To be eligible to claim the foreign earned income exclusion or the foreign housing exclusion, your client must have a tax home in a foreign country and meet either the residence test or the physical presence test. To take the exclusion, your client must 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 their home is in a foreign country and they 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 your client is a United States citizen or a resident alien who lives and works abroad, they may qualify to exclude all or part of their foreign earnings from their income. The amount they 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. Your client must be a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year. The characteristics usually qualifying them 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. Your client 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 your client violates US restrictions that prohibit travel to certain countries, they will not be able to count their presence or residence in those countries in meeting the bona fide residence test or physical presence test.
Generally, your client's tax home is the general area of their main place of business or post of duty, regardless of where they maintain their family home. If they do not have a main place of business, then their tax home may be the place where they regularly live. They are not considered to have a tax home in a foreign country for any period for which their household is in the United States. However, if your client is temporarily present in the United States, it does not necessarily mean that their tax home is in the US during that time.
Even if your client's net self-employment income is excluded for income tax purposes, it is still generally subject to self-employment tax. However, if their 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.