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2011 Tax Act

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2011 Tax Act

2011 tax act 5. 2011 tax act   Exemptions, Deductions, and Credits Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Items Related to Excluded Income Exemptions Contributions to Foreign Charitable Organizations Moving ExpensesAllocation of Moving Expenses Forms To File Contributions to Individual Retirement Arrangements Taxes of Foreign Countries and U. 2011 tax act S. 2011 tax act PossessionsCredit for Foreign Income Taxes Deduction for Foreign Income Taxes Deduction for Other Foreign Taxes How To Report Deductions Topics - This chapter discusses: The rules concerning items related to excluded income, Exemptions, Contributions to foreign charitable organizations, Moving expenses, Contributions to individual retirement arrangements (IRAs), Taxes of foreign countries and U. 2011 tax act S. 2011 tax act possessions, and How to report deductions. 2011 tax act Useful Items - You may want to see: Publication 501 Exemptions, Standard Deduction, and Filing Information 514 Foreign Tax Credit for Individuals 521 Moving Expenses 523 Selling Your Home 590 Individual Retirement Arrangements (IRAs) 597 Information on the United States—Canada Income Tax Treaty Form (and Instructions) 1116 Foreign Tax Credit 2106 Employee Business Expenses 2555 Foreign Earned Income 2555-EZ Foreign Earned Income Exclusion 3903 Moving Expenses Schedule A (Form 1040) Itemized Deductions Schedule C (Form 1040) Profit or Loss From Business SS-5 Application for a Social Security Card W-7 Application for IRS Individual Taxpayer Identification Number See chapter 7 for information about getting these publications and forms. 2011 tax act Items Related to Excluded Income U. 2011 tax act S. 2011 tax act citizens and resident aliens living outside the United States generally are allowed the same deductions as citizens and residents living in the United States. 2011 tax act If you choose to exclude foreign earned income or housing amounts, you cannot deduct, exclude, or claim a credit for any item that can be allocated to or charged against the excluded amounts. 2011 tax act This includes any expenses, losses, and other normally deductible items that are allocable to the excluded income. 2011 tax act You can deduct only those expenses connected with earning includible income. 2011 tax act These rules apply only to items definitely related to the excluded earned income and they do not apply to other items that are not definitely related to any particular type of gross income. 2011 tax act These rules do not apply to items such as: Personal exemptions, Qualified retirement contributions, Alimony payments, Charitable contributions, Medical expenses, Mortgage interest, or Real estate taxes on your personal residence. 2011 tax act For purposes of these rules, your housing deduction is not treated as allocable to your excluded income, but the deduction for self- employment tax is. 2011 tax act If you receive foreign earned income in a tax year after the year in which you earned it, you may have to file an amended return for the earlier year to properly adjust the amounts of deductions, credits, or exclusions allocable to your foreign earned income and housing exclusions. 2011 tax act Example. 2011 tax act In 2012, you had $90,400 of foreign earned income and $9,500 of deductions allocable to your foreign earned income. 2011 tax act You did not have a housing exclusion. 2011 tax act Because you excluded all of your foreign earned income, you would not have been able to claim any of the deductions on your 2012 return. 2011 tax act In 2013, you received a $12,000 bonus for work you did abroad in 2012. 2011 tax act You can exclude $4,700 of the bonus because the limit on the foreign earned income exclusion for 2012 was $95,100 and you have already excluded $90,400. 2011 tax act Since you must include $7,300 of the bonus ($12,000 − $4,700) for work you did in 2012 in income, you can file an amended return for 2012 to claim $677 of the deductions. 2011 tax act This is the deductions allocable to the foreign earned income ($9,500) multiplied by the includible portion of the foreign earned income ($7,300) and divided by the total foreign earned income for 2012 ($102,400). 2011 tax act Exemptions You can claim an exemption for your nonresident alien spouse on your separate return, provided your spouse has no gross income for U. 2011 tax act S. 2011 tax act tax purposes and is not the dependent of another U. 2011 tax act S. 2011 tax act taxpayer. 2011 tax act You also can claim exemptions for individuals who qualify as your dependents. 2011 tax act To be your dependent, the individual must be a U. 2011 tax act S. 2011 tax act citizen, U. 2011 tax act S. 2011 tax act national, U. 2011 tax act S. 2011 tax act resident alien, or a resident of Canada or Mexico for some part of the calendar year in which your tax year begins. 2011 tax act Children. 2011 tax act   Children usually are citizens or residents of the same country as their parents. 2011 tax act If you were a U. 2011 tax act S. 2011 tax act citizen when your child was born, your child generally is a U. 2011 tax act S. 2011 tax act citizen. 2011 tax act This is true even if the child's other parent is a nonresident alien, the child was born in a foreign country, and the child lives abroad with the other parent. 2011 tax act   If you have a legally adopted child who is not a U. 2011 tax act S. 2011 tax act citizen, U. 2011 tax act S. 2011 tax act resident, or U. 2011 tax act S. 2011 tax act national, the child meets the citizen requirement if you are a U. 2011 tax act S. 2011 tax act citizen or U. 2011 tax act S. 2011 tax act national and the child lived with you as a member of your household all year. 2011 tax act Social security number. 2011 tax act   You must include on your return the social security number (SSN) of each dependent for whom you claim an exemption. 2011 tax act To get a social security number for a dependent, apply at a Social Security office or U. 2011 tax act S. 2011 tax act consulate. 2011 tax act You must provide original or certified copies of documents to verify the dependent's age, identity, and citizenship, and complete Form SS-5. 2011 tax act   If you do not have an SSN for a child who was born in 2013 and died in 2013, attach a copy of the child's birth certificate to your tax return. 2011 tax act Print “Died” in column (2) of line 6c of your Form 1040 or Form 1040A. 2011 tax act   If your dependent is a nonresident alien who is not eligible to get a social security number, you must list the dependent's individual taxpayer identification number (ITIN) instead of an SSN. 2011 tax act To apply for an ITIN, file Form W-7 with the IRS. 2011 tax act It usually takes 6 to 10 weeks to get an ITIN. 2011 tax act Enter your dependent's ITIN wherever an SSN is requested on your tax return. 2011 tax act More information. 2011 tax act   For more information about exemptions, see Publication 501. 2011 tax act Contributions to Foreign Charitable Organizations If you make contributions directly to a foreign church or other foreign charitable organization, you generally cannot deduct them. 2011 tax act Exceptions are explained under Canadian, Mexican, and Israeli charities, later. 2011 tax act You can deduct contributions to a U. 2011 tax act S. 2011 tax act organization that transfers funds to a charitable foreign organization if the U. 2011 tax act S. 2011 tax act organization controls the use of the funds by the foreign organization or if the foreign organization is just an administrative arm of the U. 2011 tax act S. 2011 tax act organization. 2011 tax act Canadian, Mexican, and Israeli charities. 2011 tax act   Under the income tax treaties with Canada, Mexico and Israel, you may be able to deduct contributions to certain Canadian, Mexican, and Israeli charitable organizations. 2011 tax act Generally, you must have income from sources in Canada, Mexico, or Israel, and the organization must meet certain requirements. 2011 tax act See Publication 597, Information on the United States-Canada Income Tax Treaty, and Publication 526, Charitable Contributions, for more information. 2011 tax act Moving Expenses If you moved to a new home in 2013 because of your job or business, you may be able to deduct the expenses of your move. 2011 tax act Generally, to be deductible, the moving expenses must have been paid or incurred in connection with starting work at a new job location. 2011 tax act See Publication 521 for a complete discussion of the deduction for moving expenses and information about moves within the United States. 2011 tax act Foreign moves. 2011 tax act   A foreign move is a move in connection with the start of work at a new job location outside the United States and its possessions. 2011 tax act A foreign move does not include a move back to the United States or its possessions. 2011 tax act Allocation of Moving Expenses When your new place of work is in a foreign country, your moving expenses are directly connected with the income earned in that foreign country. 2011 tax act If you exclude all or part of the income that you earn at the new location under the foreign earned income exclusion or the foreign housing exclusion, you cannot deduct the part of your moving expense that is allocable to the excluded income. 2011 tax act Also, you cannot deduct the part of the moving expense related to the excluded income for a move from a foreign country to the United States if you receive a reimbursement that you are able to treat as compensation for services performed in the foreign country. 2011 tax act Year to which expense is connected. 2011 tax act   The moving expense is connected with earning the income (including reimbursements, as discussed in chapter 4 under Reimbursement of moving expenses ) either entirely in the year of the move or in 2 years. 2011 tax act It is connected with earning the income entirely in the year of the move if you qualify for the foreign earned income exclusion under the bona fide residence test or physical presence test for at least 120 days during that tax year. 2011 tax act   If you do not qualify under either the bona fide residence test or the physical presence test for at least 120 days during the year of the move, the expense is connected with earning the income in 2 years. 2011 tax act The moving expense is connected with the year of the move and the following year if the move is from the United States to a foreign country. 2011 tax act The moving expense is connected with the year of the move and the preceding year if the move is from a foreign country to the United States. 2011 tax act Amount allocable to excluded income. 2011 tax act   To figure the amount of your moving expense that is allocable to your excluded foreign earned income (and not deductible), you must multiply your total moving expense deduction by a fraction. 2011 tax act The numerator (top number) of the fraction is the total of your excluded foreign earned income and housing amounts for both years and the denominator (bottom number) of the fraction is your total foreign earned income for both years. 2011 tax act Example. 2011 tax act On November 1, 2012, you transfer to Monaco. 2011 tax act Your tax home is in Monaco, and you are a bona fide resident of Monaco for the entire tax year 2013. 2011 tax act In 2012, you paid $6,000 for allowable moving expenses for your move from the United States to Monaco. 2011 tax act You were fully reimbursed (under a nonaccountable plan) for these expenses in the same year. 2011 tax act The reimbursement is included in your income. 