Instructions for Form 2555 |
2006 Tax Year |
This is archived information that pertains only to the 2006 Tax Year. If you are looking for information for the current tax year, go to the Tax Prep Help Area.
To meet this test, you must be one of the following:
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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
(January 1-December 31, if you file a calendar year return), or
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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 (January
1-December 31, if
you file a calendar year return). See Pub. 901, U.S. Tax Treaties, for a list of countries with which the United States has
an income tax treaty in
effect.
No specific rule determines if you are a bona fide resident of a foreign country because the determination involves your intention
about the length
and nature of your stay. Evidence of your intention may be your words and acts. If these conflict, your acts carry more weight
than your words.
Generally, if you go to a foreign country for a definite, temporary purpose and return to the United States after you accomplish
it, you are not a
bona fide resident of the foreign country. If accomplishing the purpose requires an extended, indefinite stay, and you make
your home in the foreign
country, you may be a bona fide resident. See Pub. 54 for more information and examples.
Lines 13a and 13b.
If you submitted a statement of nonresidence to the authorities of a foreign country in which you earned income and
the authorities hold that you
are not subject to their income tax laws by reason of nonresidency in the foreign country, you are not considered a bona fide
resident of that
country.
If you submitted such a statement and the authorities have not made an adverse determination of your nonresident status,
you are not considered a
bona fide resident of that country.
To meet this test, you must be a U.S. citizen or resident alien who is physically present in a foreign country, or countries,
for at least 330 full
days during any period of 12 months in a row. A full day means the 24-hour period that starts at midnight.
To figure the minimum of 330 full days, add all separate periods you were present in a foreign country during the 12-month
period shown on line 16.
The 330 full days can be interrupted by periods when you are traveling over international waters or are otherwise not in a
foreign country. See Pub.
54 for more information and examples.
Note.
A nonresident alien who, with a U.S. citizen or U.S. resident alien spouse, chooses to be taxed as a resident of the
United States can qualify
under this test if the time requirements are met. See Pub. 54 for details on how to make this choice.
Enter in this part the total foreign earned income you earned and received (including income constructively received) during
the tax year. If you
are a cash basis taxpayer, report on Form 1040 all income you received during the tax year regardless of when you earned it.
Income is earned in the tax year you perform the services for which you receive the pay. But if you are a cash basis taxpayer
and, because of your
employer's payroll periods, you received your last salary payment for 2005 in 2006, that income may be treated as earned in
2006. If you cannot treat
that salary payment as income earned in 2006, the rules explained under Income earned in prior year, discussed later, apply. See Pub. 54
for more details.
Foreign earned income for this purpose means wages, salaries, professional fees, and other compensation received for personal
services you
performed in a foreign country during the period for which you meet the tax home test and either the bona fide residence test
or the physical presence
test. It also includes noncash income (such as a home or car) and allowances or reimbursements.
Foreign earned income does not include amounts that are actually a distribution of corporate earnings or profits rather than
a reasonable allowance
as compensation for your personal services. It also does not include the following types of income.
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Pension and annuity income (including social security and railroad retirement benefits treated as social security).
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Interest, ordinary dividends, capital gains, alimony, etc.
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Portion of 2005 moving expense deduction allocable to 2006 that is included in your 2006 gross income. For details, see Moving Expense
Attributable to Foreign Earnings in 2 Years under Moving Expenses in Pub. 54.
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Amounts paid to you by the U.S. Government or any of its agencies if you were an employee of the U.S. Government or any of
its
agencies.
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Amounts received after the end of the tax year following the tax year in which you performed the services.
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Amounts you must include in gross income because of your employer's contributions to a nonexempt employees' trust or to a
nonqualified
annuity contract.
Income received in prior year.
Foreign earned income received in 2005 for services you performed in 2006 can be excluded from your 2005 gross income
if, and to the extent, the
income would have been excludable if you had received it in 2006. To claim the additional exclusion, you must amend your 2005
tax return. To do this,
file Form 1040X.
Income earned in prior year.
