or, you can get a copy of the list of countries by writing to:

If you are present in a foreign country in violation of U.S. law, you will not be treated as a bona fide resident of a foreign country or as physically present in a foreign country while you are in violation of the law. Income that you earn from sources within such a country for services performed during a period of violation does not qualify as foreign earned income. Your housing expenses within that country (or outside that country for housing your spouse or dependents) while you are in violation of the law cannot be included in figuring your foreign housing amount.

For 2004 and 2005, the countries to which travel restrictions applied and the dates of the restrictions are as follows:

*Individuals whose activities in Iraq and Libya are or were permitted by a specific or general license issued by the Department of the Treasury's Office of Foreign Assets Control (OFAC) were not in violation of U.S. law. Accordingly, the restrictions did not apply to such individuals with respect to the activities permitted by the license.

Earned income.   This is pay for personal services performed, such as wages, salaries, or professional fees. The list that follows classifies many types of income into three categories. The column headed Variable Income lists income that may fall into either the earned income category, the unearned income category, or partly into both. For more information on earned and unearned income, see Earned and Unearned Income, later.

  In addition to the types of earned income listed, certain noncash income and allowances or reimbursements are considered earned income.

Noncash income.   The fair market value of property or facilities provided to you by your employer in the form of lodging, meals, or use of a car is earned income.

Allowances or reimbursements.   Earned income includes allowances or reimbursements you receive, such as the following amounts.

  

The source of your earned income is the place where you perform the services for which you received the income. Foreign earned income is income you receive for working in a foreign country. Where or how you are paid has no effect on the source of the income. For example, income you receive for work done in Austria is income from a foreign source even if the income is paid directly to your bank account in the United States and your employer is located in New York City.

If you receive a specific amount for work done in the United States, you must report that amount as U.S. source income. If you cannot determine how much is for work done in the United States, or for work done partly in the United States and partly in a foreign country, determine the amount of U.S. source income using the method that most correctly shows the proper source of your income.

In most cases you can make this determination on a time basis. U.S. source income is the amount that results from multiplying your total pay (including allowances, reimbursements other than for foreign moves, and noncash fringe benefits) by a fraction. The numerator (top number) is the number of days you worked within the United States. The denominator (bottom number) is the total number of days of work for which you were paid.

Earned income was defined earlier as pay for personal services performed. Some types of income are not easily identified as earned or unearned income. Some of these types of income are further explained here.

For purposes of the foreign earned income exclusion, the foreign housing exclusion, and the foreign housing deduction, foreign earned income does not include any amounts paid by the United States or any of its agencies to its employees. Payments to employees of nonappropriated fund activities are not foreign earned income. Nonappropriated fund activities include the following employers.

Amounts paid by the United States or its agencies to persons who are not their employees may qualify for exclusion or deduction.

If you are a U.S. Government employee paid by a U.S. agency that assigned you to a foreign government to perform specific services for which the agency is reimbursed by the foreign government, your pay is from the U.S. Government and does not qualify for exclusion or deduction.

If you have questions about whether you are an employee or an independent contractor, get Publication 15-A, Employer's Supplemental Tax Guide.

You do not include in your income the value of meals and lodging provided to you and your family by your employer at no charge if the following conditions are met.

Amounts you do not include in income because of these rules are not foreign earned income.

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.

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.

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.

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 2003, 2004, and 2005. You report your income on the cash basis. In 2003, you were paid $67,000 for work you did in Sweden that year and in 2004 you were paid $72,000 for that year's work in Sweden. You excluded all the income on your 2003 and 2004 returns.

  In 2005, you were paid $90,000; $80,000 for your work in Sweden during 2005, and $10,000 for work you did in Sweden in 2003. You cannot exclude any of the $10,000 for work done in 2003 because you received it after the end of the year following the year in which you earned it. You must include the $10,000 in income. You can exclude all of the $80,000 received for work you did in 2005.