2011 tax act Your only other income consists of $16,000 wages earned in 2012 after the date of your move, and $100,100 wages earned in Monaco for 2013. 2011 tax act Because you did not meet the bona fide residence test for at least 120 days during 2012, the year of the move, the moving expenses are for services you performed in both 2012 and the following year, 2013. 2011 tax act Your total foreign earned income for both years is $122,100, consisting of $16,000 wages for 2012, $100,100 wages for 2013, and $6,000 moving expense reimbursement for both years. 2011 tax act You have no housing exclusion. 2011 tax act The total amount you can exclude is $113,190, consisting of the $97,600 full-year exclusion for 2013 and a $15,590 part-year exclusion for 2012 ($95,100 times the fraction of 60 qualifying bona fide residence days over 366 total days in the year). 2011 tax act To find the part of your moving expenses that is not deductible, multiply your $6,000 total expenses by the fraction $113,190 over $122,100. 2011 tax act The result, $5,562, is your nondeductible amount. 2011 tax act    You must report the full amount of the moving expense reimbursement in the year in which you received the reimbursement. 2011 tax act In the preceding example, this year was 2012. 2011 tax act You attribute the reimbursement to both 2012 and 2013 only to figure the amount of foreign earned income eligible for exclusion for each year. 2011 tax act Move between foreign countries. 2011 tax act   If you move between foreign countries, your moving expense is allocable to income earned in the year of the move if you qualified under either the bona fide residence test or the physical presence test for a period that includes at least 120 days in the year of the move. 2011 tax act New place of work in U. 2011 tax act S. 2011 tax act   If your new place of work is in the United States, the deductible moving expenses are directly connected with the income earned in the United States. 2011 tax act If you treat a reimbursement from your employer as foreign earned income (see the discussion in chapter 4), you must allocate deductible moving expenses to foreign earned income. 2011 tax act Storage expenses. 2011 tax act   These expenses are attributable to work you do during the year in which you incur the storage expenses. 2011 tax act You cannot deduct the amount allocable to excluded income. 2011 tax act Moving Expense Attributable to Foreign Earnings in 2 Years If your moving expense deduction is attributable to your foreign earnings in 2 years (the year of the move and the following year), you should request an extension of time to file your return for the year of the move until after the end of the second year. 2011 tax act By then, you should have all the information needed to properly figure the moving expense deduction. 2011 tax act See Extensions under When To File and Pay in chapter 1. 2011 tax act If you do not request an extension, you should figure the part of the moving expense that you cannot deduct because it is allocable to the foreign earned income you are excluding. 2011 tax act You do this by multiplying the moving expense by a fraction, the numerator (top number) of which is your excluded foreign earned income for the year of the move, and the denominator (bottom number) of which is your total foreign earned income for the year of the move. 2011 tax act Once you know your foreign earnings and exclusion for the following year, you must either: Adjust the moving expense deduction by filing an amended return for the year of the move, or Recapture any additional unallowable amount as income on your return for the following year. 2011 tax act If, after you make the final computation, you have an additional amount of allowable moving expense deduction, you can claim this only on an amended return for the year of the move. 2011 tax act You cannot claim it on the return for the second year. 2011 tax act Forms To File Report your moving expenses on Form 3903. 2011 tax act Report your moving expense deduction on line 26 of Form 1040. 2011 tax act If you must reduce your moving expenses by the amount allocable to excluded income (as explained later under How To Report Deductions ), attach a statement to your return showing how you figured this amount. 2011 tax act For more information about figuring moving expenses, see Publication 521. 2011 tax act Contributions to Individual Retirement Arrangements Contributions to your individual retirement arrangements (IRAs) that are traditional IRAs or Roth IRAs are generally limited to the lesser of $5,500 ($6,500 if 50 or older) or your compensation that is includible in your gross income for the tax year. 2011 tax act In determining compensation for this purpose, do not take into account amounts you exclude under either the foreign earned income exclusion or the foreign housing exclusion. 2011 tax act Do not reduce your compensation by the foreign housing deduction. 2011 tax act If you are covered by an employer retirement plan at work, your deduction for your contributions to your traditional IRAs is generally limited based on your modified adjusted gross income. 2011 tax act This is your adjusted gross income figured without taking into account the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction. 2011 tax act Other modifications are also required. 2011 tax act For more information on IRAs, see Publication 590. 2011 tax act Taxes of Foreign Countries and U. 2011 tax act S. 2011 tax act Possessions You can take either a credit or a deduction for income taxes paid to a foreign country or a U. 2011 tax act S. 2011 tax act possession. 2011 tax act Taken as a deduction, foreign income taxes reduce your taxable income. 2011 tax act Taken as a credit, foreign income taxes reduce your tax liability. 2011 tax act You must treat all foreign income taxes the same way. 2011 tax act If you take a credit for any foreign income taxes, you cannot deduct any foreign income taxes. 2011 tax act However, you may be able to deduct other foreign taxes. 2011 tax act See Deduction for Other Foreign Taxes, later. 2011 tax act There is no rule to determine whether it is to your advantage to take a deduction or a credit for foreign income taxes. 2011 tax act In most cases, it is to your advantage to take foreign income taxes as a tax credit, which you subtract directly from your U. 2011 tax act S. 2011 tax act tax liability, rather than as a deduction in figuring taxable income. 2011 tax act However, if foreign income taxes were imposed at a high rate and the proportion of foreign income to U. 2011 tax act S. 2011 tax act income is small, a lower final tax may result from deducting the foreign income taxes. 2011 tax act In any event, you should figure your tax liability both ways and then use the one that is better for you. 2011 tax act You can make or change your choice within 10 years from the due date for filing the tax return on which you are entitled to take either the deduction or the credit. 2011 tax act Foreign income taxes. 2011 tax act   These are generally income taxes you pay to any foreign country or possession of the United States. 2011 tax act Foreign income taxes on U. 2011 tax act S. 2011 tax act return. 2011 tax act   Foreign income taxes can only be taken as a credit on Form 1040, line 47, or as an itemized deduction on Schedule A. 2011 tax act These amounts cannot be included as withheld income taxes on Form 1040, line 62. 2011 tax act Foreign taxes paid on excluded income. 2011 tax act   You cannot take a credit or deduction for foreign income taxes paid on earnings you exclude from tax under any of the following. 2011 tax act Foreign earned income exclusion. 2011 tax act Foreign housing exclusion. 2011 tax act Possession exclusion. 2011 tax act If your wages are completely excluded, you cannot deduct or take a credit for any of the foreign taxes paid on your wages. 2011 tax act   If only part of your wages is excluded, you cannot deduct or take a credit for the foreign income taxes allocable to the excluded part. 2011 tax act You find the taxes allocable to your excluded wages by applying a fraction to the foreign taxes paid on foreign earned income received during the tax year. 2011 tax act The numerator (top number) of the fraction is your excluded foreign earned income received during the tax year minus deductible expenses allocable to that income (not including the foreign housing deduction). 2011 tax act The denominator (bottom number) of the fraction is your total foreign earned income received during the tax year minus all deductible expenses allocable to that income (including the foreign housing deduction). 2011 tax act   If foreign law taxes both earned income and some other type of income and the taxes on the other type cannot be separated, the denominator of the fraction is the total amount of income subject to foreign tax minus deductible expenses allocable to that income. 2011 tax act    If you take a foreign tax credit for tax on income you could have excluded under your choice to exclude foreign earned income or your choice to exclude foreign housing costs, one or both of the choices may be considered revoked. 2011 tax act Credit for Foreign Income Taxes If you take the foreign tax credit, you may have to file Form 1116 with Form 1040. 2011 tax act Form 1116 is used to figure the amount of foreign tax paid or accrued that can be claimed as a foreign tax credit. 2011 tax act Do not include the amount of foreign tax paid or accrued as withheld federal income taxes on Form 1040, line 62. 2011 tax act The foreign income tax for which you can claim a credit is the amount of legal and actual tax liability you pay or accrue during the year. 2011 tax act The amount for which you can claim a credit is not necessarily the amount withheld by the foreign country. 2011 tax act You cannot take a foreign tax credit for income tax you paid to a foreign country that would be refunded by the foreign country if you made a claim for refund. 2011 tax act Subsidies. 2011 tax act   If a foreign country returns your foreign tax payments to you in the form of a subsidy, you cannot claim a foreign tax credit based on these payments. 2011 tax act This rule applies to a subsidy provided by any means that is determined, directly or indirectly, by reference to the amount of tax, or to the base used to figure the tax. 2011 tax act   Some ways of providing a subsidy are refunds, credits, deductions, payments, or discharges of obligations. 2011 tax act A credit is also not allowed if the subsidy is given to a person related to you, or persons who participated in a transaction or a related transaction with you. 2011 tax act Limit The foreign tax credit is limited to the part of your total U. 2011 tax act S. 2011 tax act tax that is in proportion to your taxable income from sources outside the United States compared to your total taxable income. 2011 tax act The allowable foreign tax credit cannot be more than your actual foreign tax liability. 2011 tax act Exemption from limit. 2011 tax act   You will not be subject to this limit and will not have to file Form 1116 if you meet all three of the following requirements. 2011 tax act Your only foreign source income for the year is passive income (dividends, interest, royalties, etc. 2011 tax act ) that is reported to you on a payee statement (such as a Form 1099-DIV or 1099-INT). 2011 tax act Your foreign taxes for the year that qualify for the credit are not more than $300 ($600 if you are filing a joint return) and are reported on a payee statement. 2011 tax act You elect this procedure. 