Three Tests to Qualify for the Foreign Earned Income Exclusion

Amount of Exclusion:  The maximum amount of the foreign earned income exclusion is $105,900 for calendar year 2019 ($102,100 for 2017 and $104,100 for 2018).   

In Foreign Country for Part of the Year:  The exclusion is computed on a daily basis. 

3 Tests for Excluding Foreign Earned Income:

1.     Earned income must be received for services performed in a foreign country.

Earned income is pay for personal services performed in a foreign country.  It includes salaries and wages, commissions, bonuses, professional fees and other amounts received as compensation for personal services.  Click here to find a complete discussion of what does and does not qualify as foreign earned income.  It does not include pay received as a direct hire employee of the U.S. Government or its agencies, this includes Armed Forces.  It also does not include income earned in a country in which the U.S. imposes travel restrictions.

2.     Your tax home must be in a foreign country.

Your tax home is generally the place where you have your main place of business or employment, regardless of where you maintain a family home.  The location of your tax home often depends on whether your work assignment is temporary or indefinite. Temporary assignments do not qualify for the exclusions.

3.     Residency test.

If your “tax home” is in a foreign country, you must also meet either (1) the bona fide residence test, or (2) the physical presence test.  It doesn’t matter which test you meet.

·         The bona fide residence test required that you establish “residence” in a foreign country for an uninterrupted period that includes a full tax year.  This determination will depend on the specific circumstances of your case, including your intention on the length and purpose of your stay.  It is not determined by your status under the laws of the foreign country, nor by merely living in a foreign country for a year.

·         The physical presence test can be met by being present in a foreign country (or countries) for 330 full days out of any consecutive 12 month period.

Foreign Country Includes:  A foreign country is any territory, including airspace and territorial waters, under the sovereignty of a government other than the United States, Puerto Rico, Guam, the Commonwealth of the Northern Mariana Islands, or the U.S. Virgin Islands.  Residence or presence in a U.S. possession does not qualify an individual for the exclusions.  The exclusions will also be denied if you are present in a foreign country in which travel is generally restricted.

To receive the foreign earned income exclusion, you file Form 2555 with your US Tax Return.