Publication 54 - Tax Guide For U.s. Citizens And U.s. Citizens Abroad

earned in the year you do the work for which you

of qualifying days in the year. The number of

2) Count forward 12 months from October 20,

receive the income. If you are a cash basis

qualifying days is the number of days in the year

2000, to find the last day of this 12-month

taxpayer, any salary or wage payment you re-

within the period on which you both:

period, October 19, 2001. This 12-month

ceive after the end of the year in which you do

period runs from October 20, 2000,

the work for which you receive the pay is consid-

1) Have your tax home in a foreign country,

through October 19, 2001.

ered earned entirely in the year you receive it if

and

3) Count the total days during 2001 that fall

all four of the following apply.

2) Meet either the bona fide residence test or

within this 12-month period. This is 292

1) The period for which the payment is made

the physical presence test.

days (January 1, 2001 — October 19,

is a normal payroll period of your employer

2001).

For this purpose, you can count as qualifying

that regularly applies to you.

days all days within a period of 12 consecutive

4) Multiply $78,000, the maximum limit, by

2) The payroll period includes the last day of

months once you are physically present and

the fraction 292/365 to find your maximum

your tax year (December 31 if you figure

have your tax home in a foreign country for 330

exclusion for 2001 ($62,400).

your taxes on a calendar-year basis).

full days. To figure your maximum exclusion,

3) The payroll period is not longer than 16

multiply the maximum excludable amount for the

Choosing the Exclusion

days.

year by the number of your qualifying days in the

year, and then divide the result by the number of

4) The payday comes at the same time in

The foreign earned income exclusion is volun-

days in the year.

relation to the payroll period that it would

tary. You can separately choose the foreign

normally come and it comes before the

earned income exclusion and the foreign hous-

Example. You report your income on the

end of the next payroll period.

ing exclusion by completing the appropriate

calendar-year basis and you qualified under the

parts of Form 2555. Your initial choice of the

bona fide residence test for 75 days in 2001.

exclusions on Form 2555 or Form 2555 – EZ

Income earned over more than 1 year. Re-

You can exclude a maximum of 75/365 of

generally must be made with a timely filed return

gardless of when you actually receive income,

$78,000, or $16,027, of your foreign earned in-

(including any extensions), a return amending a

you must apply it to the year in which you earned

come for 2001. If you qualify under the bona fide

timely filed return, or a late-filed return filed

it in figuring your excludable amount for that

residence test for all of 2002, you can exclude

within 1 year from the original due date of the

year. For example, a bonus may be based on

your foreign earned income up to the full

return (determined without regard to any exten-

work you did over several years. You determine

$80,000 limit.

the amount of the bonus that is considered

sions).

earned in a particular year in two steps.

Physical presence test. Under the physi-

You can choose the exclusion on a return

cal presence test, a 12-month period can be any

filed after the periods described above provided

1) Divide the bonus by the number of calen-

period of 12 consecutive months that includes

you owe no federal income tax after taking into

dar months in the period when you did the

330 full days. If you qualify under the physical

account the exclusion. If you owe federal in-

work that resulted in the bonus.

presence test for part of a year, it is important to

come tax after taking into account the exclusion,

2) Multiplying the result of step 1) by the

carefully choose the 12-month period that will

you can choose the exclusion on a return filed

number of months you did the work during

allow the maximum exclusion for that year.

after the periods described above provided you

the year. This is the amount that is subject

file before IRS discovers that you failed to

to the exclusion limit for that tax year.

Example. You are physically present and

choose the exclusion. You must type or legibly

have your tax home in a foreign country for a

print at the top of the first page of the Form 1040

16-month period from June 1, 2000, through

Income received more than 1 year after it was

“Filed pursuant to section 1.911 – 7(a)(2)(i)(D).”

September 29, 2001, except for 15 days in De-

earned. You cannot exclude income you re-

If you owe federal income tax after taking into

cember 2000 when you were on vacation in the

ceive after the end of the year following the year

account the foreign earned income exclusion

United States. You figure the maximum exclu-

you do the work to earn it.

and the IRS discovered that you failed to choose

sion for 2000 as follows.

the exclusion, you must request a private letter

Example. You qualify as a bona fide resi-

ruling under Revenue Procedure 92 – 85 (as

dent of Sweden for 1999, 2000, and 2001. You

1) Beginning with June 1, 2000, count for-

modified by Revenue Procedure 93 – 28).

report your income on the cash basis. In 1999,

ward 330 full days. Do not count the 15

you were paid $65,000 for work you did in Swe-

Revenue procedures are published in the

days you spent in the United States. The

den that year and in 2000 you were paid

Internal Revenue Bulletin (I.R.B.) and in the Cu-

330th day, May 11, 2001, is the last day of

$70,000 for that year’s work in Sweden. You

mulative Bulletin (C.B.), which are volumes con-

a 12-month period.

excluded $65,000 on your 1999 federal income

taining official matters of the Internal Revenue

tax return and $70,000 for your 2000 return.

2) Count backward 12 months from May 11,

Service. You can buy the C.B. containing a par-

In 2001, you were paid $90,000; $80,000 for

2001, to find the first day of this 12-month

ticular revenue procedure from the Superinten-

your work in Sweden during 2001, and $10,000

period, May 12, 2000. This 12-month pe-

dent of Documents, U.S. Government Printing

for work you did in Sweden in 1999. You cannot

riod runs from May 12, 2000, through May

Office, Washington, DC 20402.

exclude any of the $10,000 for work done in

11, 2001.

Once you choose to exclude your foreign

1999 because you received it after the end of the

3) Count the total days during 2000 that fall

year following the year in which you earned it.

earned income or housing amount, that choice

within this 12-month period. This is 235

That is, you received it after 2000. You must

remains in effect for that year and all later years

include the $10,000 in income. You can exclude

days (May 11, 2000 – December 31,

unless you revoke it.

$78,000 of the $80,000 received for work you

2000).

did in 2001.

4) Multiply $76,000 by the fraction 235/365 to

Revocation. You can revoke your choice for

find your maximum exclusion for 2000

any year. You do this by attaching a statement

Community income. The maximum exclu-

($48,932).

that you are revoking one or more previously

sion applies separately to the earnings of a hus-

made choices to the return or amended return

You figure the maximum exclusion for 2001

band and wife. Ignore any community property

for the first year that you do not wish to claim the

in the opposite manner.

laws when you figure your limit on the foreign

exclusion(s). You must specify which choice(s)

earned income exclusion.

you are revoking. You must revoke separately a

1) Beginning with your last full day, Septem-

choice to exclude foreign earned income and a

ber 29, 2001, count backward 330 full

Part-year exclusion. If you qualify under ei-

choice to exclude foreign housing amounts.

days. Do not count the 15 days you spent

ther the bona fide residence test or the physical

in the United States. That day, October 20,

If you revoked a choice and within 5 years

presence test for only part of the year, you must

adjust the maximum limit based on the number

2000, is the first day of a 12-month period.

again wish to choose the same exclusion, you

Chapter 4 Foreign Earned Income and Housing: Exclusion – Deduction

Page 19

Publication 54 - Tax Guide For U.s. Citizens And U.s. Citizens Abroad - 2001 Page 19

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