Foreign Earned Income Exclusion 

Expatriate Tax  
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Ralph Sayers, CPA

Exclusion of foreign earned income.   If your tax home is in a foreign country and you meet either the bona fide residence test or the physical presence test, you can choose to exclude from gross income a limited amount of your foreign earned income. Your income must be for services performed in a foreign country during your period of foreign residence or presence, whichever applies. You cannot, however, exclude the pay you receive as an employee of the U.S. Government or its agencies.

Credits and deductions.   If you claim the exclusion, you cannot claim any credits or deductions that are related to the excluded income. Thus, you cannot claim a foreign tax credit or deduction for any foreign income tax paid on the excluded income. Nor can you claim the earned income credit if you claim the exclusion. Also, for IRA purposes, the excluded income is not considered compensation and, for figuring deductible contributions when you are covered by an employer retirement plan, the excluded income is included in your modified adjusted gross income.

Amount excludable.   If your tax home is in a foreign country and you qualify under either the bona fide residence test or physical presence test for the entire tax year, you can exclude up to $82,400 of your foreign income earned during the 2006 year. Beginning in 2007, the $85,700 amount will be adjusted for inflation.

If you qualify under either test for only part of the year, you must reduce ratably the maximum amount based on the number of days within the tax year you qualified under one of the two tests.

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