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Lev
Lev, Tax Advisor
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I am a U.S. citizen working overseas and claiming the ...

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I am a U.S. citizen working overseas and claiming the Foreign Earned Income Exclusion (Part VII of form 2555). If I returned to the U.S. in July 2007 (180 days of 2007 in foreign country), and a) qualified under the physical presence test (resident of foreign country since 2002), and b) earned no additional income in 2007 upon returning to the states (last pay received in June), can I claim the full 85,700 USD exclusion for 2007 by using 180 days when calculating "number of days in your 2007 tax year". (line 39 of Part VII of form 2555)
Submitted: 9 years ago.
Category: Tax
Expert:  Lev replied 9 years ago.

You meet the bona fide residence test if you are a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. An entire tax year is from January 1 through December 31 for taxpayers who file their income tax returns on a calendar year basis.

Once you have established bona fide residence in a foreign country for an uninterrupted period that includes an entire tax year, you will qualify as a bona fide resident for the period starting with the date you actually began the residence and ending with the date you abandon the foreign residence. You could qualify as a bona fide resident for an entire tax year plus parts of 1 or 2 other tax years.

Example: You were a bona fide resident of England from March 1, 2006, through September 14, 2008. On September 15, 2008, you returned to the United States. Since you were a bona fide resident of a foreign country for all of 2007, you also qualify as a bona fide resident from March 1, 2006, through the end of 2006 and from January 1, 2008, through September 14, 2008.

Lev and other Tax Specialists are ready to help you
Customer: replied 9 years ago.
Thank you for your fast response. However under the above example, for 2008 tax year I would like to qualify for the full 85,700 USD exclusion even though I would be a bona fide resident only through Sep 14, 2008. If I were to use 365 days as the "number of days in your 2008 tax year", then this exclusion would be closer to roughly 60,000 USD. However, if I were to use 258 days as the "number of days in your 2008 tax year", then the exclusion would be the full 85,700 USD. If I was not employed (and received no income) from Sep 15, 2008 - Dec 31, 2008, then can I use 258 days to calculate the exclusion amount? thanks again.
Expert:  Lev replied 9 years ago.

If you are a United States citizen with a tax home in a foreign country and you meet the bona fide residence test or physical presence test, you may exclude up to the maximum limit allowed for the taxable year.

The example above I took from the IRS Topic word-by-word.

To be eligible to claim the foreign earned income exclusion or the foreign housing exclusion, you must have a tax home in a foreign country and meet either the bona fide residence test or the physical presence test. The bona fide residence test is described above.

The physical presence test can be used by any United States citizen or resident alien. You must be physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months. The 12-month period can begin with any day of any calendar month.

Based on your description you satisfy both tests and are eligible for excusion. The maximum annual exclusion is prorated on a daily basis if there is any part of the year that you do not qualify under either test.

I would also suggest to read the IRS publication 54 - http://www.irs.gov/pub/irs-pdf/p54.pdf

If the period for which you qualify for the foreign earned income exclusion includes only part of the year, you must adjust the maximum limit based on the number of qualifying days in the year. The number of qualifying days is the number of days in the year within the period on which you both:

  • Have your tax home in a foreign country, and
  • Meet either the bona fide residence test or the physical presence test.

For this purpose, you can count as qualifying days all days within a period of 12 consecutive months once you are physically present and have your tax home in a foreign country for 330 full days. To figure your maximum exclusion, multiply the maximum excludable amount for the year by the number of your qualifying days in the year, and then divide the result by the number of days in the year.

Example. You report your income on the calendar-year basis and you qualified for the foreign earned income exclusion under the bona fide residence test for 75 days in 2007. You can exclude a maximum of 75/365 of $85,700, or $17,610, of your foreign earned income for 2007. If you qualify under the bona fide residence test for all of 2008, you can exclude your foreign earned income up to the 2008 limit.