Publication 54
taxmap/pubs/p54-011.htm#en_us_publink100047399To claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, you must meet all three of the following requirements.
- Your tax home must be in a foreign country.
- You must have foreign earned income.
- 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.
- 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.
See Publication
519
to find out if you are a U.S. resident alien for tax purposes and whether you
keep that alien status when you temporarily work abroad.
If you are a nonresident alien married to a U.S. citizen or resident alien, and both you and your spouse choose to treat you as a resident alien, you are a resident alien for tax purposes. For information on making the choice, see the discussion in chapter 1 under
Nonresident Alien Spouse Treated as a Resident.
The minimum time requirements for bona fide residence and physical presence can be waived if you must leave a foreign country because of war, civil unrest, or similar adverse conditions in that country. This is fully explained under
Waiver of Time Requirements, later.
See Figure 4-A and information in this chapter to determine if you are eligible to claim either exclusion or the deduction.
taxmap/pubs/p54-011.htm#en_us_publink100047401To 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. Bona fide residence and physical presence are explained later.
taxmap/pubs/p54-011.htm#en_us_publink100047402Your 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.
taxmap/pubs/p54-011.htm#en_us_publink100047403You 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.
taxmap/pubs/p54-011.htm#en_us_publink100047404For 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. You satisfy the tax home test in the foreign
country.
taxmap/pubs/p54-011.htm#en_us_publink100047405The 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. Once your expectation changes, it is
indefinite.
taxmap/pubs/p54-011.htm#en_us_publink100047406To 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 includes any territory under the sovereignty of a government other than that of the United States.
The term "foreign country" includes the country's airspace and territorial waters, but not international waters and the airspace above them. It also includes the seabed and subsoil of those submarine areas adjacent to the country's territorial waters over which it has exclusive rights under international law to explore and exploit the natural resources.
The term "foreign country" does not include Antarctica or U.S. possessions such as Puerto Rico, Guam, the Commonwealth of the Northern Mariana Islands, the U.S. Virgin Islands, and 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 and those areas listed or described in the previous
sentence.
taxmap/pubs/p54-011.htm#en_us_publink100047407Residence 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.
taxmap/pubs/p54-011.htm#en_us_publink100047408There is a possession exclusion available to individuals who are bona fide residents of American Samoa for the entire tax year. Gross income from sources within American Samoa may be eligible for this exclusion. Income that is effectively connected with the conduct of a trade or business within American Samoa also may be eligible for this exclusion. Use Form 4563, Exclusion of Income for Bona Fide Residents of American Samoa, to figure the exclusion.
taxmap/pubs/p54-011.htm#en_us_publink100047409An exclusion will be available to residents of Guam and the Commonwealth of the Northern Mariana Islands if, and when, new implementation agreements take effect between the United States and those possessions.
For more information, see Publication
570.
Residents of Puerto Rico and the U.S. Virgin Islands cannot claim the foreign earned income exclusion or the foreign housing exclusion.
taxmap/pubs/p54-011.htm#en_us_publink100047411Generally, if you are a U.S. citizen who is a bona fide resident of Puerto Rico for the entire tax year, you are not subject to U.S. tax on income from Puerto Rican sources. This does not include amounts paid for services performed as an employee of the United States. However, you are subject to U.S. tax on your income from sources outside Puerto Rico. In figuring your U.S. tax, you cannot deduct expenses allocable to income not subject to tax.
taxmap/pubs/p54-011.htm#en_us_publink100047413You meet the bona fide residence test if you are a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. You can use the bona fide residence test to qualify for the exclusions and the deduction only if you are either:
- A U.S. citizen, or
- 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.
You do not automatically acquire bona fide resident status merely by living in a foreign country or countries for 1 year. If you go to a foreign country to work on a particular job for a specified period of time, you ordinarily will not be regarded as a bona fide resident of that country even though you work there for 1 tax year or longer. The length of your stay and the nature of your job are only two of the factors to be considered in determining whether you meet the bona fide residence test.
taxmap/pubs/p54-011.htm#en_us_publink100047414To meet the bona fide residence test, you must have established a bona fide 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.
taxmap/pubs/p54-011.htm#en_us_publink100047415You could have your domicile in Cleveland, Ohio, and a bona fide residence in Edinburgh, Scotland, if you intend to return eventually to
Cleveland.
