Instructions for Form 2555 (2007)

IRS Resources

Specific Instructions

Table of Contents

Part II

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). See Pub. 901, U.S. Tax Treaties, for a list of countries with which the United States has an income tax treaty in effect.

No specific rule determines if you are a bona fide resident of a foreign country because the determination involves 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. If accomplishing the purpose requires an extended, indefinite stay, and you make your home in the foreign country, you may be a bona fide resident. See Pub. 54 for more information and examples.

Lines 13a and 13b. If you submitted a statement of nonresidence to the authorities of a foreign country in which you earned income and the authorities hold that you are not subject to their income tax laws by reason of nonresidency in the foreign country, you are not considered a bona fide resident of that country.

If you submitted such a statement and the authorities have not made an adverse determination of your nonresident status, you are not considered a bona fide resident of that country.

Part III

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 months in a row. A full day means the 24-hour period that starts at midnight.

To figure the minimum of 330 full days, add all separate periods you were present in a foreign country during the 12-month period shown on line 16. The 330 full days can be interrupted by periods when you are traveling over international waters or are otherwise not in a foreign country. See Pub. 54 for more information and examples.

Note. A nonresident alien who, with a U.S. citizen or U.S. resident alien spouse, chooses to be taxed as a resident of the United States can qualify under this test if the time requirements are met. See Pub. 54 for details on how to make this choice.

Part IV

Foreign Earned Income

Enter in this part the total foreign earned income you earned and received (including income constructively received) during the tax year. If you are a cash basis taxpayer, report on Form 1040 all income you received during the tax year regardless of when you earned it.

Income is earned in the tax year you perform the services for which you receive the pay. But if you are a cash basis taxpayer and, because of your employer's payroll periods, you received your last salary payment for 2006 in 2007, that income may be treated as earned in 2007. If you cannot treat that salary payment as income earned in 2007, the rules explained under Income earned in prior year, discussed later, apply. See Pub. 54 for more details.

Foreign earned income for this purpose means wages, salaries, professional fees, and other compensation received for personal services you performed in a foreign country during the period for which you meet the tax home test and either the bona fide residence test or the physical presence test. It also includes noncash income (such as a home or car) and allowances or reimbursements.

Foreign earned income does not include amounts that are actually a distribution of corporate earnings or profits rather than a reasonable allowance as compensation for your personal services. It also does not include the following types of income.

Pension and annuity income (including social security and railroad retirement benefits treated as social security).
Interest, ordinary dividends, capital gains, alimony, etc.
Portion of 2006 moving expense deduction allocable to 2007 that is included in your 2007 gross income. For details, see Moving Expense Attributable to Foreign Earnings in 2 Years under Moving Expenses in Pub. 54.
Amounts paid to you by the U.S. Government or any of its agencies if you were an employee of the U.S. Government or any of its agencies.
Amounts received after the end of the tax year following the tax year in which you performed the services.
Amounts you must include in gross income because of your employer's contributions to a nonexempt employees' trust or to a nonqualified annuity contract.

Income received in prior year. Foreign earned income received in 2006 for services you performed in 2007 can be excluded from your 2006 gross income if, and to the extent, the income would have been excludable if you had received it in 2007. To claim the additional exclusion, you must amend your 2006 tax return. To do this, file Form 1040X.

Income earned in prior year. Foreign earned income received in 2007 for services you performed in 2006 can be excluded from your 2007 gross income if, and to the extent, the income would have been excludable if you had received it in 2006.

If you are excluding income under this rule, do not include this income in Part IV. Instead, attach a statement to Form 2555 showing how you figured the exclusion. Enter the amount that would have been excludable in 2006 on Form 2555 to the left of line 45. Next to the amount enter “Exclusion of Income Earned in 2006.” Include it in the total reported on line 45.

Note. If you claimed any deduction, credit, or exclusion on your 2006 return that is definitely related to the 2006 foreign earned income you are excluding under this rule, you may have to amend your 2006 income tax return to adjust the amount you claimed. To do this, file Form 1040X.

Line 20. If you engaged in an unincorporated trade or business in which both personal services and capital were material income-producing factors, a reasonable amount of compensation for your personal services will be considered earned income. The amount treated as earned income, however, cannot be more than 30% of your share of the net profits from the trade or business after subtracting the deduction for one-half of self-employment tax.