Foreign earned income received in 2006 for services you performed in 2005 can be excluded from your 2006 gross income
if, and to the extent, the
income would have been excludable if you had received it in 2005.
If you are excluding income under this rule, do not include this income in Part IV. Instead, attach a statement to
Form 2555 showing how you
figured the exclusion. Enter the amount that would have been excludable in 2005 on Form 2555 to the left of line 45. Next
to the amount enter
“ Exclusion of Income Earned in 2005.” Include it in the total reported on line 45.
Note.
If you claimed any deduction, credit, or exclusion on your 2005 return that is definitely related to the 2005 foreign
earned income you are
excluding under this rule, you may have to amend your 2005 income tax return to adjust the amount you claimed. To do this,
file Form 1040X.
Line 20.
If you engaged in an unincorporated trade or business in which both personal services and capital were material income-producing
factors, a
reasonable amount of compensation for your personal services will be considered earned income. The amount treated as earned
income, however, cannot be
more than 30% of your share of the net profits from the trade or business after subtracting the deduction for one-half of
self-employment tax.
If capital is not an income-producing factor and personal services produced the business income, the 30% rule does
not apply. Your entire gross
income is earned income.
Line 25.
Enter the value of meals and/or lodging provided by, or on behalf of, your employer that is excludable from your income
under section 119. To be
excludable, the meals and lodging must have been provided for your employer's convenience and on your employer's business
premises. In addition, you
must have been required to accept the lodging as a condition of your employment. If you lived in a camp provided by, or on
behalf of, your employer,
the camp may be considered part of your employer's business premises. See Exclusion of Meals and Lodging in Pub. 54 for details.
Line 28.
Enter the total reasonable expenses paid or incurred during the tax year by you, or on your behalf, for your foreign
housing and the housing of
your spouse and dependents if they lived with you. You can also include the reasonable expenses of a second foreign household
(defined later). Housing
expenses are considered reasonable to the extent they are not lavish or extravagant under the circumstances.
Housing expenses include rent, utilities (other than telephone charges), real and personal property insurance, nonrefundable
fees paid to obtain a
lease, rental of furniture and accessories, residential parking, and household repairs. You can also include the fair rental
value of housing provided
by, or on behalf of, your employer if you have not excluded it on line 25.
Do not include deductible interest and taxes, any amount deductible by a tenant-stockholder in connection with cooperative
housing, the cost of
buying or improving a house, principal payments on a mortgage, or depreciation on the house. Also, do not include the cost
of domestic labor, pay
television, or the cost of buying furniture or accessories.
Include expenses for housing only during periods for which:
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The value of your housing is not excluded from gross income under section 119 (unless you maintained a second foreign household
as defined
below), and
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You meet the tax home test and either the bona fide residence or physical presence test.
Second foreign household.
If you maintained a separate foreign household for your spouse and dependents at a place other than your tax home
because the living conditions at
your tax home were dangerous, unhealthful, or otherwise adverse, you can include the expenses of the second household on line
28.
Married couples.
The following rules apply if both you and your spouse qualify for the tax benefits of Form 2555.
Same foreign household.
If you and your spouse lived in the same foreign household and file a joint return, you must figure your housing amounts
(line 33) jointly. If you
file separate returns, only one spouse can claim the housing exclusion or deduction.
In figuring 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. The spouse claiming the exclusion
or deduction can aggregate
the housing expenses of both spouses, subject to the limit on housing expenses (line 29b), and subtract his or her base housing
amount.
Separate foreign households.
If you and your spouse lived in separate foreign households, you each can claim qualified expenses for your own household
only if:
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Your tax homes were not within a reasonable commuting distance of each other, and
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Each spouse's household was not within a reasonable commuting distance of the other spouse's tax home.
Otherwise, only one spouse can claim his or her housing exclusion or deduction. This is true even if you and your
spouse file separate returns.
See Pub. 54 for additional information.
