Foreign earned income includes 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.
Allowances and Reimbursements
Earned income also includes allowances or reimbursements, such as the following:
Cost of living allowances
Overseas differential
Family allowances
Home leave allowance
Allowance for living quarters
Reimbursement of moving expenses or moving allowance
Reimbursement of education expenses or education allowance
Non-Cash Income
Earned income also includes the fair market value of non-cash income (such as lodging, meals, or a car). But it does not include meals and lodging you exclude from income because they are at the convenience of your employer.
Earnings from Self-Employment
If you operate 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, may not be more than 30% of your share of the net profits from the trade or business, after subtracting the deduction for one-half of your self-employment tax.
If capital is not an income-producing factor and personal services produced the business income, the 30% rule does not apply. All your gross earnings are considered to be earned income.
Amounts Not Included in Foreign Earned Income
Foreign earned income does not include any of the following types of income:
Amounts that are actually a distribution of corporate earnings or profits rather than a reasonable allowance as compensation for your personal services
Pension and annuity income
Interest, ordinary dividends, capital gains, alimony, etc.
Portion of a prior year's moving expense deduction allocable to the current year that is included in your current year's gross income
Amounts paid to you by the U.S. Government or any of its agencies if you were an employee of the U.S. Government
Amounts received after the end of the tax year following the tax year in which you performed the services
Amounts you must include in gross income because of your employer's contributions to a nonexempt employees' trust or to a nonqualified annuity contract.
Source of Income
Since the exclusion applies to foreign source earned income, you must determine the source of your income. Generally, the source is the place where you performed the services for which you received the income. Where or how you are paid does not affect the source of your income. For example, if you are working overseas but are paid through a direct deposit from a U.S. bank to your U.S. bank account, your income is still foreign source income.
If you receive income that is partly for work done in the U.S. and partly for work done in a foreign country, you must allocate your income. Most of the time, you can do this based on the number of days you worked in each country.