The fact that you go to Scotland does not automatically make Scotland your bona fide residence. If you go there as a tourist, or on a short business trip, and return to the United States, you have not established bona fide residence in Scotland. But if you go to Scotland to work for an indefinite or extended period and you set up permanent quarters there for yourself and your family, you probably have established a bona fide residence in a foreign country, even though you intend to return eventually to the United States.
You are clearly not a resident of Scotland in the first instance. However, in the second, you are a resident because your stay in Scotland appears to be permanent. If your residency is not as clearly defined as either of these illustrations, it may be more difficult to decide whether you have established a bona fide
residence.
taxmap/pubs/p54-011.htm#en_us_publink100047416Questions 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.
To meet the bona fide residence test, 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 are 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.
taxmap/pubs/p54-011.htm#en_us_publink100047417You 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:
- Hold that you are not subject to their income tax laws as a resident, or
- Have not made a final decision on your status.
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.
taxmap/pubs/p54-011.htm#en_us_publink100047419You are a U.S. citizen employed in the United Kingdom by a U.S. employer under contract with the U.S. Armed Forces. You are not subject to the North Atlantic Treaty Status of Forces Agreement. You may be a bona fide resident of the United Kingdom.
taxmap/pubs/p54-011.htm#en_us_publink100047420You are a U.S. citizen in the United Kingdom who qualifies as an "employee" of an armed service or as a member of a "civilian component" under the North Atlantic Treaty Status of Forces Agreement. You are not a bona fide resident of the United
Kingdom.
taxmap/pubs/p54-011.htm#en_us_publink100047421You are a U.S. citizen employed in Japan by a U.S. employer under contract with the U.S. Armed Forces. You are subject to the agreement of the Treaty of Mutual Cooperation and Security between the United States and Japan. Being subject to the agreement does not make you a bona fide resident of Japan.
taxmap/pubs/p54-011.htm#en_us_publink100047422You are a U.S. citizen employed as an "official" by the United Nations in Switzerland. You are exempt from Swiss taxation on the salary or wages paid to you by the United Nations. This does not prevent you from being a bona fide resident of Switzerland.
taxmap/pubs/p54-011.htm#en_us_publink100047423If 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.
taxmap/pubs/p54-011.htm#en_us_publink100047424To meet the bona fide residence test, you must reside in a foreign country or countries 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.
taxmap/pubs/p54-011.htm#en_us_publink100047425You arrived with your family in Lisbon, Portugal, on November 1, 2010. Your assignment is indefinite, and you intend to live there with your family until your company sends you to a new post. You immediately established residence there. You spent April of 2011 at a business conference in the United States. Your family stayed in Lisbon. Immediately following the conference, you returned to Lisbon and continued living there. On January 1, 2012, you completed an uninterrupted period of residence for a full tax year (2011), and you meet the bona fide residence
test.
taxmap/pubs/p54-011.htm#en_us_publink100047426Assume the same facts as in
Example 1,
except that you transferred back to the United States on December 13, 2011. You
would not meet the bona fide residence test because your bona fide residence in
the foreign country, although it lasted more than a year, did not include a full
tax year. You may, however, qualify for the foreign earned income exclusion or
the housing exclusion or deduction under the physical presence test (discussed
later).
taxmap/pubs/p54-011.htm#en_us_publink100047427Once you have established bona fide residence in a foreign country for an uninterrupted period that includes an entire tax year, you are a bona fide resident of that country for the period starting with the date you actually began the residence and ending with the date you abandon the foreign residence. Your period of bona fide residence can include an entire tax year plus parts of 2 other tax years.
taxmap/pubs/p54-011.htm#en_us_publink100047428You were a bona fide resident of Singapore from March 1, 2010, through September 14, 2012. On September 15, 2012, you returned to the United States. Since you were a bona fide resident of a foreign country for all of 2011, you were also a bona fide resident of a foreign country from March 1, 2010, through the end of 2010 and from January 1, 2012, through September 14,
2012.
taxmap/pubs/p54-011.htm#en_us_publink100047429If 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.
taxmap/pubs/p54-011.htm#en_us_publink100047430You were a resident of Pakistan from October 1, 2011, through November 30, 2012. On December 1, 2012, you and your family returned to the United States to wait for an assignment to another foreign country. Your household goods also were returned to the United
States.