The IRS expects to issue guidance in early 2007 listing the housing expense limits (line 29b) based on geographic differences
in foreign housing
costs relative to housing costs in the United States. At the time these instructions went to print, the limits were not yet
available for 2006. To
find out if this guidance has been issued, and for more details, go to
www.irs.gov, click on More Forms and Publications , and then on What's Hot in forms
and publications. The Limits on Housing Expenses table appears at the end of these instructions, beginning on
page 5.
Line 29a.
Enter the city or other location (if applicable) and the country where you incurred foreign housing expenses during
the tax year only if your
location is listed in the table provided in the IRS guidance to be issued in early 2007; otherwise, leave this line blank.
Line 29b.
Your housing expenses may not exceed a certain limit. The limit on housing expenses varies depending upon the location
in which you incur housing
expenses (see Caution, above). In 2006, for most locations, this limit is $24,720 (30 percent of $82,400) if your qualifying period
includes all of 2006 (or $67.73 per day if the number of days in your qualifying period that fall within your 2006 tax year
is less than 365).
If the location in which you incurred housing expenses is listed in the table provided in the IRS guidance to be issued
in early 2007, or the
number of days in your qualifying period that fall within the 2006 tax year is less than 365, use the Limit on Housing Expenses Worksheet
on this page to figure the amount to enter on line 29b. If the location in which you incurred housing expenses is not listed
in the table provided in
the IRS guidance to be issued in early 2007, and the number of days in your qualifying period is 365, enter $24,720 on line
29b.
Limit on Housing Expenses Worksheet—Line 29b
Note. If the location in which you incurred housing expenses is not
listed in the table provided in the IRS guidance to be issued in early 2007, and the number of days in your qualifying period
that fall within the
2006 tax year is 365, DO NOT complete this worksheet. Instead, enter $24,720 on line 29b.
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1.
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Enter the number of days in your qualifying period that fall within the 2006 tax year (see the instructions
for line 31)
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1.
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2.
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Did you enter 365 on line 1?
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No. If the amount on line 1 is less than 365, skip line 2 and go to line 3.
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Yes. Enter the limit for a full year for the location in which you incurred housing expenses.
You can find this limit in the table provided in the IRS guidance to be issued in early 2007. This is your limit on housing expenses. Enter
the amount here and on line 29b.
Do not complete the rest of this worksheet.
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2.
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3.
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Enter the daily limit for the location in which you incurred housing expenses. You can find this limit in
the table provided in the IRS guidance to be issued in early 2007. If the location is not listed in the table, enter $67.73.
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3.
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4.
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Multiply line 1 by line 3. This is your limit on housing expenses. Enter the result here and on
line 29b
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4.
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Example.
For 2006, because your location is not listed in the table provided in the IRS guidance to be issued in early 2007, your limit
on housing expenses
is $67.73 per day ($24,720 divided by 365). If you file a calendar year return and your qualifying period is January 1, 2006,
to September 30, 2006
(273 days), you would enter $18,490 on line 29b ($67.73 mutiplied by 273 days).
More than one foreign location.
If you moved during the 2006 tax year and incurred housing expenses in more than one foreign location as a result,
complete the Limit on
Housing Expenses Worksheet on page 3 for each location in which you incurred housing expenses, entering the number of qualifying days during
which you lived in the applicable location on line 1. Add the results shown on line 4 of each worksheet, and enter the total
on line 29b.
If you moved during the 2006 tax year and are completing more than one Limit on Housing Expenses Worksheet , the total number
of days
entered on line 1 of your worksheets may not exceed the total number of days in your qualifying period that fall within the
2006 tax year (that is,
the number of days entered on Form 2555, line 31).
Line 31.
Enter the number of days in your qualifying period that fall within your 2006 tax year. Your qualifying period is
the period during which you meet
the tax home test and either the bona fide residence or the physical presence test.
Example.
You establish a tax home and bona fide residence in a foreign country on August 14, 2006. You maintain the tax home
and residence until January 31,
2008. You are a calendar year taxpayer. The number of days in your qualifying period that fall within your 2006 tax year is
140 (August 14 through
December 31, 2006).
Nontaxable U.S. Government allowances.
