Publication 54 - Tax Guide For U.s. Citizens And Resident Aliens Abroad - 2006 Page 19
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44receive the income, even if you work in one year
Income earned over more than 1 year. Re-
your foreign earned income up to the full
gardless of when you actually receive income,
but are not paid until the following year. If you
$85,700 limit.
you must apply it to the year in which you earned
report your income on a cash basis, you report
Physical presence test. Under the physi-
it in figuring your excludable amount for that
the income on your return for the year you re-
cal presence test, a 12-month period can be any
year. For example, a bonus may be based on
ceive it. If you work one year, but are not paid for
period of 12 consecutive months that includes
work you did over several years. You determine
that work until the next year, the amount you can
330 full days. If you qualify under the physical
the amount of the bonus that is considered
exclude in the year you are paid is the amount
presence test for part of a year, it is important to
earned in a particular year in two steps.
you could have excluded in the year you did the
carefully choose the 12-month period that will
work if you had been paid in that year. For an
1. Divide the bonus by the number of calen-
allow the maximum exclusion for that year.
exception to this general rule, see Year-end
dar months in the period when you did the
payroll period, later.
work that resulted in the bonus.
Example. You are physically present and
have your tax home in a foreign country for a
Example. You qualify as a bona fide resi-
2. Multiply the result of (1) by the number of
16-month period from June 1, 2005, through
dent of Brazil for all of 2005 and 2006. You
months you did the work during the year.
September 29, 2006, except for 15 days in De-
report your income on the cash basis. In 2005,
This is the amount that is subject to the
cember 2005 when you were on vacation in the
you were paid $69,000 for work you did in Brazil
exclusion limit for that tax year.
during that year. You excluded all of the $69,000
United States. You figure the maximum exclu-
from your income in 2005.
sion for 2005 as follows.
Income received more than 1 year after it was
In 2006, you were paid $95,400 for your work
earned. You cannot exclude income you re-
1. Beginning with June 1, 2005, count for-
in Brazil. $12,000 was for work you did in 2005
ceive after the end of the year following the year
ward 330 full days. Do not count the 15
and $83,400 was for work you did in 2006. You
you do the work to earn it.
days you spent in the United States. The
can exclude $11,000 of the $12,000 from your
Example. You qualify as a bona fide resi-
330th day, May 11, 2006, is the last day of
income in 2006. This is the $80,000 maximum
dent of Sweden for 2004, 2005, and 2006. You
a 12-month period.
exclusion in 2005 minus the $69,000 actually
report your income on the cash basis. In 2004,
excluded that year. You must include the re-
2. Count backward 12 months from May 10,
you were paid $67,000 for work you did in Swe-
maining $1,000 in income in 2006 because you
2006, to find the first day of this 12-month
den that year and in 2005 you were paid
could not have excluded that income in 2005 if
period, May 11, 2005. This 12-month pe-
$72,000 for that year’s work in Sweden. You
you had received it that year. You can exclude
riod runs from May 11, 2005, through May
excluded all the income on your 2004 and 2005
$82,400 of the $83,400 you were paid for work
returns.
10, 2006.
you did in 2006 from your 2006 income.
In 2006, you were paid $90,000; $80,000 for
3. Count the total days during 2005 that fall
Your total foreign earned income exclusion
your work in Sweden during 2006, and $10,000
within this 12-month period. This is 234
for 2006 is $93,400 ($11,000 of the pay received
for work you did in Sweden in 2004. You cannot
days (May 11, 2005 – December 31,
in 2006 for work you did in 2005 and $82,400 of
exclude any of the $10,000 for work done in
2005).
the pay you received in 2006 for work you did in
2004 because you received it after the end of the
2006). You would include in your 2006 income
year following the year in which you earned it.
4. Multiply $80,000 by the fraction 235/365 to
$2,000 ($1,000 of the pay received in 2006 for
You must include the $10,000 in income. You
find your maximum exclusion for 2005
the work you did in 2005 and $1,000 of the pay
can exclude all of the $80,000 received for work
($51,507).
received in 2006 for the work you did in 2006).
you did in 2006.
You figure the maximum exclusion for 2006
Year-end payroll period. There is an excep-
Community income. The maximum exclu-
in the opposite manner.
tion to the general rule that income is considered
sion applies separately to the earnings of a hus-
1. Beginning with your last full day, Septem-
earned in the year you do the work for which you
band and wife. Ignore any community property
ber 29, 2006, count backward 330 full
receive the income. If you are a cash-basis tax-
laws when you figure your limit on the foreign
days. Do not count the 15 days you spent
payer, any salary or wage payment you receive
earned income exclusion.
after the end of the year in which you do the work
in the United States. That day, October 20,
Part-year exclusion. If you qualify under ei-
for which you receive the pay is considered
2005, is the first day of a 12-month period.
ther the bona fide residence test or the physical
earned entirely in the year you receive it if all
2. Count forward 12 months from October 20,
presence test for only part of the year, you must
four of the following apply.
2005, to find the last day of this 12-month
adjust the maximum limit based on the number
•
The period for which the payment is made
of qualifying days in the year. The number of
period, October 19, 2006. This 12-month
is a normal payroll period of your employer
qualifying days is the number of days in the year
period runs from October 20, 2005,
that regularly applies to you.
within the period on which you both:
through October 19, 2006.
•
•
The payroll period includes the last day of
Have your tax home in a foreign country,
3. Count the total days during 2006 that fall
your tax year (December 31 if you figure
and
within this 12-month period. This is 292
your taxes on a calendar-year basis).
•
days (January 1, 2006 – October 19,
Meet either the bona fide residence test or
•
2006).
The payroll period is not longer than 16
the physical presence test.
days.
4. Multiply $82,400, the maximum limit, by
•
For this purpose, you can count as qualifying
the fraction 292/365 to find your maximum
The payday comes at the same time in
days all days within a period of 12 consecutive
exclusion for 2006 ($65,920).
relation to the payroll period that it would
months once you are physically present and
normally come and it comes before the
have your tax home in a foreign country for 330
end of the next payroll period.
Choosing the Exclusion
full days. To figure your maximum exclusion,
multiply the maximum excludable amount for the
Example. You are paid twice a month. For
The foreign earned income exclusion is volun-
year by the number of your qualifying days in the
the normal payroll period which begins on the
year, and then divide the result by the number of
tary. You can choose the exclusion by complet-
first of the month and ends on the fifteenth of the
days in the year.
ing the appropriate parts of Form 2555.
month, you are paid on the sixteenth day of the
month. For the normal payroll period that begins
Example. You report your income on the
When You Can
on the sixteenth of the month and ends on the
calendar-year basis and you qualified under the
last day of the month, you are paid on the first
bona fide residence test for 75 days in 2006.
Choose the Exclusion
day of the following month. Because all of the
You can exclude a maximum of 75/365 of
Your initial choice of the exclusion on Form 2555
above conditions are met, the pay you received
$82,400, or $16,932, of your foreign earned in-
on January 1, 2006, is considered earned in
come for 2006. If you qualify under the bona fide
or Form 2555-EZ generally must be made with
2006.
residence test for all of 2007, you can exclude
one of the following returns.
Chapter 4 Foreign Earned Income and Housing: Exclusion – Deduction
Page 19
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