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U.S. citizens and resident aliens living outside the United States generally are allowed the same deductions as citizens and residents living in the United States. If you paid or accrued foreign taxes to a foreign country on foreign source income and are subject to U.S. tax on the same income, you may be able to take either a foreign tax credit on foreign income taxes or an itemized deduction for eligible foreign taxes. However, if you take the foreign earned income exclusion your foreign tax credit or deduction will be reduced.

If eligible, you can claim a foreign tax credit on foreign income taxes owed and paid by filing Form 1116 with your U.S. income tax return. See Publication 514, Foreign Tax Credit for Individuals, for more details.

You may also be eligible for the foreign earned income exclusion. See the “Foreign Earned Income and Housing: Exclusion – Deduction” section of Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad, for more details. Please note that for purposes of the foreign earned income exclusion, the foreign housing exclusion, and the foreign housing deduction, foreign earned income does not include any amounts paid by the United States or any of its agencies to its employees. This includes amounts paid from both appropriated and nonappropriated funds.

Yes, since the foreign earned income exclusion is voluntary, you must file a tax return to claim the foreign earned income exclusion. It does not matter if your foreign earnings are below the foreign earned income exclusion threshold.

There are specific requirements that you must satisfy to be eligible to claim the foreign earned income exclusion. See the “Foreign Earned Income and Housing: Exclusion – Deduction” section in Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad, for more details.

Yes. To be eligible for the foreign earned income exclusion, you must have a tax home in a foreign country and be a U.S. citizen or resident alien. You must also be either a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, or you must be physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months. U.S. citizens may qualify for the foreign income exclusion under either test. U.S. resident aliens must qualify under the physical presence test, unless they are citizens or nationals of a country with which the United States has an income tax treaty in effect. In that case, U.S. resident aliens also may qualify for the foreign earned income exclusion under the bona fide residence test.

Your tax home must be in the foreign country or countries throughout your period of bona fide residence or physical presence. For this purpose, your period of physical presence is the 330 full days during which you are present in a foreign country or countries, not the 12 consecutive months during which those days occur.

To be eligible for the foreign earned income exclusion, you must have a tax home in a foreign country and be a U.S. citizen or resident alien. You must also be either a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year (Bona Fide Residence Test), or you must be physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months (Physical Presence Test).

U.S. citizens may qualify under either test. But, there are specific definitions for U.S. resident aliens under each test.

Physical Presence Test

To meet this test, you must be a U.S. citizen or 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. A full day means the 24-hour period that starts at midnight.

Bona Fide Residence Test

To meet this test, 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 (January 1-December 31, if you file a calendar year return), or
•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 (January 1-December 31, if you file a calendar year return).

Whether you are a bona fide resident of a foreign country depends on your intention about the length and nature of your stay. Evidence of your intention may be your words and acts. If these conflict, your acts carry more weight than your words. Generally, if you go to a foreign country for a definite temporary purpose and return to the United States after you accomplish it, you are not a bona fide resident of the foreign country.

The two tests differ in that one is based exclusively on physical presence while the other is based on a taxpayer’s intentions.

Foreign pensions cannot be excluded on Form 2555. Foreign earned income for purposes of the foreign earned income exclusion does not include pensions and annuity income (including social security benefits and railroad retirement benefits treated as social security).

The foreign earned income exclusion, housing exclusion, or housing deductions are claimed using either a Form 2555 or 2555-EZ. The Form 2555-EZ is a simplified version of the regular Form 2555 and can be used by most individuals assuming:
•You did not have any self-employment income for the year,
•Your total foreign earned income did not exceed the maximum foreign earned income exclusion threshold for the corresponding tax year,
•You did not have any business or moving expenses, and
•You do not claim the housing exclusion or deduction.

If you claimed the foreign earned income exclusion, housing exclusion, or housing deduction on Form 2555 or 2555-EZ, you must calculate your tax liability using the Foreign Earned Income Tax Worksheet (for Line 44) in the Form 1040 Instructions or your income tax preparation software.