To claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction:
you must have foreign earned income, your tax home must be in a foreign country, and you must be one of the following:
- A U.S. citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year,
- A U.S. 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, or
- A U.S. citizen or a U.S. 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.
The maximum amount of the Foreign Earned Income Exclusion under Internal Revenue Code (IRC) section 911 is indexed to inflation
- $92,900 for 2011,
- $95,100 for 2012,
- $97,600 for 2013,
- $99,200 for 2014
- $100,800 for 2015
Not foreign earned income
Foreign earned income does not include the following amounts:
- Pay received as a military or civilian employee of the U.S. Government or any of its agencies
- Pay for services conducted in international waters (not a foreign country)
- Pay in specific combat zones, as designated by an Executive Order from the President, that is excludable from income
- Payments received after the end of the tax year following the year in which the services that earned the income were performed
- The value of meals and lodging that are excluded from income because it was furnished for the convenience of the employer
- Pension or annuity payments, including social security benefits
A qualifying individual may claim the foreign earned income exclusion on foreign earned self-employment income. The excluded amount will reduce the individual’s regular income tax, but will not reduce the individual’s self-employment tax. Also, the foreign housing deduction – instead of a foreign housing exclusion – may be claimed.
Foreign Tax Credit
In relation to income types that are ineligible for the Foreign Earned Income Exclusion or for earned income that exceeds the Foreign Earned Income Exclusion limits US taxpayers with foreign source income are able to utilize the Foreign Tax Credit to mitigate the effects of potential double taxation.
This enables eligible foreign taxes to be used as either a deduction from income or as a credit against US tax liability but only up to the amount of US tax liability for the same year.
The credit is not refundable, however, it is able to utilized by carrying it back one year and/or forward for up to ten years.
To make the prior year claim and amended return 1040x must be filed.
To qualify for the Foreign Tax Credit the foreign tax must pass four tests.
- The tax must be imposed upon and paid or accrued by the taxpayer.
- The tax must be the legal and actual foreign tax liability.
- The tax must be an income tax.
- The tax must arise from income that is subject to taxation in the foreign country.