The foreign income exclusion allows U.S. citizens and residents to exclude from their income for U.S. tax purposes, the income they earn for personal services performed in a foreign country, up to a certain maximum amount per year. This limit is periodically changed and can be found in IRS Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad, or in the instructions for Form 2555, Foreign Earned Income, which is the form that has to be filed to claim this exclusion.
What is the Foreign Housing Exclusion or Deduction?
In addition to the foreign earned income exclusion, you may be able to exclude a certain amount of your income used to pay housing expenses, or deduct from your income part of your housing expenses while living abroad. The foreign housing exclusion applies to employees, and the foreign housing deduction applies to self-employed individuals.
Who Qualifies?
In order to qualify for the foreign earned income exclusion and the foreign housing exclusion or deduction, you must meet the following requirements:
You must have your “tax home” in a foreign country,
You must have earned income from personal services performed in a foreign country, and
You must meet the bona ride resident or physical presence test:
A U.S. citizen qualifies if he or she is considered a bona fide resident of one or more foreign countries for an uninterrupted period that includes an entire tax year.
A U.S. resident alien qualifies if he or she is a citizen or national of a country with which the United States has an income tax treaty, and is a bona fide resident of one or more foreign countries for an uninterrupted period that includes an entire tax year.
A U.S. citizen or a U.S. resident alien also qualifies if he or she is physically present in one or more foreign countries for at least 330 days during a period of 12 consecutive months.
These minimum time requirements may be waived if you had to leave a country due to war, civil unrest, or similar adverse conditions.