36.6 Claiming Deductions

You may not deduct expenses that are allocable to the foreign earned income and housing exclusions. If you elect the earned income exclusion, you deduct expenses as follows:

Personal or nonbusiness deductions, such as medical expenses, mortgage interest, and real estate taxes paid on a personal residence, are deductible if you itemize deductions. Business expenses that are attributable to earning excludable income are not deductible. Dependency exemptions are fully deductible; see Example 1 below.

If your foreign earnings exceed the exclusion ceiling, you allocate expenses between taxable and excludable income and deduct the amount allocated to taxable earned income; see Example 2 below.

If your job expenses are reimbursed and the expenses are adequately accounted for to your employer (20.30), the reimbursements are not reported as income on your Form W-2. If the reimbursement is less than expenses, the excess expenses are allocated as in Example 2 above.

You may have to allocate state income taxes paid on your income.

If either you or your spouse elects the earned income or housing exclusion, you may not claim an IRA deduction based on excluded income.

If you were reimbursed by your employer under a non-accountable plan, or if the reimbursement is for expenses that you deducted in an earlier year, the reimbursement is considered earned income in the year of receipt and is added to other earned income before taking the exclusion and making the allocation. See 36.2 for allocating reimbursements of moving expenses between the year of the move and the following year for purposes of claiming the exclusion.

Filing Tip

Overseas Moving Expenses

These expenses are generally treated as related to your foreign earnings. Thus, if you move to a foreign country and exclude your income, you may not deduct your moving expenses. If your earned income exceeds the exclusion limit, you allocate moving expenses between your tax-free and taxable earned income.

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If, after working in a foreign country, your employer transfers you back to the U.S. or you move back to the U.S. to take a different job, your moving expenses are deductible under the general rules discussed in 12.3. If your residence and principal place of work was outside the U.S. and you retire and move back to the U.S., your moving expenses are also deductible, except that you do not have to meet the 39-week test for employees or the 78-week test for the self-employed and partners.

Survivors of workers abroad returning to U.S.

If you are the spouse or dependent of a worker who died while his or her principal place of work was outside the U.S., you may deduct your moving expenses back to the U.S. For the costs to be deductible, the move must begin within six months of the worker’s death. The requirements for deducting moving expenses apply, except for the 39-week test for employees or the 78-week test for the self-employed and partners.

Compulsory home leave.

Foreign service officers stationed abroad must periodically return to the U.S. Because the home leave is compulsory, foreign service officers may deduct their travel expenses; travel expenses of the officer’s family are not deductible.