2011 tax act If you make this election, you cannot carry back or carry over any unused foreign tax to or from this year. 2011 tax act Separate limit. 2011 tax act   You must figure the limit on a separate basis with regard to “passive category income” and “general category income” (see the instructions for Form 1116). 2011 tax act Figuring the limit. 2011 tax act   In figuring taxable income in each category, you take into account only the amount that you must include in income on your federal tax return. 2011 tax act Do not take any excluded amount into account. 2011 tax act   To determine your taxable income in each category, deduct expenses and losses that are definitely related to that income. 2011 tax act   Other expenses (such as itemized deductions or the standard deduction) not definitely related to specific items of income must be apportioned to the foreign income in each category by multiplying them by a fraction. 2011 tax act The numerator (top number) of the fraction is your gross foreign income in the separate limit category. 2011 tax act The denominator (bottom number) of the fraction is your gross income from all sources. 2011 tax act For this purpose, gross income includes income that is excluded under the foreign earned income provisions but does not include any other exempt income. 2011 tax act You must use special rules for deducting interest expenses. 2011 tax act For more information on allocating and apportioning your deductions, see Publication 514. 2011 tax act Exemptions. 2011 tax act   Do not take the deduction for exemptions for yourself, your spouse, or your dependents in figuring taxable income for purposes of the limit. 2011 tax act Recapture of foreign losses. 2011 tax act   If you have an overall foreign loss and the loss reduces your U. 2011 tax act S. 2011 tax act source income (resulting in a reduction of your U. 2011 tax act S. 2011 tax act tax liability), you must recapture the loss in later years when you have taxable income from foreign sources. 2011 tax act This is done by treating a part of your taxable income from foreign sources in later years as U. 2011 tax act S. 2011 tax act source income. 2011 tax act This reduces the numerator of the limiting fraction and the resulting foreign tax credit limit. 2011 tax act Recapture of domestic losses. 2011 tax act   If you have an overall domestic loss (resulting in no U. 2011 tax act S. 2011 tax act tax liability), you cannot claim a foreign tax credit for taxes paid during that year. 2011 tax act You must recapture the loss in later years when you have U. 2011 tax act S. 2011 tax act source taxable income. 2011 tax act This is done by treating a part of your taxable income from U. 2011 tax act S. 2011 tax act sources in later years as foreign source income. 2011 tax act This increases the numerator of the limiting fraction and the resulting foreign tax credit limit. 2011 tax act Foreign tax credit carryback and carryover. 2011 tax act   The amount of foreign income tax not allowed as a credit because of the limit can be carried back 1 year and carried forward 10 years. 2011 tax act   More information on figuring the foreign tax credit can be found in Publication 514. 2011 tax act Deduction for Foreign Income Taxes Instead of taking the foreign tax credit, you can deduct foreign income taxes as an itemized deduction on Schedule A (Form 1040). 2011 tax act You can deduct only foreign income taxes paid on income that is subject to U. 2011 tax act S. 2011 tax act tax. 2011 tax act You cannot deduct foreign taxes paid on earnings you exclude from tax under any of the following. 2011 tax act Foreign earned income exclusion. 2011 tax act Foreign housing exclusion. 2011 tax act Possession exclusion. 2011 tax act Example. 2011 tax act You are a U. 2011 tax act S. 2011 tax act citizen and qualify to exclude your foreign earned income. 2011 tax act Your excluded wages in Country X are $70,000 on which you paid income tax of $10,000. 2011 tax act You received dividends from Country X of $2,000 on which you paid income tax of $600. 2011 tax act You can deduct the $600 tax payment because the dividends relating to it are subject to U. 2011 tax act S. 2011 tax act tax. 2011 tax act Because you exclude your wages, you cannot deduct the income tax of $10,000. 2011 tax act If you exclude only a part of your wages, see the earlier discussion under Foreign taxes paid on excluded income. 2011 tax act Deduction for Other Foreign Taxes You can deduct real property taxes you pay that are imposed on you by a foreign country. 2011 tax act You take this deduction on Schedule A (Form 1040). 2011 tax act You cannot deduct other foreign taxes, such as personal property taxes, unless you incurred the expenses in a trade or business or in the production of income. 2011 tax act On the other hand, you generally can deduct personal property taxes when you pay them to U. 2011 tax act S. 2011 tax act possessions. 2011 tax act But if you claim the possession exclusion, see Publication 570. 2011 tax act The deduction for foreign taxes other than foreign income taxes is not related to the foreign tax credit. 2011 tax act You can take deductions for these miscellaneous foreign taxes and also claim the foreign tax credit for income taxes imposed by a foreign country. 2011 tax act How To Report Deductions If you exclude foreign earned income or housing amounts, how you show your deductions on your tax return and how you figure the amount allocable to your excluded income depends on whether the expenses are used in figuring adjusted gross income (Form 1040, line 38) or are itemized deductions. 2011 tax act If you have deductions used in figuring adjusted gross income, enter the total amount for each of these items on the appropriate lines and schedules of Form 1040. 2011 tax act Generally, you figure the amount of a deduction related to the excluded income by multiplying the deduction by a fraction, the numerator of which is your foreign earned income exclusion and the denominator of which is your foreign earned income. 2011 tax act Enter the amount of the deduction(s) related to excluded income on line 44 of Form 2555. 2011 tax act If you have itemized deductions related to excluded income, enter on Schedule A (Form 1040) only the part not related to excluded income. 2011 tax act You figure that amount by subtracting from the total deduction the amount related to excluded income. 2011 tax act Generally, you figure the amount that is related to the excluded income by multiplying the total deduction by a fraction, the numerator of which is your foreign earned income exclusion and the denominator of which is your foreign earned income. 2011 tax act Attach a statement to your return showing how you figured the deductible amount. 2011 tax act Example 1. 2011 tax act You are a U. 2011 tax act S. 2011 tax act citizen employed as an accountant. 2011 tax act Your tax home is in Germany for the entire tax year. 2011 tax act You meet the physical presence test. 2011 tax act Your foreign earned income for the year was $122,000 and your investment income was $10,380. 2011 tax act After excluding $97,600, your AGI is $34,780. 2011 tax act You had unreimbursed business expenses of $2,500 for travel and entertainment in earning your foreign income, of which $500 was for meals and entertainment. 2011 tax act These expenses are deductible only as miscellaneous deductions on Schedule A (Form 1040). 2011 tax act You also have $500 of miscellaneous expenses that are not related to your foreign income that you enter on line 23 of Schedule A. 2011 tax act You must fill out Form 2106. 2011 tax act On that form, reduce your deductible meal and entertainment expenses by 50% ($250). 2011 tax act You must reduce the remaining $2,250 of travel and entertainment expenses by 80% ($1,800) because you excluded 80% ($97,600/$122,000) of your foreign earned income. 2011 tax act You carry the remaining total of $450 to line 21 of Schedule A. 2011 tax act Add the $450 to the $500 that you have on line 23 and enter the total ($950) on line 24. 2011 tax act On line 26 of Schedule A, enter $696, which is 2% of your adjusted gross income of $34,780 (line 38, Form 1040) and subtract it from the amount on line 24. 2011 tax act Enter $254 on line 27 of Schedule A. 2011 tax act Example 2. 2011 tax act You are a U. 2011 tax act S. 2011 tax act citizen, have a tax home in Spain, and meet the physical presence test. 2011 tax act You are self-employed and personal services produce the business income. 2011 tax act Your gross income was $116,931, business expenses $66,895, and net income (profit) $50,036. 2011 tax act You choose the foreign earned income exclusion and exclude $97,600 of your gross income. 2011 tax act Since your excluded income is 83. 2011 tax act 47% of your total income, 83. 2011 tax act 47% of your business expenses are not deductible. 2011 tax act Report your total income and expenses on Schedule C (Form 1040). 2011 tax act On Form 2555 you will show the following: Line 20a, $116,931, gross income, Lines 42 and 43, $97,600, foreign earned income exclusion, and Line 44, $55,837 (83. 2011 tax act 47% × $66,895) business expenses attributable to the exclusion. 2011 tax act In this situation (Example 2), you cannot use Form 2555-EZ since you had self-employment income and business expenses. 2011 tax act Example 3. 2011 tax act Assume in Example 2 that both capital and personal services combine to produce the business income. 2011 tax act No more than 30% of your net income, or $15,011, assuming that this amount is a reasonable allowance for your services, is considered earned and can be excluded. 2011 tax act Your exclusion of $15,011 is 12. 2011 tax act 84% of your gross income ($15,011 ÷ $116,931). 2011 tax act Because you excluded 12. 2011 tax act 84% of your total income, $8,589 (. 2011 tax act 1284 x $66,895) of your business expenses is attributable to the excluded income and is not deductible. 2011 tax act Example 4. 2011 tax act You are a U. 2011 tax act S. 2011 tax act citizen, have a tax home in Brazil, and meet the physical presence test. 2011 tax act You are self-employed and both capital and personal services combine to produce business income. 2011 tax act Your gross income was $146,000, business expenses were $172,000, and your net loss was $26,000. 2011 tax act A reasonable allowance for the services you performed for the business is $77,000. 2011 tax act Because you incurred a net loss, the earned income limit of 30% of your net profit does not apply. 2011 tax act The $77,000 is foreign earned income. 2011 tax act If you choose to exclude the $77,000, you exclude 52. 2011 tax act 74% of your gross income ($77,000 ÷ $146,000), and 52. 2011 tax act 74% of your business expenses ($90,713) is attributable to that income and is not deductible. 2011 tax act Show your total income and expenses on Schedule C (Form 1040). 2011 tax act On Form 2555, exclude $77,000 and show $90,713 on line 44. 2011 tax act Subtract line 44 from line 43, and enter the difference as a negative (in parentheses) on line 45. 2011 tax act Because this amount is negative, enter it as a positive (no parentheses) on line 21, Form 1040, and combine it with your other income to arrive at total income on line 22 of Form 1040. 2011 tax act In this situation (Example 4), you would probably not want to choose the foreign earned income exclusion if this was the first year you were eligible. 2011 tax act If you had chosen the exclusion in an earlier year, you might want to revoke the choice for this year. 2011 tax act To do so would mean that you could not claim the exclusion again for the next 5 tax years without IRS approval. 2011 tax act See Choosing the Exclusion in chapter 4. 2011 tax act Example 5. 2011 tax act You are a U. 2011 tax act S. 2011 tax act citizen, have a tax home in Panama, and meet the bona fide residence test. 2011 tax act You have been performing services for clients as a partner in a firm that provides services exclusively in Panama. 2011 tax act Capital investment is not material in producing the partnership's income. 2011 tax act Under the terms of the partnership agreement, you are to receive 50% of the net profits. 2011 tax act The partnership received gross income of $244,000 and incurred operating expenses of $98,250. 2011 tax act Of the net profits of $145,750, you received $72,875 as your distributive share. 2011 tax act You choose to exclude $97,600 of your share of the gross income. 2011 tax act Because you exclude 80% ($97,600 ÷ $122,000) of your share of the gross income, you cannot deduct $39,300, 80% of your share of the operating expenses (. 2011 tax act 80 × $49,125). 2011 tax act Report $72,875, your distributive share of the partnership net profit, on Schedule E (Form 1040), Supplemental Income and Loss. 2011 tax act On Form 2555, show $97,600 on line 42 and show $39,300 on line 44. 2011 tax act Your exclusion on Form 2555 is $58,300. 2011 tax act In this situation (Example 5), you cannot use Form 2555-EZ since you had earned income other than salaries and wages and you had business expenses. 2011 tax act Prev  Up  Next   Home   More Online Publications
