Tax Facts

955 / What is the foreign earned income exclusion?



The foreign earned income exclusion is available if the following requirements are met:
(1)     The individual has income received for work performed in a foreign country,

(2)     The individual has a tax home in a foreign country, and

(3)     The individual meets either (i) the bona fide residence test or (ii) the physical presence test (see Q 956).

 

According to IRS guidance, an individual’s “tax home” is the general area of the individual’s principal place of business or employment. The individual’s principal place of residence is irrelevant for determining the individual’s tax home. However, if the individual is not consistently present in one business location, the location of that individual’s principal residence may be used as a factor in the tax home determination. If the individual has neither a regular principal place of business or residence, the individual is considered itinerant and his or her tax home is wherever he or she works. The individual’s tax home is not considered to be in a foreign country if that taxpayer’s “abode” is in the U.S.1



Example: Joe is a U.S. citizen who is employed on a fishing enterprise in the waters of a foreign country. His schedule provides that he works one month on and one month off. Joe continues to maintain a residence in the U.S., where his family lives and where he returns on his “off” months. Joe is considered to have a “tax home” in the U.S. because his time is split equally between the U.S. and foreign waters. He is not entitled to take advantage of the foreign earned income exclusion, though he may be entitled to deduct his living expenses while living abroad as business travel expenses.2

A taxpayer’s election to exclude foreign earnings under the foreign earned income exclusion may be revoked by the taxpayer by filing a statement to that effect with the IRS, but if the taxpayer attempts to claim the exclusion within five tax years after the revocation, he or she must apply for IRS approval.3





1     IRS Pub. 54 (2019), p.12

2     See IRS Guidance, “Foreign Earned Income Exclusion – Tax Home in Foreign Country,” available at https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion-tax-home-in-foreign-country (last accessed June 17, 2024).

3     See IRS Guidance: “Revocation of the Foreign Earned Income Exclusion,” available at http://www.irs.gov/Individuals/International-Taxpayers/Revocation-of-the-Foreign-Earned-Income-Exclusion (last accessed June 17, 2024).


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