January 30th, 2012 
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Expat Exclusions – Foreign Earned Income Exclusion
Are you paying too much tax? If you meet certain requirements, you may qualify for the foreign earned income and foreign housing exclusions and the foreign housing deduction. Our Houston CPA firm can assess your personal situation, determine if you qualify for this tax benefit, and prepare the proper forms for your particular tax situation. Call us today at 713-661-1040 for more details.
General Rule for Foreign Earned Income
If you are a U.S. citizen or a resident alien of the United States and you live abroad, you are taxed on your worldwide income. However, you may qualify to exclude from income up to ,400 of your foreign earnings. In addition, you can exclude or deduct certain foreign housing amounts.
Foreign Earned Income Exclusion – Requirements
To claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, you must have foreign earned income, your tax home must be in a foreign country, and you must be one of the following:
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
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, or
A U.S. citizen or a U.S. resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months
Foreign Country
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 U.S. possessions such as Puerto Rico, Guam, the Commonwealth of the Northern Mariana Islands, the U.S. Virgin Islands, or American Samoa. 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. The term “foreign country” does not include ships and aircraft traveling in or above international waters. Nor does it include offshore installations which are located outside the territorial waters of any individual nation.
Changes in the Foreign Earned Income Exclusion
For tax year 2009 the maximum amount of the Foreign Earned Income Exclusion under section 911 of the Internal Revenue Code has been increased to ,400. In addition, Section 515 of the Tax Increase Prevention and Reconciliation Act of 2005 (P.L. 109-222) amends the computation of the Maximum Housing Amount Exclusion under Section 911 of the Code. (Refer to Notice 2006-87 and Notice 2007-25.)
Effective for tax years beginning after 2005, the amount of foreign earned income (and foreign housing costs) excluded from an individual’s gross income will be used for purposes of determining the rate of income and alternative minimum tax (AMT) that applies to his or her nonexcluded income. The Tax Increase Prevention and Reconciliation Act of 2005 (P.L. 109-222) adds a new section 911(f) to the Internal Revenue Code. An individual’s tax will be the excess of the tax that would be imposed if his or her taxable income were increased by the amount(s) excluded, and the tax that would be imposed if his or her taxable income were equal to the excluded amount(s). For this purpose, the excluded amount(s) will be reduced by the aggregate amount of any deductions or other exclusions otherwise disallowed. In many cases this will have the effect of increasing an individual’s U.S. federal income tax to an amount greater than it would have been under prior law.
Foreign Earned Income Exclusion – Can I Claim the Exclusion or Deduction?
To determine whether you can claim the exclusion or deduction please begin with question 1
Do you have foreign earned income?
Yes. Go to question 2.
No. You CANNOT claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction.
Is your tax home in a foreign country?
Yes. Got to question 3.
No. You CANNOT claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction.
Are you a U.S. citizen?
Yes. Go to question 4.
No. Are you a U.S. resident alien?
Yes. Are you a citizen or national of a country with which the United States has an income tax treaty in effect?
Yes. Go to question 4.
No. Go to question 5.
No. You CANNOT claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction.
Were you a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year?
Yes. You CAN claim the foreign earned income exclusion and the foreign housing exclusion or the foreign housing deduction.
No. Go to question 5.
Were you physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months?
Yes. You CAN claim the foreign earned income exclusion and the foreign housing exclusion or the foreign housing deduction.
No You CANNOT claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction
Foreign Earned Income Exclusion – Tax Home In Foreign Country
To qualify for the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, your tax home must be in a foreign country throughout your period of bona fide residence or physical presence abroad.
Tax Home
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.
Example 1:
You are employed on an offshore oil rig in the territorial waters of a foreign country and work a 28-day on/28-day off schedule. You return to your family residence in the United States during your off periods. You are considered to have an abode in the United States and do not satisfy the tax home test in the foreign country. You cannot claim either of the exclusions or the housing deduction.
Example 2:
For several years, you were a marketing executive with a producer of machine tools in Toledo, Ohio. In November of last year your employer transferred you to London, England, for a minimum of 18 months to set up a sales operation for Europe. Before you left, you distributed business cards showing your business and home addresses in London. You kept ownership of your home in Toledo but rented it to another family. You placed your car in storage. In November of last year, you moved your spouse, children, furniture, and family pets to a home your employer rented for you in London.
Shortly after moving, you leased a car, and you and your spouse got British driving licenses. Your entire family got library cards for the local public library. You and your spouse opened bank accounts with a London bank and secured consumer credit. You joined a local business league, and both you and your spouse became active in the neighborhood civic association and worked with a local charity. Your abode is in London for the time you live there, and you satisfy the tax home test in the foreign country.
Temporary Or Indefinite Assignment
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
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