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The 2011 Tax Act

2011 tax act 4. 2011 tax act   Foreign Earned Income and Housing: Exclusion – Deduction Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Who Qualifies for the Exclusions and the Deduction? RequirementsTax Home in Foreign Country Bona Fide Residence Test Physical Presence Test Waiver of Time Requirements U. 2011 tax act S. 2011 tax act Travel Restrictions Foreign Earned Income Foreign Earned Income ExclusionLimit on Excludable Amount Choosing the Exclusion Foreign Housing Exclusion and DeductionHousing Amount Foreign Housing Exclusion Foreign Housing Deduction Married Couples Form 2555 and Form 2555-EZForm 2555-EZ Form 2555 Topics - This chapter discusses: Who qualifies for the foreign earned income exclusion, the foreign housing exclusion, and the foreign housing deduction, The requirements that must be met to claim either exclusion or the deduction, How to figure the foreign earned income exclusion, and How to figure the foreign housing exclusion and the foreign housing deduction. 2011 tax act Useful Items - You may want to see: Publication 519 U. 2011 tax act S. 2011 tax act Tax Guide for Aliens 570 Tax Guide for Individuals With Income from U. 2011 tax act S. 2011 tax act Possessions 596 Earned Income Credit (EIC) Form (and Instructions) 1040X Amended U. 2011 tax act S. 2011 tax act Individual Income Tax Return 2555 Foreign Earned Income 2555-EZ Foreign Earned Income Exclusion See chapter 7 for information about getting these publications and forms. 2011 tax act Who Qualifies for the Exclusions and the Deduction? If you meet certain requirements, you may qualify for the foreign earned income and foreign housing exclusions and the foreign housing deduction. 2011 tax act If you are a U. 2011 tax act S. 2011 tax act citizen or a resident alien of the United States and you live abroad, you are taxed on your worldwide income. 2011 tax act However, you may qualify to exclude from income up to $97,600 of your foreign earnings. 2011 tax act In addition, you can exclude or deduct certain foreign housing amounts. 2011 tax act See Foreign Earned Income Exclusion and Foreign Housing Exclusion and Deduction, later. 2011 tax act You also may be entitled to exclude from income the value of meals and lodging provided to you by your employer. 2011 tax act See Exclusion of Meals and Lodging, later. 2011 tax act Requirements To claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, you must meet all three of the following requirements. 2011 tax act Your tax home must be in a foreign country. 2011 tax act You must have foreign earned income. 2011 tax act You must be one of the following. 2011 tax act A U. 2011 tax act S. 2011 tax act citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. 2011 tax act A U. 2011 tax act S. 2011 tax act 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. 2011 tax act A U. 2011 tax act S. 2011 tax act citizen or a U. 2011 tax act S. 2011 tax act 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. 2011 tax act See Publication 519 to find out if you are a U. 2011 tax act S. 2011 tax act resident alien for tax purposes and whether you keep that alien status when you temporarily work abroad. 2011 tax act If you are a nonresident alien married to a U. 2011 tax act S. 2011 tax act 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. 2011 tax act For information on making the choice, see the discussion in chapter 1 under Nonresident Alien Spouse Treated as a Resident . 2011 tax act Waiver of minimum time requirements. 2011 tax act   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. 2011 tax act This is fully explained under Waiver of Time Requirements , later. 2011 tax act   See Figure 4-A and information in this chapter to determine if you are eligible to claim either exclusion or the deduction. 2011 tax act Tax Home in Foreign Country To 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. 2011 tax act Bona fide residence and physical presence are explained later. 2011 tax act Tax Home Your 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. 2011 tax act Your tax home is the place where you are permanently or indefinitely engaged to work as an employee or self-employed individual. 2011 tax act Having a “tax home” in a given location does not necessarily mean that the given location is your residence or domicile for tax purposes. 2011 tax act 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. 2011 tax act 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. 2011 tax act 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. 2011 tax act However, your abode is not necessarily in the United States while you are temporarily in the United States. 2011 tax act 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. 2011 tax act “Abode” has been variously defined as one's home, habitation, residence, domicile, or place of dwelling. 2011 tax act It does not mean your principal place of business. 2011 tax act “Abode” has a domestic rather than a vocational meaning and does not mean the same as “tax home. 2011 tax act ” The location of your abode often will depend on where you maintain your economic, family, and personal ties. 2011 tax act Example 1. 2011 tax act You 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. 2011 tax act You return to your family residence in the United States during your off periods. 2011 tax act You are considered to have an abode in the United States and do not satisfy the tax home test in the foreign country. 2011 tax act You cannot claim either of the exclusions or the housing deduction. 2011 tax act Example 2. 2011 tax act For several years, you were a marketing executive with a producer of machine tools in Toledo, Ohio. 2011 tax act 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. 2011 tax act Before you left, you distributed business cards showing your business and home addresses in London. 2011 tax act You kept ownership of your home in Toledo but rented it to another family. 2011 tax act You placed your car in storage. 2011 tax act In November of last year, you moved your spouse, children, furniture, and family pets to a home your employer rented for you in London. 2011 tax act Shortly after moving, you leased a car and you and your spouse got British driving licenses. 2011 tax act Your entire family got library cards for the local public library. 2011 tax act You and your spouse opened bank accounts with a London bank and secured consumer credit. 2011 tax act 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. 2011 tax act Your abode is in London for the time you live there. 2011 tax act You satisfy the tax home test in the foreign country. 2011 tax act Please click here for the text description of the image. 2011 tax act Figure 4–A Can I Claim the Exclusion or Deduction? Temporary or Indefinite Assignment The location of your tax home often depends on whether your assignment is temporary or indefinite. 2011 tax act 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. 2011 tax act 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. 2011 tax act 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. 2011 tax act 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. 2011 tax act If you expect it to last for more than 1 year, it is indefinite. 2011 tax act 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. 2011 tax act Once your expectation changes, it is indefinite. 2011 tax act Foreign Country To meet the bona fide residence test or the physical presence test, you must live in or be present in a foreign country. 2011 tax act A foreign country includes any territory under the sovereignty of a government other than that of the United States. 2011 tax act The term “foreign country” includes the country's airspace and territorial waters, but not international waters and the airspace above them. 2011 tax act 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. 2011 tax act The term “foreign country” does not include Antarctica or U. 2011 tax act S. 2011 tax act possessions such as Puerto Rico, Guam, the Commonwealth of the Northern Mariana Islands, the U. 2011 tax act S. 2011 tax act Virgin Islands, and Johnston Island. 2011 tax act 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. 2011 tax act American Samoa, Guam, and the Commonwealth of the Northern Mariana Islands Residence or presence in a U. 2011 tax act S. 2011 tax act possession does not qualify you for the foreign earned income exclusion. 2011 tax act You may, however, qualify for an exclusion of your possession income on your U. 2011 tax act S. 2011 tax act return. 2011 tax act American Samoa. 2011 tax act   There is a possession exclusion available to individuals who are bona fide residents of American Samoa for the entire tax year. 2011 tax act Gross income from sources within American Samoa may be eligible for this exclusion. 2011 tax act Income that is effectively connected with the conduct of a trade or business within American Samoa also may be eligible for this exclusion. 2011 tax act Use Form 4563, Exclusion of Income for Bona Fide Residents of American Samoa, to figure the exclusion. 2011 tax act Guam and the Commonwealth of the Northern Mariana Islands. 2011 tax act   An 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. 2011 tax act   For more information, see Publication 570. 2011 tax act Puerto Rico and U. 2011 tax act S. 2011 tax act Virgin Islands Residents of Puerto Rico and the U. 2011 tax act S. 2011 tax act Virgin Islands cannot claim the foreign earned income exclusion or the foreign housing exclusion. 2011 tax act Puerto Rico. 2011 tax act   Generally, if you are a U. 2011 tax act S. 2011 tax act citizen who is a bona fide resident of Puerto Rico for the entire tax year, you are not subject to U. 2011 tax act S. 2011 tax act tax on income from Puerto Rican sources. 2011 tax act This does not include amounts paid for services performed as an employee of the United States. 2011 tax act However, you are subject to U. 2011 tax act S. 2011 tax act tax on your income from sources outside Puerto Rico. 2011 tax act In figuring your U. 2011 tax act S. 2011 tax act tax, you cannot deduct expenses allocable to income not subject to tax. 2011 tax act Bona Fide Residence Test You 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. 