If you or your spouse received a nontaxable housing allowance as a military or civilian employee of the U.S. Government,
see Pub. 54 for
information on how that allowance may affect your housing exclusion or deduction.
Line 34.
Enter any amount your employer paid or incurred on your behalf that is foreign earned income included in your gross
income for the tax year
(without regard to section 911).
Examples of employer-provided amounts are:
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Wages and salaries received from your employer.
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The fair market value of compensation provided in kind (such as the fair rental value of lodging provided by your employer
as long as it is
not excluded on line 25).
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Rent paid by your employer directly to your landlord.
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Amounts paid by your employer to reimburse you for housing expenses, educational expenses of your dependents, or as part of
a tax
equalization plan.
Self-employed individuals.
If all of your foreign earned income (Part IV) is self-employment income, skip lines 34 and 35 and enter -0- on line
36. If you qualify, be sure to
complete Part IX.
Married couples.
If both you and your spouse qualify for, and choose to claim, the foreign earned income exclusion, figure the amount
of the exclusion separately
for each of you. You each must complete Part VII of your separate Forms 2555.
Community income.
The amount of the exclusion is not affected by the income-splitting provisions of community property laws. The sum
of the amounts figured
separately for each of you is the total amount excluded on a joint return.
If you claim either of the exclusions, you cannot claim any deduction (including moving expenses), credit, or exclusion that
is definitely related
to the excluded income. If only part of your foreign earned income is excluded, you must prorate such items based on the ratio
that your excludable
earned income bears to your total foreign earned income. See Pub. 54 for details on how to figure the amount allocable to
the excluded income.
The exclusion under section 119 and the housing deduction are not considered definitely related to the excluded income.
Line 44.
Report in full on Form 1040 and related forms and schedules all deductions allowed in figuring your adjusted gross
income (Form 1040, line 37).
Enter on line 44 the total amount of those deductions (such as the deduction for moving expenses, the deduction for one-half
of self-employment tax,
and the expenses claimed on Schedule C or C-EZ (Form 1040)) that are not allowed because they are allocable to the excluded
income. This applies only
to deductions definitely related to the excluded earned income. See Pub. 54 for details on how to report your itemized deductions
(such as
unreimbursed employee business expenses) that are allocable to the excluded income.
IRA deduction.
The IRA deduction is not definitely related to the excluded income. However, special rules apply in figuring the amount
of your IRA deduction. For
details, see Pub. 590, Individual Retirement Arrangements (IRAs).
Foreign taxes.
You cannot take a credit or deduction for foreign income taxes paid or accrued on income that is excluded under either
of the exclusions.
If all of your foreign earned income is excluded, you cannot claim a credit or deduction for the foreign taxes paid
or accrued on that income.
If only part of your income is excluded, you cannot claim a credit or deduction for the foreign taxes allocable to
the excluded income. See Pub.
514, Foreign Tax Credit for Individuals, for details on how to figure the amount allocable to the excluded income.
Housing Deduction Carryover Worksheet—Line 49
1.
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Enter the amount from your 2005 Form 2555, line 44
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1.
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2.
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Enter the amount from your 2005 Form 2555, line 46
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2.
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3.
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Subtract line 2 from line 1. If the result is zero, stop; enter -0- on line 49 of your 2006 Form
2555. You do not have any housing deduction carryover from 2005
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3.
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4.
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Enter the amount from your 2006 Form 2555, line 47
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4.
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5.
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Enter the amount from your 2006 Form 2555, line 48
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5.
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6.
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Subtract line 5 from line 4
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6.
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7.
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Enter the smaller of line 3 or line 6 here and on line 49 of your 2006 Form 2555. If line 3 is
more than line 6, you cannot carry the difference over to any future tax year
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7.
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If line 33 is more than line 36 and line 27 is more than line 43, complete this part to figure your housing deduction. Also,
complete this part to
figure your housing deduction carryover from 2005.
One-year carryover.
If the amount on line 46 is more than the amount on line 47, you can carry the difference over to your 2007 tax year.
If you cannot deduct the
excess in 2007 because of the 2007 limit, you cannot carry it over to any future tax year.
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