Your foreign residence ended on November 30, 2012, and did not begin again until after you were assigned to another foreign country and physically entered that country. Since you were not a bona fide resident of a foreign country for the entire tax year of 2011 or 2012 you do not meet the bona fide residence test in either year. You may, however, qualify for the foreign earned income exclusion or the housing exclusion or deduction under the physical presence test, discussed
later.
taxmap/pubs/p54-011.htm#en_us_publink100047431Assume the same facts as in
Example 1,
except that upon completion of your assignment in Pakistan you were given a new assignment to Turkey. On December 1, 2012, you and your family returned to the United States for a month's vacation. On January 2, 2013, you arrived in Turkey for your new assignment. Because you did not interrupt your bona fide residence abroad, you meet the bona fide residence
test.
taxmap/pubs/p54-011.htm#en_us_publink100047432You meet the physical presence test if you are physically present in a foreign country or countries 330 full days during a period of 12 consecutive months. The 330 days do not have to be consecutive. Any U.S. citizen or resident alien can use the physical presence test to qualify for the exclusions and the deduction.
The physical presence test is based only on how long you stay in a foreign country or countries. This test does not depend on the kind of residence you establish, your intentions about returning, or the nature and purpose of your stay
abroad.
taxmap/pubs/p54-011.htm#en_us_publink100047433Generally, 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.
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.
taxmap/pubs/p54-011.htm#en_us_publink100047434You 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.
taxmap/pubs/p54-011.htm#en_us_publink100047435A full day is a period of 24 consecutive hours, beginning at
midnight.
taxmap/pubs/p54-011.htm#en_us_publink100047436
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.
taxmap/pubs/p54-011.htm#en_us_publink100047437You leave the United States for France by air on June 10. You arrive in France at 9:00 a.m. on June 11. Your first full day of physical presence in France is June
12.
taxmap/pubs/p54-011.htm#en_us_publink100047438If, 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.
taxmap/pubs/p54-011.htm#en_us_publink100047439You leave the United States by air at 9:30 a.m. on June 10 to travel to Kenya. You pass over western Africa at 11:00 p.m. on June 10 and arrive in Kenya at 12:30 a.m. on June 11. Your first full day in a foreign country is June
11.
taxmap/pubs/p54-011.htm#en_us_publink100047440You 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.
taxmap/pubs/p54-011.htm#en_us_publink100047441You leave Ireland by air at 11:00 p.m. on July 6 and arrive in Sweden at 5:00 a.m. on July 7. Your trip takes less than 24 hours and you lose no full
days.
taxmap/pubs/p54-011.htm#en_us_publink100047442You leave Norway by ship at 10:00 p.m. on July 6 and arrive in Portugal at 6:00 a.m. on July 8. Since your travel is not within a foreign country or countries and the trip takes more than 24 hours, you lose as full days July 6, 7, and 8. If you remain in Portugal, your next full day in a foreign country is July
9.
taxmap/pubs/p54-011.htm#en_us_publink100047443If 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.
taxmap/pubs/p54-011.htm#en_us_publink100047444There are four rules you should know when figuring the 12-month period.
- Your 12-month period can begin with any day of the month. It ends the day before the same calendar day, 12 months
later.
- Your 12-month period must be made up of consecutive months. Any 12-month period can be used if the 330 days in a foreign country fall within that period.
- You do not have to begin your 12-month period with your first full day in a foreign country or end it with the day you leave. You can choose the 12-month period that gives you the greatest exclusion.
- In determining whether the 12-month period falls within a longer stay in the foreign country, 12-month periods can overlap one another.