2011 tax act You can use the bona fide residence test to qualify for the exclusions and the deduction only if you are either: A U. 2011 tax act S. 2011 tax act citizen, or A U. 2011 tax act S. 2011 tax act resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect. 2011 tax act You do not automatically acquire bona fide resident status merely by living in a foreign country or countries for 1 year. 2011 tax act 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. 2011 tax act 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. 2011 tax act Bona fide residence. 2011 tax act   To meet the bona fide residence test, you must have established a bona fide residence in a foreign country. 2011 tax act   Your bona fide residence is not necessarily the same as your domicile. 2011 tax act Your domicile is your permanent home, the place to which you always return or intend to return. 2011 tax act Example. 2011 tax act You could have your domicile in Cleveland, Ohio, and a bona fide residence in Edinburgh, Scotland, if you intend to return eventually to Cleveland. 2011 tax act The fact that you go to Scotland does not automatically make Scotland your bona fide residence. 2011 tax act 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. 2011 tax act 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. 2011 tax act You are clearly not a resident of Scotland in the first instance. 2011 tax act However, in the second, you are a resident because your stay in Scotland appears to be permanent. 2011 tax act 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. 2011 tax act Determination. 2011 tax act   Questions 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. 2011 tax act   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. 2011 tax act 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. 2011 tax act IRS cannot make this determination until you file Form 2555. 2011 tax act Statement to foreign authorities. 2011 tax act   You 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. 2011 tax act Special agreements and treaties. 2011 tax act   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. 2011 tax act 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. 2011 tax act Example 1. 2011 tax act You are a U. 2011 tax act S. 2011 tax act citizen employed in the United Kingdom by a U. 2011 tax act S. 2011 tax act employer under contract with the U. 2011 tax act S. 2011 tax act Armed Forces. 2011 tax act You are not subject to the North Atlantic Treaty Status of Forces Agreement. 2011 tax act You may be a bona fide resident of the United Kingdom. 2011 tax act Example 2. 2011 tax act You are a U. 2011 tax act S. 2011 tax act 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. 2011 tax act You are not a bona fide resident of the United Kingdom. 2011 tax act Example 3. 2011 tax act You are a U. 2011 tax act S. 2011 tax act citizen employed in Japan by a U. 2011 tax act S. 2011 tax act employer under contract with the U. 2011 tax act S. 2011 tax act Armed Forces. 2011 tax act You are subject to the agreement of the Treaty of Mutual Cooperation and Security between the United States and Japan. 2011 tax act Being subject to the agreement does not make you a bona fide resident of Japan. 2011 tax act Example 4. 2011 tax act You are a U. 2011 tax act S. 2011 tax act citizen employed as an “official” by the United Nations in Switzerland. 2011 tax act You are exempt from Swiss taxation on the salary or wages paid to you by the United Nations. 2011 tax act This does not prevent you from being a bona fide resident of Switzerland. 2011 tax act Effect of voting by absentee ballot. 2011 tax act   If you are a U. 2011 tax act S. 2011 tax act 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. 2011 tax act   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. 2011 tax act Uninterrupted period including entire tax year. 2011 tax act   To 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. 2011 tax act An entire tax year is from January 1 through December 31 for taxpayers who file their income tax returns on a calendar year basis. 2011 tax act   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. 2011 tax act 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. 2011 tax act Example 1. 2011 tax act You arrived with your family in Lisbon, Portugal, on November 1, 2011. 2011 tax act Your assignment is indefinite, and you intend to live there with your family until your company sends you to a new post. 2011 tax act You immediately established residence there. 2011 tax act You spent April of 2012 at a business conference in the United States. 2011 tax act Your family stayed in Lisbon. 2011 tax act Immediately following the conference, you returned to Lisbon and continued living there. 2011 tax act On January 1, 2013, you completed an uninterrupted period of residence for a full tax year (2012), and you meet the bona fide residence test. 2011 tax act Example 2. 2011 tax act Assume the same facts as in Example 1, except that you transferred back to the United States on December 13, 2012. 2011 tax act 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. 2011 tax act You may, however, qualify for the foreign earned income exclusion or the housing exclusion or deduction under the physical presence test (discussed later). 2011 tax act Bona fide resident for part of a year. 2011 tax act   Once 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. 2011 tax act Your period of bona fide residence can include an entire tax year plus parts of 2 other tax years. 2011 tax act Example. 2011 tax act You were a bona fide resident of Singapore from March 1, 2011, through September 14, 2013. 2011 tax act On September 15, 2013, you returned to the United States. 2011 tax act Since you were a bona fide resident of a foreign country for all of 2012, you were also a bona fide resident of a foreign country from March 1, 2011, through the end of 2011 and from January 1, 2013, through September 14, 2013. 2011 tax act Reassignment. 2011 tax act   If 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. 2011 tax act Example 1. 2011 tax act You were a resident of Pakistan from October 1, 2012, through November 30, 2013. 2011 tax act On December 1, 2013, you and your family returned to the United States to wait for an assignment to another foreign country. 2011 tax act Your household goods also were returned to the United States. 2011 tax act Your foreign residence ended on November 30, 2013, and did not begin again until after you were assigned to another foreign country and physically entered that country. 2011 tax act Since you were not a bona fide resident of a foreign country for the entire tax year of 2012 or 2013 you do not meet the bona fide residence test in either year. 2011 tax act You may, however, qualify for the foreign earned income exclusion or the housing exclusion or deduction under the physical presence test, discussed later. 2011 tax act Example 2. 2011 tax act Assume the same facts as in Example 1, except that upon completion of your assignment in Pakistan you were given a new assignment to Turkey. 2011 tax act On December 1, 2013, you and your family returned to the United States for a month's vacation. 2011 tax act On January 2, 2014, you arrived in Turkey for your new assignment. 2011 tax act Because you did not interrupt your bona fide residence abroad, you meet the bona fide residence test. 2011 tax act Physical Presence Test You 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. 2011 tax act The 330 days do not have to be consecutive. 2011 tax act Any U. 2011 tax act S. 2011 tax act citizen or resident alien can use the physical presence test to qualify for the exclusions and the deduction. 2011 tax act The physical presence test is based only on how long you stay in a foreign country or countries. 2011 tax act 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. 2011 tax act 330 full days. 2011 tax act   Generally, 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. 2011 tax act You can count days you spent abroad for any reason. 2011 tax act You do not have to be in a foreign country only for employment purposes. 2011 tax act You can be on vacation. 2011 tax act   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. 2011 tax act Exception. 2011 tax act   You 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. 2011 tax act See Waiver of Time Requirements, later. 2011 tax act Full day. 2011 tax act   A full day is a period of 24 consecutive hours, beginning at midnight. 2011 tax act Travel. 2011 tax act    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. 2011 tax act Example. 2011 tax act You leave the United States for France by air on June 10. 2011 tax act You arrive in France at 9:00 a. 2011 tax act m. 2011 tax act on June 11. 2011 tax act Your first full day of physical presence in France is June 12. 2011 tax act Passing over foreign country. 2011 tax act   If, 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. 2011 tax act Example. 2011 tax act You leave the United States by air at 9:30 a. 2011 tax act m. 2011 tax act on June 10 to travel to Kenya. 2011 tax act You pass over western Africa at 11:00 p. 2011 tax act m. 2011 tax act on June 10 and arrive in Kenya at 12:30 a. 2011 tax act m. 2011 tax act on June 11. 2011 tax act Your first full day in a foreign country is June 11. 2011 tax act Change of location. 2011 tax act   You can move about from one place to another in a foreign country or to another foreign country without losing full days. 2011 tax act 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. 2011 tax act Example 1. 2011 tax act You leave Ireland by air at 11:00 p. 2011 tax act m. 2011 tax act on July 6 and arrive in Sweden at 5:00 a. 2011 tax act m. 2011 tax act on July 7. 2011 tax act Your trip takes less than 24 hours and you lose no full days. 2011 tax act Example 2. 2011 tax act You leave Norway by ship at 10:00 p. 2011 tax act m. 2011 tax act on July 6 and arrive in Portugal at 6:00 a. 2011 tax act m. 2011 tax act on July 8. 2011 tax act 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. 2011 tax act If you remain in Portugal, your next full day in a foreign country is July 9. 2011 tax act In United States while in transit. 2011 tax act   If 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. 2011 tax act You are treated as traveling over areas not within any foreign country. 2011 tax act    Please click here for the text description of the image. 2011 tax act Figure 4-B How to figure the 12-month period. 2011 tax act   There are four rules you should know when figuring the 12-month period. 2011 tax act Your 12-month period can begin with any day of the month. 2011 tax act It ends the day before the same calendar day, 12 months later. 2011 tax act Your 12-month period must be made up of consecutive months. 2011 tax act Any 12-month period can be used if the 330 days in a foreign country fall within that period. 2011 tax act 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. 2011 tax act You can choose the 12-month period that gives you the greatest exclusion. 2011 tax act In determining whether the 12-month period falls within a longer stay in the foreign country, 12-month periods can overlap one another. 2011 tax act Example 1. 2011 tax act You are a construction worker who works on and off in a foreign country over a 20-month period. 2011 tax act 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. 2011 tax act Example 2. 