If capital is not an income-producing factor and personal services produced the business income, the 30% rule does not apply. Your entire gross income is earned income.

Line 25. Enter the value of meals and/or lodging provided by, or on behalf of, your employer that is excludable from your income under section 119. To be excludable, the meals and lodging must have been provided for your employer's convenience and on your employer's business premises. In addition, you must have been required to accept the lodging as a condition of your employment. If you lived in a camp provided by, or on behalf of, your employer, the camp may be considered part of your employer's business premises. See Exclusion of Meals and Lodging in Pub. 54 for details.

Part VI

Line 28. Enter the total reasonable expenses paid or incurred during the tax year by you, or on your behalf, for your foreign housing and the housing of your spouse and dependents if they lived with you. You can also include the reasonable expenses of a second foreign household (defined later). Housing expenses are considered reasonable to the extent they are not lavish or extravagant under the circumstances.

Housing expenses include rent, utilities (other than telephone charges), real and personal property insurance, nonrefundable fees paid to obtain a lease, rental of furniture and accessories, residential parking, and household repairs. You can also include the fair rental value of housing provided by, or on behalf of, your employer if you have not excluded it on line 25.

Do not include deductible interest and taxes, any amount deductible by a tenant-stockholder in connection with cooperative housing, the cost of buying or improving a house, principal payments on a mortgage, or depreciation on the house. Also, do not include the cost of domestic labor, pay television, or the cost of buying furniture or accessories.

Include expenses for housing only during periods for which:

The value of your housing is not excluded from gross income under section 119 (unless you maintained a second foreign household as defined later), and
You meet the tax home test and either the bona fide residence or physical presence test.

Second foreign household. If you maintained a separate foreign household for your spouse and dependents at a place other than your tax home because the living conditions at your tax home were dangerous, unhealthful, or otherwise adverse, you can include the expenses of the second household on line 28.

Married couples. The following rules apply if both you and your spouse qualify for the tax benefits of Form 2555.

Same foreign household. If you and your spouse lived in the same foreign household and file a joint return, you must figure your housing amounts (line 33) jointly. If you file separate returns, only one spouse can claim the housing exclusion or deduction.

In figuring your housing amount jointly, either spouse (but not both) can claim the housing exclusion or housing deduction. However, if you and your spouse have different periods of residence or presence, and the one with the shorter period of residence or presence claims the exclusion or deduction, you can claim as housing expenses only the expenses for that shorter period. The spouse claiming the exclusion or deduction can aggregate the housing expenses of both spouses, subject to the limit on housing expenses (line 29b), and subtract his or her base housing amount.

Separate foreign households. If you and your spouse lived in separate foreign households, you each can claim qualified expenses for your own household only if:

Your tax homes were not within a reasonable commuting distance of each other, and
Each spouse's household was not within a reasonable commuting distance of the other spouse's tax home.

Otherwise, only one spouse can claim his or her housing exclusion or deduction. This is true even if you and your spouse file separate returns.

See Pub. 54 for additional information.

Line 29a. Enter the city or other location (if applicable) and the country where you incurred foreign housing expenses during the tax year only if your location is listed in the table beginning on page 5; otherwise, leave this line blank.

Line 29b. Your housing expenses may not exceed a certain limit. The limit on housing expenses varies depending upon the location in which you incur housing expenses. In 2007, for most locations, this limit is $25,710 (30 percent of $85,700) if your qualifying period includes all of 2007 (or $70.44 per day if the number of days in your qualifying period that fall within your 2007 tax year is less than 365).

The table beginning on page 5 lists the housing expense limits based on geographic differences in foreign housing costs relative to housing costs in the United States. If the location in which you incurred housing expenses is listed in the table, or the number of days in your qualifying period that fall within the 2007 tax year is less than 365, use the Limit on Housing Expenses Worksheet on this page to figure the amount to enter on line 29b. If the location in which you incurred housing expenses is not listed in the table, and the number of days in your qualifying period is 365, enter $25,710 on line 29b.