You are a construction worker who works on and off in a foreign country over a 20-month period. You might pick up the 330 full days in a 12-month period only during the middle months of the time you work in the foreign country because the first few and last few months of the 20-month period are broken up by long visits to the United
States.
taxmap/pubs/p54-011.htm#en_us_publink100047446You work in New Zealand for a 20-month period from January 1, 2011, through August 31, 2012, except that you spend 28 days in February 2011 and 28 days in February 2012 on vacation in the United States. You are present in New Zealand 330 full days during each of the following two 12-month periods: January 1, 2011 – December 31, 2011 and September 1, 2011 – August 31, 2012. By overlapping the 12-month periods in this way, you meet the physical presence test for the whole 20-month period. See Figure 4-B, on the previous
page.
taxmap/pubs/p54-011.htm#en_us_publink100047447Both 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 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 2013, the IRS will publish in the Internal Revenue Bulletin a list of the only countries that qualify for the waiver for 2012 and the effective dates. If you left one of the countries on or after the date listed for each country, you can meet the bona fide residence test or physical presence test for 2012 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.
taxmap/pubs/p54-011.htm#en_us_publink100047449If 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 2012, the only country to which travel restrictions applied was Cuba. The restrictions applied for the entire year.
However, individuals working at the U.S. Naval Base at Guantanamo Bay in Cuba are not in violation of U.S. law. Personal service income earned by individuals at the base is eligible for the foreign earned income exclusion provided the other requirements are met.
taxmap/pubs/p54-011.htm#en_us_publink100047450To claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, you must have foreign earned
income.
Foreign earned income generally is income you receive for services you perform during a period in which you meet both of the following requirements.
- Your tax home is in a foreign country.
- You meet either the bona fide residence test or the physical presence
test.
To determine whether your tax home is in a foreign country, see
Tax Home in Foreign Country,
earlier. To determine whether you meet either the bona fide residence test or the physical presence test, see
Bona Fide Residence Test
and
Physical Presence Test,
earlier.
Foreign earned income does not include the following amounts.
- The value of meals and lodging that you exclude from your income because the meals and lodging were furnished for the convenience of your
employer.
- Pension or annuity payments you receive, including social security benefits (see
Pensions and annuities,
later).
- Pay you receive as an employee of the U.S. Government. (See
U.S. Government Employees,
later.)
- Amounts you include in your income because of your employer's contributions to a nonexempt employee trust or to a nonqualified annuity
contract.
- Any unallowable moving expense deduction that you choose to recapture as explained under
Moving Expense Attributable to Foreign Earnings in 2 Years
in chapter 5.
- Payments you receive after the end of the tax year following the tax year in which you performed the services that earned the 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.
| Earned Income | Unearned Income | Variable Income |
| Salaries and wages | Dividends | Business profits |
| Commissions | Interest | Royalties |
| Bonuses | Capital gains | Rents |
| Professional fees | Gambling winnings | Scholarships and fellowships |
| Tips | Alimony | |
| | Social security benefits | |
| | Pensions | |
| | Annuities | |
In addition to the types of earned income listed, certain noncash income and allowances or reimbursements are considered earned
income.
taxmap/pubs/p54-011.htm#en_us_publink100047452The 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.
taxmap/pubs/p54-011.htm#en_us_publink100047453Earned income includes allowances or reimbursements you receive, such as the following
amounts.
- Cost-of-living allowances.
- Overseas differential.
- Family allowance.
- Reimbursement for education or education allowance.
- Home leave allowance.
- Quarters allowance.
- Reimbursement for moving or moving allowance (unless excluded from income as discussed later in
Reimbursement of employee expenses under
Earned and Unearned Income).
