36.3 Qualifying for the Foreign Earned Income Exclusion

You may elect the exclusion for foreign earned income only if your tax home is in a foreign country and you meet either the foreign residence test or the foreign physical presence test of 330 days. The foreign residence and physical presence tests are discussed in 36.5. Tax home is discussed at 20.6–20.8. If your tax home is in the U.S., you may not claim the exclusion but may claim the foreign tax credit and your living expenses while away from home if you meet the rules in 20.9 for temporary assignments that are expected to last, and actually do last, for one year or less. U.S. government employees may not claim either the earned income exclusion or housing exclusion based on government pay.

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image Caution
Countries Subject to Travel Restrictions
You may not claim the foreign earned income exclusion, or the housing exclusion or deduction, if you work in a country subject to U.S. government travel restrictions. You are not treated as a bona fide resident of, or as present in, a country subject to the travel ban. See Form 2555 for countries on the restricted list.
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Exclusion prorated on a daily basis.

If you qualify under the foreign residence or physical presence test for only part of 2012, the $95,100 exclusion limit is reduced on a daily basis.

EXAMPLES
1. You were a resident of France from February 20, 2010, until July 1, 2012. On July 2, 2012, you returned to the U.S. Since your period of foreign residency included all of 2011, thereby satisfying the foreign residence test, you may claim a prorated exclusion for 2012. As you were abroad for 183 of the 366 days in 2012 (January 1 through July 1), you can exclude earnings up to $47,550, or 183/366 of the $95,100 maximum exclusion. If you earned more than $47,550, the exclusion is limited to $47,550.
2. You worked in France from June 1, 2011, through September 30, 2012. Your only days outside France were a 15-day vacation to the U.S. in December 2011. You do not qualify for an exclusion under the foreign residence test because you were not abroad for a full taxable year; you were not abroad for either the full year of 2011 or 2012. However, you do qualify under the physical presence test; you were physically present abroad for at least 330 full days during a 12-month period. The 12-month period giving you the largest 2012 exclusion is the 12-month period starting October 22, 2011, and ending October 21, 2012. See 36.5 for figuring the 12-month period. Since you were abroad for at least 330 full days during that 12-month period, you may claim an exclusion. In 2012, you were abroad for 295 days within the 12-month period (January 1 through October 21, 2012, is 295 days). Thus, you exclude earnings up to $76,651 ($95,100 x 295/366). Earnings exceeding $76,651 are not excludable.

If you are married and you and your spouse each have foreign earned income and meet the foreign residence or physical presence test, you may each claim a separate exclusion. If your permanent home is in a community property state, your earned income is not considered community property for purposes of the exclusion.

Foreign earnings from a prior year.

Foreign income earned in a prior year but paid in 2012 does not qualify for the 2012 exclusion. However, if the income was attributable to foreign services performed in 2011, the pay is tax free in 2012 to the extent that you did not use the full 2011 exclusion of $92,900. Under another exception, payments received in 2012 for 2011 services are treated as 2012 income if the payment was within a normal payroll period of 16 days or less that included the last day of 2011. If the services were performed before 2011, no exclusion is available to shelter the pay. You cannot exclude income that you receive after the end of the year following the year in which you provide the services.

Income for services performed in the U.S. does not qualify for the exclusion, even though it is paid to you while you are abroad.

Foreign tax credit.

Foreign taxes paid on tax-free foreign earned income do not qualify for a credit or deduction. But if your foreign pay for 2012 exceeds $95,100, you may claim a foreign tax credit or deduction for the foreign taxes allocated to taxable income. The instructions to Form 1116 and IRS Publication 514 provide details for making the computation.

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