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:

  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.

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.

Your initial choice of the exclusion on Form 2555 or Form 2555-EZ generally must be made with one of the following returns.

You can choose the exclusion on a return filed after the periods described above if 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 if 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 may still be able to choose the exclusion. You must request a private letter ruling under Income Tax Regulation 301.9100-3 and Revenue Procedure 2005-1.

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. The I.R.B. is available on the Internet at www.irs.gov. You can buy the C.B. containing a particular revenue procedure from the Government Printing Office (online at http://bookstore.gpo.gov or call 1-866-512-1800).

Once you choose to exclude your foreign earned income, that choice remains in effect for that year and all later years unless you revoke it.

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:

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 2005-1, which is published in Internal Revenue Bulletin No. 2005-1.

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.

Base amount.   The base amount is 16% of the annual salary of a GS-14, step 1, U.S. Government employee, figured on a daily basis, times the number of days during the year that you meet the bona fide residence test or the physical presence test. The annual salary is determined on January 1 of the year in which your tax year begins.

  On January 1, 2005, the GS-14 salary was $74,335 per year; 16% of this amount is $11,894 or $32.59 per day. To figure your base amount if you are a calendar-year taxpayer, multiply $32.59 by the number of your qualifying days during 2005. (See Part-year exclusion under Limit on Excludable Amount, earlier.) Subtract the result from your total housing expenses to find your housing amount.

U.S. Government allowance.   You must reduce your housing amount by any U.S. Government allowance or similar nontaxable allowance intended to compensate you or your spouse for the expenses of housing during the period for which you claim a foreign housing exclusion or deduction.

Housing expenses.   Housing expenses include your reasonable expenses paid or incurred for housing in a foreign country for you and (if they live with you) for your spouse and dependents.

  Consider only housing expenses for the part of the year that you qualify for the foreign earned income exclusion.

  Housing expenses include:

  Housing expenses do not include:

Second foreign household.   Ordinarily, if you maintain two foreign households, your reasonable foreign housing expenses include only costs for the household that bear the closer relationship (not necessarily geographic) to your tax home. However, if you maintain a second, separate household outside the United States for your spouse or dependents because living conditions near your tax home are dangerous, unhealthful, or otherwise adverse, include the expenses for the second household in your reasonable foreign housing expenses. You cannot include expenses for more than one second foreign household at the same time.

  If you maintain two households and you exclude the value of one because it is provided by your employer, you can still include the expenses for the second household in figuring a foreign housing exclusion or deduction.

  Adverse living conditions include:

Employer-provided amounts.   These include any amounts paid to you or paid or incurred on your behalf by your employer that are taxable foreign earned income (without regard to the foreign earned income exclusion) to you for the year. Employer-provided amounts include:

Choosing the exclusion.   You can choose the housing exclusion by completing the appropriate parts of Form 2555. You cannot use Form 2555-EZ to claim the housing exclusion. Otherwise, the rules about choosing the exclusion under Foreign Earned Income Exclusion also apply to the foreign housing exclusion.

  Your housing exclusion is the lesser of: If you choose the housing exclusion, you must figure it before figuring your foreign earned income exclusion. You cannot claim less than the full amount of the housing exclusion to which you are entitled.

Foreign tax credit or deduction.   Once you choose to exclude foreign housing amounts, you cannot take a foreign tax credit or deduction for taxes on income you can exclude. If you do take a credit or deduction for any of those taxes, your choice to exclude housing amounts may be considered revoked. See Publication 514 for more information.

Earned income credit.   If you claim the foreign housing exclusion, you will not qualify for the earned income credit for the year.

Self-employed — no employer-provided amounts.   If none of your housing amount is considered paid for with employer-provided amounts, such as when all of your income is from self-employment, you can deduct your housing amount, subject to the limit described later.

  Take the deduction by including it in the total on line 36 of Form 1040. On the dotted line next to line 36, enter the amount and write “Form 2555.”