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.
taxmap/pubs/p54-011.htm#en_us_publink100047455You are a U.S. citizen, a bona fide resident of Canada, and working as a mining engineer. Your salary is $76,800 per year. You also receive a $6,000 cost-of-living allowance, and a $6,000 education allowance. Your employment contract did not indicate that you were entitled to these allowances only while outside the United States. Your total income is $88,800. You work a 5-day week, Monday through Friday. After subtracting your vacation, you have a total of 240 workdays in the year. You worked in the United States during the year for 6 weeks (30 workdays). The following shows how to figure the part of your income that is for work done in Canada during the
year.
| | Number of days worked in Canada during the year (210) | × | Total income ($88,800) | = | $77,700 | |
| | Number of days of work during the year for which payment was made
(240) | |
Your foreign source earned income is $77,700.
taxmap/pubs/p54-011.htm#en_us_publink100047456Earned 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.
taxmap/pubs/p54-011.htm#en_us_publink100047457Income from a business in which capital investment is an important part of producing the income may be unearned income. If you are a sole proprietor or partner and your personal services are also an important part of producing the income, the part of the income that represents the value of your personal services will be treated as earned
income.
taxmap/pubs/p54-011.htm#en_us_publink100047458If capital investment is an important part of producing income, no more than 30% of your share of the net profits of the business is earned
income.
If you have no net profits, the part of your gross profit that represents a reasonable allowance for personal services actually performed is considered earned income. Because you do not have a net profit, the 30% limit does not apply.
taxmap/pubs/p54-011.htm#en_us_publink100047459You are a U.S. citizen and meet the bona fide residence test. You invest in a partnership based in Cameroon that is engaged solely in selling merchandise outside the United States. You perform no services for the partnership. At the end of the tax year, your share of the net profits is $80,000. The entire $80,000 is unearned
income.
taxmap/pubs/p54-011.htm#en_us_publink100047460Assume that in
Example 1
you spend time operating the business. Your share of the net profits is $80,000; 30% of your share of the profits is $24,000. If the value of your services for the year is $15,000, your earned income is limited to the value of your services,
$15,000.
taxmap/pubs/p54-011.htm#en_us_publink100047461If capital is not an income-producing factor and personal services produce the business income, the 30% rule does not apply. The entire amount of business income is earned
income.
taxmap/pubs/p54-011.htm#en_us_publink100047462You and Lou Green are management consultants and operate as equal partners in performing services outside the United States. Because capital is not an
income-
producing factor, all the income from the partnership is considered earned
income.
taxmap/pubs/p54-011.htm#en_us_publink100047463The salary you receive from a corporation is earned income only if it represents a reasonable allowance as compensation for work you do for the corporation. Any amount over what is considered a reasonable salary is unearned
income.
taxmap/pubs/p54-011.htm#en_us_publink100047464You are a U.S. citizen and an officer and stockholder of a corporation in Honduras. You perform no work or service of any kind for the corporation. During the tax year you receive a $10,000 "salary" from the corporation. The $10,000 clearly is not for personal services and is unearned
income.
taxmap/pubs/p54-011.htm#en_us_publink100047465You are a U.S. citizen and work full time as secretary-treasurer of your corporation. During the tax year you receive $100,000 as salary from the corporation. If $80,000 is a reasonable allowance as pay for the work you did, then $80,000 is earned
income.
taxmap/pubs/p54-011.htm#en_us_publink100047466You may have earned income if you disposed of stock that you got by exercising a stock option granted to you under an employee stock purchase plan.
If your gain on the disposition of stock you got by exercising an option is treated as capital gain, your gain is unearned
income.
However, if you disposed of the stock less than 2 years after you were granted the option or less than 1 year after you got the stock, part of the gain on the disposition may be earned income. It is considered received in the year you disposed of the stock and earned in the year you performed the services for which you were granted the option. Any part of the earned income that is due to work you did outside the United States is foreign earned
income.
See Publication
525, Taxable and Nontaxable Income, for a discussion of the treatment of stock
options.
For purposes of the foreign earned income exclusion, the foreign housing
exclusion, and the foreign housing deduction, amounts received as pensions or
annuities are unearned income.
taxmap/pubs/p54-011.htm#en_us_publink100047468Royalties from the leasing of oil and mineral lands and patents generally are a form of rent or dividends and are unearned
income.
Royalties received by a writer are earned income if they are received:
- For the transfer of property rights of the writer in the writer's product,
or
- Under a contract to write a book or series of articles.