2011 tax act You work in New Zealand for a 20-month period from January 1, 2012, through August 31, 2013, except that you spend 28 days in February 2012 and 28 days in February 2013 on vacation in the United States. 2011 tax act You are present in New Zealand for at least 330 full days during each of the following two 12-month periods: January 1, 2012 – December 31, 2012 and September 1, 2012 – August 31, 2013. 2011 tax act By overlapping the 12-month periods in this way, you meet the physical presence test for the whole 20-month period. 2011 tax act See Figure 4-B, on the previous page. 2011 tax act Waiver of Time Requirements Both the bona fide residence test and the physical presence test contain minimum time requirements. 2011 tax act 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. 2011 tax act You must be able to show that you reasonably could have expected to meet the minimum time requirements if not for the adverse conditions. 2011 tax act 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. 2011 tax act Early in 2014, the IRS will publish in the Internal Revenue Bulletin a list of the only countries that qualify for the waiver for 2013 and the effective dates. 2011 tax act 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 2013 without meeting the minimum time requirement. 2011 tax act 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. 2011 tax act U. 2011 tax act S. 2011 tax act Travel Restrictions If you are present in a foreign country in violation of U. 2011 tax act S. 2011 tax act 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. 2011 tax act 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. 2011 tax act 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. 2011 tax act For 2013, the only country to which travel restrictions applied was Cuba. 2011 tax act The restrictions applied for the entire year. 2011 tax act However, individuals working at the U. 2011 tax act S. 2011 tax act Naval Base at Guantanamo Bay in Cuba are not in violation of U. 2011 tax act S. 2011 tax act law. 2011 tax act Personal service income earned by individuals at the base is eligible for the foreign earned income exclusion provided the other requirements are met. 2011 tax act Foreign Earned Income To claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, you must have foreign earned income. 2011 tax act Foreign earned income generally is income you receive for services you perform during a period in which you meet both of the following requirements. 2011 tax act Your tax home is in a foreign country. 2011 tax act You meet either the bona fide residence test or the physical presence test. 2011 tax act To determine whether your tax home is in a foreign country, see Tax Home in Foreign Country, earlier. 2011 tax act 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. 2011 tax act Foreign earned income does not include the following amounts. 2011 tax act 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. 2011 tax act Pension or annuity payments you receive, including social security benefits (see Pensions and annuities, later). 2011 tax act Pay you receive as an employee of the U. 2011 tax act S. 2011 tax act Government. 2011 tax act (See U. 2011 tax act S. 2011 tax act Government Employees, later. 2011 tax act ) Amounts you include in your income because of your employer's contributions to a nonexempt employee trust or to a nonqualified annuity contract. 2011 tax act 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. 2011 tax act Payments you receive after the end of the tax year following the tax year in which you performed the services that earned the income. 2011 tax act Earned income. 2011 tax act   This is pay for personal services performed, such as wages, salaries, or professional fees. 2011 tax act The list that follows classifies many types of income into three categories. 2011 tax act The column headed Variable Income lists income that may fall into either the earned income category, the unearned income category, or partly into both. 2011 tax act For more information on earned and unearned income, see Earned and Unearned Income, later. 2011 tax act 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. 2011 tax act Noncash income. 2011 tax act   The 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. 2011 tax act Allowances or reimbursements. 2011 tax act   Earned income includes allowances or reimbursements you receive, such as the following amounts. 2011 tax act    Cost-of-living allowances. 2011 tax act Overseas differential. 2011 tax act Family allowance. 2011 tax act Reimbursement for education or education allowance. 2011 tax act Home leave allowance. 2011 tax act Quarters allowance. 2011 tax act Reimbursement for moving or moving allowance (unless excluded from income as discussed later in Reimbursement of employee expenses under Earned and Unearned Income). 2011 tax act Source of Earned Income The source of your earned income is the place where you perform the services for which you received the income. 2011 tax act Foreign earned income is income you receive for working in a foreign country. 2011 tax act Where or how you are paid has no effect on the source of the income. 2011 tax act 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. 2011 tax act Example. 2011 tax act You are a U. 2011 tax act S. 2011 tax act citizen, a bona fide resident of Canada, and working as a mining engineer. 2011 tax act Your salary is $76,800 per year. 2011 tax act You also receive a $6,000 cost-of-living allowance, and a $6,000 education allowance. 2011 tax act Your employment contract did not indicate that you were entitled to these allowances only while outside the United States. 2011 tax act Your total income is $88,800. 2011 tax act You work a 5-day week, Monday through Friday. 2011 tax act After subtracting your vacation, you have a total of 240 workdays in the year. 2011 tax act You worked in the United States during the year for 6 weeks (30 workdays). 2011 tax act The following shows how to figure the part of your income that is for work done in Canada during the year. 2011 tax act   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. 2011 tax act Earned and Unearned Income Earned income was defined earlier as pay for personal services performed. 2011 tax act Some types of income are not easily identified as earned or unearned income. 2011 tax act Some of these types of income are further explained here. 2011 tax act Income from a sole proprietorship or partnership. 2011 tax act   Income from a business in which capital investment is an important part of producing the income may be unearned income. 2011 tax act 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. 2011 tax act Capital a factor. 2011 tax act   If 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. 2011 tax act   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. 2011 tax act Because you do not have a net profit, the 30% limit does not apply. 2011 tax act Example 1. 2011 tax act You are a U. 2011 tax act S. 2011 tax act citizen and meet the bona fide residence test. 2011 tax act You invest in a partnership based in Cameroon that is engaged solely in selling merchandise outside the United States. 2011 tax act You perform no services for the partnership. 2011 tax act At the end of the tax year, your share of the net profits is $80,000. 2011 tax act The entire $80,000 is unearned income. 2011 tax act Example 2. 2011 tax act Assume that in Example 1 you spend time operating the business. 2011 tax act Your share of the net profits is $80,000; 30% of your share of the profits is $24,000. 2011 tax act 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. 2011 tax act Capital not a factor. 2011 tax act   If capital is not an income-producing factor and personal services produce the business income, the 30% rule does not apply. 2011 tax act The entire amount of business income is earned income. 2011 tax act Example. 2011 tax act You and Lou Green are management consultants and operate as equal partners in performing services outside the United States. 2011 tax act Because capital is not an income- producing factor, all the income from the partnership is considered earned income. 2011 tax act Income from a corporation. 2011 tax act   The 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. 2011 tax act Any amount over what is considered a reasonable salary is unearned income. 2011 tax act Example 1. 2011 tax act You are a U. 2011 tax act S. 2011 tax act citizen and an officer and stockholder of a corporation in Honduras. 2011 tax act You perform no work or service of any kind for the corporation. 2011 tax act During the tax year you receive a $10,000 “salary” from the corporation. 2011 tax act The $10,000 clearly is not for personal services and is unearned income. 2011 tax act Example 2. 2011 tax act You are a U. 2011 tax act S. 2011 tax act citizen and work full time as secretary-treasurer of your corporation. 2011 tax act During the tax year you receive $100,000 as salary from the corporation. 2011 tax act If $80,000 is a reasonable allowance as pay for the work you did, then $80,000 is earned income. 2011 tax act Stock options. 2011 tax act   You 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. 2011 tax act   If your gain on the disposition of stock you got by exercising an option is treated as capital gain, your gain is unearned income. 2011 tax act   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. 2011 tax act 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. 2011 tax act Any part of the earned income that is due to work you did outside the United States is foreign earned income. 2011 tax act   See Publication 525, Taxable and Nontaxable Income, for a discussion of the treatment of stock options. 2011 tax act Pensions and annuities. 2011 tax act    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. 2011 tax act Royalties. 2011 tax act   Royalties from the leasing of oil and mineral lands and patents generally are a form of rent or dividends and are unearned income. 2011 tax act   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. 2011 tax act Rental income. 2011 tax act   Generally, rental income is unearned income. 2011 tax act 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. 2011 tax act Example. 2011 tax act Larry Smith, a U. 2011 tax act S. 2011 tax act citizen living in Australia, owns and operates a rooming house in Sydney. 2011 tax act 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. 2011 tax act 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. 2011 tax act It is all unearned income. 2011 tax act Professional fees. 2011 tax act   If 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. 2011 tax act Income of an artist. 2011 tax act   Income you receive from the sale of paintings you created is earned income. 2011 tax act Scholarships and fellowships. 2011 tax act   Any 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. 2011 tax act 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. 2011 tax act    Certain scholarship and fellowship income may be exempt under other provisions. 2011 tax act See Publication 970, Tax Benefits for Education, chapter 1. 2011 tax act Use of employer's property or facilities. 2011 tax act   If 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. 2011 tax act 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. 2011 tax act Example. 2011 tax act You are privately employed and live in Japan all year. 2011 tax act You are paid a salary of $6,000 a month. 2011 tax act You live rent-free in a house provided by your employer that has a fair rental value of $3,000 a month. 2011 tax act The house is not provided for your employer's convenience. 2011 tax act You report on the calendar-year, cash basis. 