Self-employed and employer-provided amounts.   If you are both an employee and a self-employed individual during the year, you can deduct part of your housing amount and exclude part of it. To find the part that you can exclude, multiply your housing amount by the employer-provided amounts (discussed earlier) and then divide the result by your foreign earned income. This is the amount you can use to figure your foreign housing exclusion. You can deduct the balance of the housing amount, subject to the limit described later.

Your housing deduction cannot be more than your foreign earned income minus the total of:

If you and your spouse live apart and maintain separate households, you both may be able to claim the foreign housing exclusion or the foreign housing deduction. You can both claim the exclusion or the deduction if both of the following conditions are met.

If you both claim a foreign housing exclusion or a foreign housing deduction, neither of you can claim the expenses for a qualified second foreign household maintained for the other. If one of you qualifies for but does not claim the exclusion or the deduction, the other spouse can claim the expenses for a qualified second household maintained for the first spouse. This would usually result in a larger total foreign housing exclusion or deduction since you would apply only one base amount against the combined housing expenses.

If you and your spouse live together, both of you claim a foreign housing exclusion or a foreign housing deduction, and you file a joint return, you can figure your housing amounts either separately or jointly. If you file separate returns, you must figure your housing amounts separately. In figuring your housing amounts separately, you can allocate your housing expenses between yourselves in any proportion you wish, but each spouse must use his or her full base amount.

In figuring your housing amount jointly, you can combine your housing expenses and figure one base amount. If you figure your housing amount jointly, either spouse (but not both) can claim the housing exclusion or housing deduction. However, if you and your spouse have different periods of residence or presence and the one with the shorter period of residence or presence claims the exclusion or deduction, you can claim as housing expenses only the expenses for that shorter period.

Jim's Form 2555.   On Jim's Form 2555, Part IV, he lists his salary on line 19, his housing allowance on line 22e, and the fair market value of meals and lodging provided in camps by his employer on lines 21a and 21b. The entries on lines 21a and 21b are not shown as income on Form 1040. Jim enters the total of these two entries on line 25 of Form 2555.

  Jim combines his housing expenses, $18,000, with the qualified expenses for the second household, $12,000, and enters total housing expenses of $30,000 on line 28. He puts a base amount of $11,894 on line 30 and subtracts that amount to arrive at a total foreign housing amount of $18,106 on line 31. He figures a housing exclusion of $18,106 on line 34.

  

Although Judy could claim a separate housing exclusion for her expenses rather than combining those expenses with Jim's housing expenses, she does not do so because she would have to reduce her expenses by a separate base housing amount. Also, her foreign earned income is less than the maximum foreign earned income exclusion, so claiming a separate housing exclusion would not result in any tax benefit.

  Jim figures his foreign earned income exclusion in Part VII of Form 2555. Because his foreign earned income ($89,000) is more than the maximum exclusion of $80,000, he must reduce the income by the housing exclusion. The foreign earned income exclusion on line 40 is $70,894 ($89,000 - $18,106).

  When Jim combines this exclusion of $70,894 with his housing exclusion of $18,106, he comes up with a total exclusion of $89,000 in Part VIII.

  The Adamses cannot deduct any of Jim's unreimbursed employee business expenses because they are all allocable to excluded income. However, the Adamses are still entitled to the full standard deduction for a married couple filing jointly.

Judy's Form 2555-EZ.   Judy completes a Form 2555-EZ to figure her foreign earned income exclusion. Her foreign earned income is less than the maximum excludable amount. On Judy's Form 2555-EZ, Part IV, she lists her salary on line 17. She figures an exclusion of $44,000 on line 18.

  The Adamses enter their combined exclusions of $133,000 on line 21, Form 1040. They identify this item to the left of the entry space. Their adjusted gross income on line 38 is $7,500 (their investment income), which does not qualify for exclusion.