Generally, rental income is unearned income. If you perform personal services in connection with the production of rent, up to 30% of your net rental income can be considered earned
income.
taxmap/pubs/p54-011.htm#en_us_publink100047470Larry Smith, a U.S. citizen living in Australia, owns and operates a rooming house in Sydney. If he is operating the rooming house as a business that requires capital and personal services, he can consider up to 30% of net rental income as earned income. On the other hand, if he just owns the rooming house and performs no personal services connected with its operation, except perhaps making minor repairs and collecting rents, none of his net income from the house is considered earned income. It is all unearned
income.
taxmap/pubs/p54-011.htm#en_us_publink100047471If you are engaged in a professional occupation (such as a doctor or lawyer), all fees received in the performance of these services are earned
income.
taxmap/pubs/p54-011.htm#en_us_publink100047472Income you receive from the sale of paintings you created is earned income.
taxmap/pubs/p54-011.htm#en_us_publink100047473Any portion of a scholarship or fellowship grant that is paid to you for teaching, research or other services is considered earned income if you must include it in your gross income. If the payer of the grant is required to provide you with a Form W-2, Wage and Tax Statement, these amounts will be listed as
wages.
 | Certain scholarship and fellowship income may be exempt under other provisions. See Publication
970, Tax Benefits for Education, chapter 1. |
taxmap/pubs/p54-011.htm#en_us_publink100047475If you receive fringe benefits in the form of the right to use your employer's property or facilities, the fair market value of that right is earned income. Fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being required to buy or sell, and both having reasonable knowledge of all the necessary facts.
taxmap/pubs/p54-011.htm#en_us_publink100047476You are privately employed and live in Japan all year. You are paid a salary of $6,000 a month. You live rent-free in a house provided by your employer that has a fair rental value of $3,000 a month. The house is not provided for your employer's convenience. You report on the calendar-year, cash basis. You received $72,000 salary from foreign sources plus $36,000 fair rental value of the house, or a total of $108,000 of earned
income.
taxmap/pubs/p54-011.htm#en_us_publink100047477If you are reimbursed under an accountable plan (defined below) for expenses you incur on your employer's behalf and you have adequately accounted to your employer for the expenses, do not include the reimbursement for those expenses in your earned
income.
The expenses for which you are reimbursed are not considered allocable (related) to your earned income. If expenses and reimbursement are equal, there is nothing to allocate to excluded income. If expenses are more than the reimbursement, the unreimbursed expenses are considered to have been incurred in producing earned income and must be divided between your excluded and included income in determining the amount of unreimbursed expenses you can deduct. (See
chapter 5.) If the reimbursement is more than the expenses, no expenses remain to be divided between excluded and included income and the excess reimbursement must be included in earned
income.
These rules do not apply to the following individuals.
- Straight-commission salespersons.
- Employees who have arrangements with their employers under which taxes are not withheld on a percentage of the commissions because the employers consider that percentage to be attributable to the employees'
expenses.
An accountable plan is a reimbursement or allowance arrangement that includes all three of the following rules.
- The expenses covered under the plan must have a business connection.
- The employee must adequately account to the employer for these expenses within a reasonable period of
time.
- The employee must return any excess reimbursement or allowance within a reasonable period of
time.
Reimbursement of moving expenses may be earned income. You must include as earned income:
- Any reimbursements of, or payments for, nondeductible moving
expenses,
- Reimbursements that are more than your deductible expenses and that you do not return to your
employer,
- Any reimbursements made (or treated as made) under a nonaccountable plan (any plan that does not meet the rules listed above for an accountable plan), even if they are for deductible expenses,
and
- Any reimbursement of moving expenses you deducted in an earlier
year.
This section discusses reimbursements that must be included in earned income. Publication 521, Moving Expenses, discusses additional rules that apply to moving expense deductions and reimbursements.
The rules for determining when the reimbursement is considered earned or where the reimbursement is considered earned may differ somewhat from the general rules previously discussed.
