Foreign Earned Income Exclusion

U.S. citizens and United States resident aliens living abroad are taxed on their worldwide income. Taxpayers who qualify may be able to exclude some or all of their foreign income, as well as exclude or deduct housing expenses up to a limit. The Foreign Earned Income Exclusion, Foreign Housing Exclusion and Foreign Housing Deduction are claimed through the filing of Form 2555. Individuals wishing to utilize these write-offs must have foreign earned income; their tax home must be in a foreign country; and they must pass either the bona fide residence or physical presence tests.

When choosing which exclusions, if any, to claim on Form 2555, U.S. taxpayers should be aware that both carry several consequences. Choosing to revoke the exclusion(s) suspends it for five tax years unless approval is given by the Internal Revenue Service to claim it sooner. While choosing to claim an exclusion, commits the taxpayer to that exclusion for current and future tax years until the exclusion is revoked. Also, electing to make use of any exclusions on Form 2555 negates the ability to claim an Earned Income Credit; and additionally, it disqualifies excluded income from a Foreign Tax Credit or Deduction and requires special rules to be used when calculating an IRA Deduction.

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