Foreign Earned Income and Housing Exclusions

The Foreign Earned Income Exclusion is provided for by U.S. Internal Revenue Code Section 911. Pursuant to this code section, a qualifying individual can exclude from income an amount of qualifying foreign earnings up to a maximum that is now adjusted for inflation ($91,400 for 2009, $91,500 for 2010, $92,900 for 2011, $95,100 for 2012, $97,600 for 2013, and $99,200 for 2014). In addition, you can exclude or deduct certain foreign housing amounts.

However, in order to qualify for this exclusion, you must meet at least one of two possible qualifying tests. If neither test can be met, no part of the potential exclusion is available. If a qualifying test is fully met, but only part of a given tax year falls within the qualifying period, a prorated exclusion is allowed.

Qualifying Tests

There are two alternative methods of qualifying for the Exclusion; the Bona Fide Residence Test and the Physical Presence Test.

Bona Fide Residence Test

The Bona Fide Residence Test is available only for U.S. Citizens and U.S. Residents from countries that have a tax treaty with the U.S. that contains a non-discrimination clause. This test entails being a bona fide resident (as determined by facts and circumstances), of some foreign country, for at least one full calendar year, (i.e., an entire period from January 1 through December 31 must be covered before the test can ever be met). If such a period has never been covered by foreign residency, the Bona Fide Residence Test would never be met, and the Exclusion would be lost in its entirety (unless the Physical Presence Test were met). There are no exceptions (other than U.S. State Department-certified civil unrest in the particular country) for failure to qualify.

Physical Presence Test

The Physical Presence Test requires being physically present, in some foreign country or countries, for at least 330 full days out of any 12-month period.  Conversely stated, the taxpayer cannot be physically present in the U.S., or any U.S. possessions, for more than (any part of) 35 days within the 12-month qualifying period.  Again, reasons for U.S. presence, (such as medical emergency), are irrelevant.  If the test is not met, the exclusion is lost in its entirety (other than in a case of certified civil unrest in the foreign country).

During any days counted in either of the two tests discussed above, the taxpayer must also have a “foreign tax home” (i.e., simply stated, he cannot be merely on a vacation or a business trip; it typically must be a foreign assignment or other long-term stay).

Excludible Income – The income must be earned income (no dividends, etc), earned during a qualifying period, and not attributable to a year earlier than the immediately preceding calendar year.  It must also be earned outside the U.S.  Thus, income earned while in the U.S. on business would not qualify.