Although you receive the reimbursement in one tax year, it may be considered earned for services performed, or to be performed, in another tax year. You must report the reimbursement as income on your return in the year you receive it, even if it is considered earned during a different year.
taxmap/pubs/p54-011.htm#en_us_publink100047480If you move from the United States to a foreign country, your moving expense reimbursement is generally considered pay for future services to be performed at the new location. The reimbursement is considered earned solely in the year of the move if you qualify for the exclusion for a period that includes at least 120 days during that tax year.
If you are neither a bona fide resident of nor physically present in a foreign country or countries for a period that includes 120 days during the year of the move, a portion of the reimbursement is considered earned in the year of the move and a portion is considered earned in the year following the year of the move. To figure the amount earned in the year of the move, multiply the reimbursement by a fraction. The numerator (top number) is the number of days in your qualifying period that fall within the year of the move, and the denominator (bottom number) is the total number of days in the year of the move.
The difference between the total reimbursement and the amount considered earned in the year of the move is the amount considered earned in the year following the year of the move. The part earned in each year is figured as shown in the following example.
taxmap/pubs/p54-011.htm#en_us_publink100047481You are a U.S. citizen working in the United States. You were told in October 2011 that you were being transferred to a foreign country. You arrived in the foreign country on December 15, 2011, and you are a bona fide resident for the remainder of 2011 and all of 2012. Your employer reimbursed you $2,000 in January 2012 for the part of the moving expense that you were not allowed to deduct. Because you did not qualify for the exclusion under the bona fide residence test for at least 120 days in 2011 (the year of the move), the reimbursement is considered pay for services performed in the foreign country for both 2011 and
2012.
You figure the part of the reimbursement for services performed in the foreign country in 2011 by multiplying the total reimbursement by a fraction. The fraction is the number of days during which you were a bona fide resident in 2011 (the year of the move) divided by 365. The remaining part of the reimbursement is for services performed in the foreign country in
2012.
This computation is used only to determine when the reimbursement is considered earned. You would include the amount of the reimbursement in income in 2012, the year you received
it.
taxmap/pubs/p54-011.htm#en_us_publink100047482If you move between foreign countries, any moving expense reimbursement that you must include in income will be considered earned in the year of the move if you qualify for the foreign earned income exclusion for a period that includes at least 120 days in the year of the move.
taxmap/pubs/p54-011.htm#en_us_publink100047483If you move to the United States, the moving expense reimbursement that you must include in income is generally considered to be U.S. source income.
However, if under either an agreement between you and your employer or a statement of company policy that is reduced to writing before your move to the foreign country, your employer will reimburse you for your move back to the United States regardless of whether you continue to work for the employer, the includible reimbursement is considered compensation for past services performed in the foreign country. The includible reimbursement is considered earned in the year of the move if you qualify for the foreign earned income exclusion for a period that includes at least 120 days during that year. Otherwise, you treat the includible reimbursement as received for services performed in the foreign country in the year of the move and the year immediately before the year of the move.
See the discussion under
Move from U.S. to foreign country, earlier, to figure the amount of the includible reimbursement considered earned in the year of the move. The amount earned in the year before the year of the move is the difference between the total includible reimbursement and the amount earned in the year of the move.
You are a U.S. citizen employed in a foreign country. You retired from employment with your employer on March 31, 2012, and returned to the United States after having been a bona fide resident of the foreign country for several years. A written agreement with your employer entered into before you went abroad provided that you would be reimbursed for your move back to the United
States.
In April 2012, your former employer reimbursed you $4,000 for the part of the cost of your move back to the United States that you were not allowed to deduct. Because you were not a bona fide resident of a foreign country or countries for a period that included at least 120 days in 2012 (the year of the move), the includible reimbursement is considered pay for services performed in the foreign country for both 2012 and
2011.
You figure the part of the moving expense reimbursement for services performed in the foreign country for 2012 by multiplying the total includible reimbursement by a fraction. The fraction is the number of days of foreign residence during the year (90) divided by the number of days in the year (366). The remaining part of the includible reimbursement is for services performed in the foreign country in 2011. You report the amount of the includible reimbursement in 2012, the year you received it.
| In this example, if you met the physical presence test for a period that included at least 120 days in 2012, the moving expense reimbursement would be considered earned entirely in the year of the move.
|
taxmap/pubs/p54-011.htm#en_us_publink100047486If you are reimbursed for storage expenses, the reimbursement is for services you perform during the period of time for which the storage expenses are incurred.
taxmap/pubs/p54-011.htm#en_us_publink100047487For 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. This includes amounts paid from both appropriated and nonappropriated funds.
