To be eligible to claim the foreign earned income exclusion or the foreign housing exclusion, you must have a tax home in a foreign country and meet either the residence test or the physical presence test. To take the exclusion, you file Form 2555. Foreign earned income includes wages, salaries, commissions, professional fees and bonuses for personal services performed in a foreign country during the time your home is in a foreign country and you meet either a bona fide residence test or a physical presence test. Usually, the foreign earned income exclusion does not include investment income such as interest, dividends, capital gains, pensions, annuities, gambling winnings, alimony or amounts attributable to certain employee trusts. Generally, if you are a United States citizen or a resident alien who lives and works abroad, you may qualify to exclude all or part of your foreign earnings from your income.
The amount you may exclude is as follows:
|Tax Year||Exclusion Amount|
The bona fide residence test can be used by US citizens and US resident aliens who are citizens or nationals of a country with which the United States has an income tax treaty. You must be a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year. The characteristics usually qualifying you as a bona fide resident include establishing a home and settling in that country with some degree of permanence.
Any US citizen or resident alien can use the physical presence test. You must be physically present in a foreign land for at least 330 full days during any period of the tax year. The year can begin with any calendar month. However, if you violate US restrictions that prohibit travel to certain countries, you will not be able to count your presence or residence in those countries in meeting the bona fide residence test or physical presence test.
Generally, your tax home is the general area of your main place of business or post of duty, regardless of where you maintain your family home. If you do not have a main place of business, then your tax home may be the place where you regularly live. You are not considered to have a tax home in a foreign country for any period for which your household is in the United States. However, if you are temporarily present in the United States, it does not necessarily mean that your tax home is in the US during that time.
Even if your net self-employment income is excluded for income tax purposes, it is still generally subject to self-employment tax. However, if your self-employment income was earned in a country that has a totalization agreement (social security agreement) with the United States, it may be exempt from US social security taxes including the self-employment tax.