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S. Anderson
S. Anderson, Tax Preparer
Category: Tax
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Experience:  Bookkeeper/Tax Preparer with over 25 years' experience
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RE: Foreign Earned Income Exclusion: Taxpayer has worked

Customer Question

RE: Foreign Earned Income Exclusion:
Taxpayer has worked for several consecutive years for his employer in a foreign country. He has qualified under the physical presence test for full exclusion during these years. On 2/1/12 he is layed off & returns to USA home. He is a US citizen and had no USA earned income while in USA for the period 2/1-6/30/12. On 7/1/12 he is hired by another foreign employer and is still working there in foreign country and fully expects to be working there thru 6/30/13. His wages were $10,000 from the first employer for the period 1/1-1/31/12 and $80,000 for the second employer for the period 7/1/12-12/31/12. The maximum foreign earned income exclusion for 2012 is $95,100.
Question: What is his Foreign Earned Income Exclusion for 2012?
Submitted: 1 year ago.
Category: Tax
Expert:  S. Anderson replied 1 year ago.

S. Anderson :

Hi, my name is Sandy. I'll be doing the research to answer your question.

S. Anderson :

I have pulled the instructions for form 2555. The publication states,"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 months in a row."

S. Anderson :

It also states, "The 12-month period on which the physical presence test is based must include 365 or 366 days, part of which must be in 2012. The dates may begin or end in a calendar year other than 2012."

S. Anderson :

This is tricky because for the CALENDAR year 2012, he does not meet the physical presence test.

S. Anderson :

However, if he uses either 2/1/11-1/131/12 or 7/1/12-6/30/13 he does meet that test.

S. Anderson :

When filling out form 2555 part III you must put in the 12-month period you are using to meet the test. Since calendar year 2012 does not meet the test, I would use the period with the higher income for the exclusion; hence I would put 7/1/12 thru 6/30/13 and take $80,000 as the exclusion.

S. Anderson :

However, he may need to get an extension and wait to file for 2012 in order to be sure he will meet the physical presence test for that $80,000.

S. Anderson :

Does this make sense?

S. Anderson :

More information from publication 54:

S. Anderson :

How to figure the 12-month period. There are four rules you should know when figuring
the 12-month period. Your 12-month period can begin with any
day of the month. It ends the day before
the same calendar day, 12 months later.
Your 12-month period must be made up of
consecutive months. Any 12-month period
can be used if the 330 days in a foreign
country fall within that period.
You do not have to begin your 12-month
period with your first full day in a foreign
country or end it with the day you leave.
You can choose the 12-month period that
gives you the greatest exclusion.
In determining whether the 12-month period
falls within a longer stay in the foreign
country, 12-month periods can overlap one
another.

S. Anderson :

Example 1. You are a construction worker
who works on and off in a foreign country over a
20-month period. You might pick up the 330 full
days in a 12-month period only during the middle
months of the time you work in the foreign
country because the first few and last few
months of the 20-month period are broken up
by long visits to the United States.

S. Anderson :

Based on this info and example, I would still use the period from 7/1/12 - 6/30/13 to establish physical presence and take an exclusion of $80,000.

Expert:  S. Anderson replied 1 year ago.
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Customer: replied 1 year ago.

Seems reasonable yet I can't help but think the exclusion should be pro-rated since if he had worked entire year 2012 and made $160,000 he would only get $95,100 exclusion, however if he works 1/1/13-6/30/13 he will get another $80,000 exclusion for a total of $160,000.

Expert:  S. Anderson replied 1 year ago.

I understand your point, but the IRS doesn't do prorating. The way the law is written is that the taxpayer has to be absent from the country for 330 out of 365 days. You can't use calendar year 2012 as your 12 months, since he will not meet that test. The exclusion is for a tax year, so he will get another $80,000 exclusion for 2013 if he is gone until 6/30/13.

S. Anderson, Tax Preparer
Category: Tax
Satisfied Customers: 31
Experience: Bookkeeper/Tax Preparer with over 25 years' experience
S. Anderson and 6 other Tax Specialists are ready to help you
Customer: replied 1 year ago.

After working thru Form 2555 I see that I am forced to pro-rate the exclusion based upon the number of days in 2012 that taxpayer, so about one-half of the exclusion is allowed.

Expert:  S. Anderson replied 1 year ago.
Thanks for letting me know.

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