2011 tax act 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. 2011 tax act Reimbursement of employee expenses. 2011 tax act   If 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. 2011 tax act   The expenses for which you are reimbursed are not considered allocable (related) to your earned income. 2011 tax act If expenses and reimbursement are equal, there is nothing to allocate to excluded income. 2011 tax act 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. 2011 tax act (See chapter 5. 2011 tax act ) 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. 2011 tax act   These rules do not apply to the following individuals. 2011 tax act Straight-commission salespersons. 2011 tax act 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. 2011 tax act Accountable plan. 2011 tax act   An accountable plan is a reimbursement or allowance arrangement that includes all three of the following rules. 2011 tax act The expenses covered under the plan must have a business connection. 2011 tax act The employee must adequately account to the employer for these expenses within a reasonable period of time. 2011 tax act The employee must return any excess reimbursement or allowance within a reasonable period of time. 2011 tax act Reimbursement of moving expenses. 2011 tax act   Reimbursement of moving expenses may be earned income. 2011 tax act 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. 2011 tax act This section discusses reimbursements that must be included in earned income. 2011 tax act Publication 521, Moving Expenses, discusses additional rules that apply to moving expense deductions and reimbursements. 2011 tax act   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. 2011 tax act   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. 2011 tax act 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. 2011 tax act Move from U. 2011 tax act S. 2011 tax act to foreign country. 2011 tax act   If 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. 2011 tax act 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. 2011 tax act   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. 2011 tax act To figure the amount earned in the year of the move, multiply the reimbursement by a fraction. 2011 tax act 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. 2011 tax act   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. 2011 tax act The part earned in each year is figured as shown in the following example. 2011 tax act Example. 2011 tax act You are a U. 2011 tax act S. 2011 tax act citizen working in the United States. 2011 tax act You were told in October 2012 that you were being transferred to a foreign country. 2011 tax act You arrived in the foreign country on December 15, 2012, and you are a bona fide resident for the remainder of 2012 and all of 2013. 2011 tax act Your employer reimbursed you $2,000 in January 2013 for the part of the moving expense that you were not allowed to deduct. 2011 tax act Because you did not qualify for the exclusion under the bona fide residence test for at least 120 days in 2012 (the year of the move), the reimbursement is considered pay for services performed in the foreign country for both 2012 and 2013. 2011 tax act You figure the part of the reimbursement for services performed in the foreign country in 2012 by multiplying the total reimbursement by a fraction. 2011 tax act The fraction is the number of days during which you were a bona fide resident in 2012 (the year of the move) divided by 366. 2011 tax act The remaining part of the reimbursement is for services performed in the foreign country in 2013. 2011 tax act This computation is used only to determine when the reimbursement is considered earned. 2011 tax act You would include the amount of the reimbursement in income in 2013, the year you received it. 2011 tax act Move between foreign countries. 2011 tax act   If 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. 2011 tax act Move to U. 2011 tax act S. 2011 tax act   If you move to the United States, the moving expense reimbursement that you must include in income is generally considered to be U. 2011 tax act S. 2011 tax act source income. 2011 tax act   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. 2011 tax act 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. 2011 tax act 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. 2011 tax act   See the discussion under Move from U. 2011 tax act S. 2011 tax act to foreign country , earlier, to figure the amount of the includible reimbursement considered earned in the year of the move. 2011 tax act 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. 2011 tax act Example. 2011 tax act You are a U. 2011 tax act S. 2011 tax act citizen employed in a foreign country. 2011 tax act You retired from employment with your employer on March 31, 2013, and returned to the United States after having been a bona fide resident of the foreign country for several years. 2011 tax act 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. 2011 tax act In April 2013, 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. 2011 tax act Because you were not a bona fide resident of a foreign country or countries for a period that included at least 120 days in 2013 (the year of the move), the includible reimbursement is considered pay for services performed in the foreign country for both 2013 and 2012. 2011 tax act You figure the part of the moving expense reimbursement for services performed in the foreign country for 2013 by multiplying the total includible reimbursement by a fraction. 2011 tax act The fraction is the number of days of foreign residence during the year (90) divided by the number of days in the year (365). 2011 tax act The remaining part of the includible reimbursement is for services performed in the foreign country in 2012. 2011 tax act You report the amount of the includible reimbursement in 2013, the year you received it. 2011 tax act    In this example, if you met the physical presence test for a period that included at least 120 days in 2013, the moving expense reimbursement would be considered earned entirely in the year of the move. 2011 tax act Storage expense reimbursements. 2011 tax act   If 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. 2011 tax act U. 2011 tax act S. 2011 tax act Government Employees For 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. 2011 tax act This includes amounts paid from both appropriated and nonappropriated funds. 2011 tax act 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. 2011 tax act United States Armed Forces exchanges. 2011 tax act Commissioned and noncommissioned officers' messes. 2011 tax act Armed Forces motion picture services. 2011 tax act Kindergartens on foreign Armed Forces installations. 2011 tax act Amounts paid by the United States or its agencies to persons who are not their employees may qualify for exclusion or deduction. 2011 tax act If you are a U. 2011 tax act S. 2011 tax act Government employee paid by a U. 2011 tax act S. 2011 tax act 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. 2011 tax act S. 2011 tax act Government and does not qualify for exclusion or deduction. 2011 tax act If you have questions about whether you are an employee or an independent contractor, get Publication 15-A, Employer's Supplemental Tax Guide. 2011 tax act American Institute in Taiwan. 2011 tax act   Amounts 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. 2011 tax act If you are an employee of the American Institute in Taiwan, allowances you receive are exempt from U. 2011 tax act S. 2011 tax act tax up to the amount that equals tax-exempt allowances received by civilian employees of the U. 2011 tax act S. 2011 tax act Government. 2011 tax act Allowances. 2011 tax act   Cost-of-living and foreign-area allowances paid under certain acts of Congress to U. 2011 tax act S. 2011 tax act 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. 2011 tax act Post differentials are wages that must be included in gross income, regardless of the act of Congress under which they are paid. 2011 tax act More information. 2011 tax act   Publication 516, U. 2011 tax act S. 2011 tax act Government Civilian Employees Stationed Abroad, has more information for U. 2011 tax act S. 2011 tax act Government employees abroad. 2011 tax act Exclusion of Meals and Lodging You 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. 2011 tax act The meals are furnished: On the business premises of your employer, and For the convenience of your employer. 2011 tax act The lodging is furnished: On the business premises of your employer, For the convenience of your employer, and As a condition of your employment. 2011 tax act 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. 2011 tax act Amounts you do not include in income because of these rules are not foreign earned income. 2011 tax act If you receive a Form W-2, excludable amounts should not be included in the total reported in box 1 as wages. 2011 tax act Family. 2011 tax act   Your family, for this purpose, includes only your spouse and your dependents. 2011 tax act Lodging. 2011 tax act   The 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. 2011 tax act Business premises of employer. 2011 tax act   Generally, the business premises of your employer is wherever you work. 2011 tax act 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. 2011 tax act 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. 2011 tax act Convenience of employer. 2011 tax act   Whether meals or lodging are provided for your employer's convenience must be determined from all the facts and circumstances. 2011 tax act 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. 2011 tax act   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. 2011 tax act Condition of employment. 2011 tax act   Lodging is provided as a condition of employment if you must accept the lodging to properly carry out the duties of your job. 2011 tax act 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. 2011 tax act Foreign camps. 2011 tax act   If the lodging is in a camp located in a foreign country, the camp is considered part of your employer's business premises. 2011 tax act 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. 2011 tax act Foreign Earned Income Exclusion If your tax home is in a foreign country and you meet the bona fide residence test or the physical presence test, you can choose to exclude from your income a limited amount of your foreign earned income. 2011 tax act Foreign earned income was defined earlier in this chapter. 2011 tax act You also can choose to exclude from your income a foreign housing amount. 2011 tax act This is explained later under Foreign Housing Exclusion. 2011 tax act If you choose to exclude a foreign housing amount, you must figure the foreign housing exclusion before you figure the foreign earned income exclusion. 2011 tax act Your foreign earned income exclusion is limited to your foreign earned income minus your foreign housing exclusion. 2011 tax act If you choose to exclude foreign earned income, you cannot deduct, exclude, or claim a credit for any item that can be allocated to or charged against the excluded amounts. 2011 tax act This includes any expenses, losses, and other normally deductible items allocable to the excluded income. 2011 tax act For more information about deductions and credits, see chapter 5 . 2011 tax act Limit on Excludable Amount You may be able to exclude up to $97,600 of your foreign earned income in 2013. 2011 tax act You cannot exclude more than the smaller of: $97,600, or Your foreign earned income (discussed earlier) for the tax year minus your foreign housing exclusion (discussed later). 