The following organizations (and other organizations similarly organized and operated under United States Army, Navy, or Air Force regulations) are integral parts of the Armed Forces, agencies, or instrumentalities of the United
States.
- United States Armed Forces exchanges.
- Commissioned and noncommissioned officers' messes.
- Armed Forces motion picture services.
- Kindergartens on foreign Armed Forces installations.
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.
taxmap/pubs/p54-011.htm#en_us_publink100047488Amounts paid by the American Institute in Taiwan are not foreign earned income for purposes of the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction. If you are an employee of the American Institute in Taiwan, allowances you receive are exempt from U.S. tax up to the amount that equals tax-exempt allowances received by civilian employees of the U.S. Government.
taxmap/pubs/p54-011.htm#en_us_publink100047489Cost-of-living and foreign-area allowances paid under certain acts of Congress to U.S. civilian officers and employees stationed in Alaska and Hawaii or elsewhere outside the 48 contiguous states and the District of Columbia can be excluded from gross income. Post differentials are wages that must be included in gross income, regardless of the act of Congress under which they are paid.
taxmap/pubs/p54-011.htm#en_us_publink100047490Publication 516, U.S. Government Civilian Employees Stationed Abroad, has more information for U.S. Government employees
abroad.
taxmap/pubs/p54-011.htm#en_us_publink100047491You 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.
- The meals are furnished:
- On the business premises of your employer, and
- For the convenience of your employer.
- The lodging is furnished:
- On the business premises of your employer,
- For the convenience of your employer, and
- As a condition of your employment.
If these conditions are met, do not include the value of the meals or lodging in your income, even if a law or your employment contract says that they are provided as
compensation.
Amounts you do not include in income because of these rules are not foreign earned
income.
If you receive a Form W-2, excludable amounts should not be included in the total reported in box 1 as
wages.
taxmap/pubs/p54-011.htm#en_us_publink100047492Your family, for this purpose, includes only your spouse and your dependents.
taxmap/pubs/p54-011.htm#en_us_publink100047493The value of lodging includes the cost of heat, electricity, gas, water, sewer service, and similar items needed to make the lodging fit to live in.
taxmap/pubs/p54-011.htm#en_us_publink100047494Generally, the business premises of your employer is wherever you work. For example, if you work as a housekeeper, meals and lodging provided in your employer's home are provided on the business premises of your employer. Similarly, meals provided to cowhands while herding cattle on land leased or owned by their employer are considered provided on the premises of their employer.
taxmap/pubs/p54-011.htm#en_us_publink100047495Whether meals or lodging are provided for your employer's convenience must be determined from all the facts and circumstances. Meals furnished at no charge are considered provided for your employer's convenience if there is a good business reason for providing them, other than to give you more pay.
On the other hand, if your employer provides meals to you or your family as a means of giving you more pay, and there is no other business reason for providing them, their value is extra income to you because they are not furnished for the convenience of your employer.
taxmap/pubs/p54-011.htm#en_us_publink100047496Lodging is provided as a condition of employment if you must accept the lodging to properly carry out the duties of your job. You must accept lodging to properly carry out your duties if, for example, you must be available for duty at all times or you could not perform your duties if the lodging was not furnished.
taxmap/pubs/p54-011.htm#en_us_publink100047497If the lodging is in a camp located in a foreign country, the camp is considered part of your employer's business premises. The camp must be:
- Provided for your employer's convenience because the place where you work is in a remote area where satisfactory housing is not available to you on the open market within a reasonable commuting
distance,
- Located as close as reasonably possible in the area where you work,
and
- Provided in a common area or enclave that is not available to the general public for lodging or accommodations and that normally houses at least ten employees.
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