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Foreign Earned Income Exclusions for U.S. Citizens and Residents

As a U.S. citizen or U.S. resident, you subject to US international tax law on your worldwide income even if you do not reside in the U.S. However, the IRS provides certain deductions and credits to U.S. taxpayers who live abroad. If you qualify for the Foreign Earned Income Exclusion, you may be able to exclude a portion of your foreign income from your taxable income. You may also qualify for the foreign housing exclusion or the foreign housing deduction. 26 U.S. Code § 911, available at http://www.law.cornell.edu/uscode/text/26/911.

What are the Basic Physical Requirements of the Foreign Earned Income Exclusion?

In order to qualify for these foreign deductions and exclusions, you must be one of the following: 1) a U.S. taxpayer who is a “bona fide” resident of a foreign country for the entire tax year; 2) a U.S. resident alien who is a citizen of a country with which the U.S. has an income tax treaty. You must also be a “bona fide” resident of this other country during the tax year; or 3) a U.S. citizen or U.S. resident who is physically present in a foreign country or countries for at least 330 days during a 12 month period. Internal Revenue Service, Foreign Earned Income Exclusion – Requirements, http://www.irs.gov/Individuals/International-Taxpayers/Foreign-Earned-Income-Exclusion---Requirements.

What is a Bona Fide Resident Under the Foreign Earned Income Exclusion?

In order to qualify for the Foreign Earned Income Exclusion, you must be a bona fide resident of a foreign country during an entire tax year. For these purposes, “bona fide” resident has a specific definition, which essentially requires that you reside in a foreign country or countries for an uninterrupted period of time which includes an entire tax year. The test applies to U.S. citizens or U.S. resident aliens who are residing in a country which has a tax treaty with the U.S.

In order to qualify as a bona fide resident, it is essential that the uninterrupted period of time that you live in a foreign country include an entire tax year. Under this test, you can travel back to the U.S. for short trips, as long as you have a clear intention to return to the foreign country. Moreover,simply living in a foreign country for an entire year, but not an entire tax year, will not qualify you as a bona fide resident for the purposes of the foreign earned income exclusion. The IRS defines the entire tax year as the period from January 1 through December 31. Internal Revenue Service, Foreign Earned Income Exclusion – Bona Fide Residence Test, http://www.irs.gov/Individuals/International-Taxpayers/Foreign-Earned-Income-Exclusion---Bona-Fide-Residence-Test.

How Do I Prove Bona Fide Residence?

The IRS will determine whether or not you qualify for bona fide residence based on the information that you supply in your Form 2555 for Foreign Earned Income. IRS Form 2555, This determination is made on a case-by-case basis, and the IRS will consider the length of your travel to a foreign country as well as the nature and purpose behind your travel plans. Internal Revenue Service, Foreign Earned Income Exclusion – Bona Fide Residence Test, http://www.irs.gov/Individuals/International-Taxpayers/Foreign-Earned-Income-Exclusion---Bona-Fide-Residence-Test.

How a Tax Attorney Can Help with the Foreign Earned Income Exclusion

If you are a U.S. Citizen with foreign income or living abroad, you may have many questions about how U.S. international tax laws impact you. The bona fide residence test is only one aspect of the Foreign Earned Income Exclusion. In order to qualify for the exclusion, you need to consider other factors as well. In this situation, you may need the assistance of a knowledgeable tax attorney to help you evaluate all aspects of your situation.

The Tax Lawyer - William D. Hartsock has been successfully helping clients comply with U.S. International Tax Laws and deal with issues related to worldwide taxation since the early 1980s. Mr. Hartsock offers free consultations with the full benefit and protections of attorney client privilege to help people clearly understand their situation and options based on the circumstances of their case. To schedule your free consultation simply fill out the contact form found on this page, or call (858) 481-4844.

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The Tax Lawyer - William D. Hartsock, Esq. – San Diego Tax Attorney

Author: William D. Hartsock, Esq

A "Certified Tax Law Specialist" for over 37 years, Mr. Hartsock is one of the most trusted and respected tax attorneys in Southern California. Call today to discuss the facts of your case and learn about your options. Mr. Hartsock offers free consultations and all conversations are protected under attorney-client privilege; meaning that no information shared with a tax attorney will be shared with the IRS or California Franchise Tax Board.