2011 tax act If both you and your spouse work abroad and each of you meets either the bona fide residence test or the physical presence test, you can each choose the foreign earned income exclusion. 2011 tax act You do not both need to meet the same test. 2011 tax act Together, you and your spouse can exclude as much as $195,200. 2011 tax act Paid in year following work. 2011 tax act   Generally, you are considered to have earned income in the year in which you do the work for which you receive the income, even if you work in one year but are not paid until the following year. 2011 tax act If you report your income on a cash basis, you report the income on your return for the year you receive it. 2011 tax act If you work one year, but are not paid for that work until the next year, the amount you can exclude in the year you are paid is the amount you could have excluded in the year you did the work if you had been paid in that year. 2011 tax act For an exception to this general rule, see Year-end payroll period, later. 2011 tax act Example. 2011 tax act You were a bona fide resident of Brazil for all of 2012 and 2013. 2011 tax act You report your income on the cash basis. 2011 tax act In 2012, you were paid $84,200 for work you did in Brazil during that year. 2011 tax act You excluded all of the $84,200 from your income in 2012. 2011 tax act In 2013, you were paid $117,300 for your work in Brazil. 2011 tax act $18,800 was for work you did in 2012 and $98,500 was for work you did in 2013. 2011 tax act You can exclude $10,900 of the $18,800 from your income in 2013. 2011 tax act This is the $95,100 maximum exclusion in 2012 minus the $84,200 actually excluded that year. 2011 tax act You must include the remaining $7,900 in income in 2013 because you could not have excluded that income in 2012 if you had received it that year. 2011 tax act You can exclude $97,600 of the $98,500 you were paid for work you did in 2013 from your 2013 income. 2011 tax act Your total foreign earned income exclusion for 2013 is $108,500 ($10,900 for work you did in 2012 and $97,600 for work you did in 2013). 2011 tax act You would include in your 2013 income $8,800 ($7,900 for the work you did in 2012 and $900 for the work you did in 2013). 2011 tax act Year-end payroll period. 2011 tax act   There is an exception to the general rule that income is considered earned in the year you do the work for which you receive the income. 2011 tax act If you are a cash-basis taxpayer, any salary or wage payment you receive after the end of the year in which you do the work for which you receive the pay is considered earned entirely in the year you receive it if all four of the following apply. 2011 tax act The period for which the payment is made is a normal payroll period of your employer that regularly applies to you. 2011 tax act The payroll period includes the last day of your tax year (December 31 if you figure your taxes on a calendar-year basis). 2011 tax act The payroll period is not longer than 16 days. 2011 tax act The payday comes at the same time in relation to the payroll period that it would normally come and it comes before the end of the next payroll period. 2011 tax act Example. 2011 tax act You are paid twice a month. 2011 tax act For the normal payroll period that begins on the first of the month and ends on the fifteenth of the month, you are paid on the sixteenth day of the month. 2011 tax act For the normal payroll period that begins on the sixteenth of the month and ends on the last day of the month, you are paid on the first day of the following month. 2011 tax act Because all of the above conditions are met, the pay you received on January 1, 2013, is considered earned in 2013. 2011 tax act Income earned over more than 1 year. 2011 tax act   Regardless of when you actually receive income, you must apply it to the year in which you earned it in figuring your excludable amount for that year. 2011 tax act For example, a bonus may be based on work you did over several years. 2011 tax act You determine the amount of the bonus that is considered earned in a particular year in two steps. 2011 tax act Divide the bonus by the number of calendar months in the period when you did the work that resulted in the bonus. 2011 tax act Multiply the result of (1) by the number of months you did the work during the year. 2011 tax act This is the amount that is subject to the exclusion limit for that tax year. 2011 tax act Income received more than 1 year after it was earned. 2011 tax act   You cannot exclude income you receive after the end of the year following the year you do the work to earn it. 2011 tax act Example. 2011 tax act   You were a bona fide resident of Sweden for 2011, 2012, and 2013. 2011 tax act You report your income on the cash basis. 2011 tax act In 2011, you were paid $69,000 for work you did in Sweden that year and in 2012 you were paid $74,000 for that year's work in Sweden. 2011 tax act You excluded all the income on your 2011 and 2012 returns. 2011 tax act   In 2013, you were paid $92,000; $82,000 for your work in Sweden during 2013, and $10,000 for work you did in Sweden in 2011. 2011 tax act You cannot exclude any of the $10,000 for work done in 2011 because you received it after the end of the year following the year in which you earned it. 2011 tax act You must include the $10,000 in income. 2011 tax act You can exclude all of the $82,000 received for work you did in 2013. 2011 tax act Community income. 2011 tax act   The maximum exclusion applies separately to the earnings of spouses. 2011 tax act Ignore any community property laws when you figure your limit on the foreign earned income exclusion. 2011 tax act Part-year exclusion. 2011 tax act   If the period for which you qualify for the foreign earned income exclusion includes only part of the year, you must adjust the maximum limit based on the number of qualifying days in the year. 2011 tax act The number of qualifying days is the number of days in the year within the period on which you both: Have your tax home in a foreign country, and Meet either the bona fide residence test or the physical presence test. 2011 tax act   For this purpose, you can count as qualifying days all days within a period of 12 consecutive months once you are physically present and have your tax home in a foreign country for 330 full days. 2011 tax act To figure your maximum exclusion, multiply the maximum excludable amount for the year by the number of your qualifying days in the year, and then divide the result by the number of days in the year. 2011 tax act Example. 2011 tax act You report your income on the calendar-year basis and you qualified for the foreign earned income exclusion under the bona fide residence test for 75 days in 2013. 2011 tax act You can exclude a maximum of 75/365 of $97,600, or $20,055, of your foreign earned income for 2013. 2011 tax act If you qualify under the bona fide residence test for all of 2014, you can exclude your foreign earned income up to the 2014 limit. 2011 tax act Physical presence test. 2011 tax act   Under the physical presence test, a 12-month period can be any period of 12 consecutive months that includes 330 full days. 2011 tax act If you qualify for the foreign earned income exclusion under the physical presence test for part of a year, it is important to carefully choose the 12-month period that will allow the maximum exclusion for that year. 2011 tax act Example. 2011 tax act You are physically present and have your tax home in a foreign country for a 16-month period from June 1, 2012, through September 30, 2013, except for 16 days in December 2012 when you were on vacation in the United States. 2011 tax act You figure the maximum exclusion for 2012 as follows. 2011 tax act Beginning with June 1, 2012, count forward 330 full days. 2011 tax act Do not count the 16 days you spent in the United States. 2011 tax act The 330th day, May 12, 2013, is the last day of a 12-month period. 2011 tax act Count backward 12 months from May 11, 2013, to find the first day of this 12-month period, May 12, 2012. 2011 tax act This 12-month period runs from May 12, 2012, through May 11, 2013. 2011 tax act Count the total days during 2012 that fall within this 12-month period. 2011 tax act This is 234 days (May 12, 2012 – December 31, 2012). 2011 tax act Multiply $95,100 (the maximum exclusion for 2012) by the fraction 234/366 to find your maximum exclusion for 2012 ($60,802). 2011 tax act You figure the maximum exclusion for 2013 in the opposite manner. 2011 tax act Beginning with your last full day, September 30, 2013, count backward 330 full days. 2011 tax act Do not count the 16 days you spent in the United States. 2011 tax act That day, October 20, 2012, is the first day of a 12-month period. 2011 tax act Count forward 12 months from October 20, 2012, to find the last day of this 12-month period, October 19, 2013. 2011 tax act This 12-month period runs from October 20, 2012, through October 19, 2013. 2011 tax act Count the total days during 2013 that fall within this 12-month period. 2011 tax act This is 292 days (January 1, 2013 – October 19, 2013). 2011 tax act Multiply $97,600, the maximum limit, by the fraction 292/365 to find your maximum exclusion for 2013 ($78,080). 2011 tax act Choosing the Exclusion The foreign earned income exclusion is voluntary. 2011 tax act You can choose the exclusion by completing the appropriate parts of Form 2555. 2011 tax act When You Can Choose the Exclusion Your initial choice of the exclusion on Form 2555 or Form 2555-EZ generally must be made with one of the following returns. 2011 tax act A return filed by the due date (including any extensions). 2011 tax act A return amending a timely-filed return. 2011 tax act Amended returns generally must be filed by the later of 3 years after the filing date of the original return or 2 years after the tax is paid. 2011 tax act A return filed within 1 year from the original due date of the return (determined without regard to any extensions). 2011 tax act Filing after the above periods. 2011 tax act   You can choose the exclusion on a return filed after the periods described above if you owe no federal income tax after taking into account the exclusion. 2011 tax act If you owe federal income tax after taking into account the exclusion, you can choose the exclusion on a return filed after the periods described earlier if you file before the IRS discovers that you failed to choose the exclusion. 2011 tax act Whether or not you owe federal income tax after taking the exclusion into account, if you file your return after the periods described earlier, you must type or legibly print at the top of the first page of the Form 1040 “Filed pursuant to section 1. 2011 tax act 911-7(a)(2)(i)(D). 2011 tax act ” If you owe federal income tax after taking into account the foreign earned income exclusion and the IRS discovered that you failed to choose the exclusion, you may still be able to choose the exclusion. 2011 tax act You must request a private letter ruling under Income Tax Regulation 301. 2011 tax act 9100-3 and Revenue Procedure 2013-1, 2013-1 I. 2011 tax act R. 2011 tax act B. 2011 tax act 1, available at www. 2011 tax act irs. 2011 tax act gov/irb/2013-01_IRB/ar06. 2011 tax act html. 2011 tax act Effect of Choosing the Exclusion Once you choose to exclude your foreign earned income, that choice remains in effect for that year and all later years unless you revoke it. 2011 tax act Foreign tax credit or deduction. 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