Limit on Housing Expenses Worksheet—Line 29b

Note. If the location in which you incurred housing expenses is not listed in the table beginning on page 5, and the number of days in your qualifying period that fall within the 2007 tax year is 365, DO NOT complete this worksheet. Instead, enter $25,710 on line 29b.
1.	Enter the number of days in your qualifying period that fall within the 2007 tax year (see the instructions for line 31)	1.
2.	Did you enter 365 on line 1?
	No. If the amount on line 1 is less than 365, skip line 2 and go to line 3.
	Yes. Locate the amount under the column Limit on Housing Expenses (full year) from the table beginning on page 5 for the location in which you incurred housing expenses. This is your limit on housing expenses. Enter the amount here and on line 29b. Do not complete the rest of this worksheet	2.
3.	Enter the amount under the column Limit on Housing Expenses (daily) from the table beginning on page 5 for the location in which you incurred housing expenses. If the location is not listed in the table, enter $70.44	3.
4.	Multiply line 1 by line 3. This is your limit on housing expenses. Enter the result here and on line 29b	4.

Example.

For 2007, because your location is not listed in the table beginning on page 5, your limit on housing expenses is $70.44 per day ($25,710 divided by 365). If you file a calendar year return and your qualifying period is January 1, 2007, to September 30, 2007 (273 days), you would enter $19,230 on line 29b ($70.44 mutiplied by 273 days).

More than one foreign location. If you moved during the 2007 tax year and incurred housing expenses in more than one foreign location as a result, complete the Limit on Housing Expenses Worksheet on this page for each location in which you incurred housing expenses, entering the number of qualifying days during which you lived in the applicable location on line 1. Add the results shown on line 4 of each worksheet, and enter the total on line 29b.

If you moved during the 2007 tax year and are completing more than one Limit on Housing Expenses Worksheet , the total number of days entered on line 1 of your worksheets may not exceed the total number of days in your qualifying period that fall within the 2007 tax year (that is, the number of days entered on Form 2555, line 31).

Line 31. Enter the number of days in your qualifying period that fall within your 2007 tax year. Your qualifying period is the period during which you meet the tax home test and either the bona fide residence or the physical presence test.

Example. You establish a tax home and bona fide residence in a foreign country on August 14, 2007. You maintain the tax home and residence until January 31, 2009. You are a calendar year taxpayer. The number of days in your qualifying period that fall within your 2007 tax year is 140 (August 14 through December 31, 2007).

Nontaxable U.S. Government allowances. If you or your spouse received a nontaxable housing allowance as a military or civilian employee of the U.S. Government, see Pub. 54 for information on how that allowance may affect your housing exclusion or deduction.

Line 34. Enter any amount your employer paid or incurred on your behalf that is foreign earned income included in your gross income for the tax year (without regard to section 911).

Examples of employer-provided amounts are:

Wages and salaries received from your employer.
The fair market value of compensation provided in kind (such as the fair rental value of lodging provided by your employer as long as it is not excluded on line 25).
Rent paid by your employer directly to your landlord.
Amounts paid by your employer to reimburse you for housing expenses, educational expenses of your dependents, or as part of a tax equalization plan.

Self-employed individuals. If all of your foreign earned income (Part IV) is self-employment income, skip lines 34 and 35 and enter -0- on line 36. If you qualify, be sure to complete Part IX.

Part VII

Married couples. If both you and your spouse qualify for, and choose to claim, the foreign earned income exclusion, figure the amount of the exclusion separately for each of you. You each must complete Part VII of your separate Forms 2555.

Community income. The amount of the exclusion is not affected by the income-splitting provisions of community property laws. The sum of the amounts figured separately for each of you is the total amount excluded on a joint return.

Part VIII

If you claim either of the exclusions, you cannot claim any deduction (including moving expenses), credit, or exclusion that is definitely related to the excluded income. If only part of your foreign earned income is excluded, you must prorate such items based on the ratio that your excludable earned income bears to your total foreign earned income. See Pub. 54 for details on how to figure the amount allocable to the excluded income.

The exclusion under section 119 and the housing deduction are not considered definitely related to the excluded income.

Line 44. Report in full on Form 1040 and related forms and schedules all deductions allowed in figuring your adjusted gross income (Form 1040, line 37). Enter on line 44 the total amount of those deductions (such as the deduction for moving expenses, the deduction for one-half of self-employment tax, and the expenses claimed on Schedule C or C-EZ (Form 1040)) that are not allowed because they are allocable to the excluded income. This applies only to deductions definitely related to the excluded earned income. See Pub. 54 for details on how to report your itemized deductions (such as unreimbursed employee business expenses) that are allocable to the excluded income.

IRA deduction. The IRA deduction is not definitely related to the excluded income. However, special rules apply in figuring the amount of your IRA deduction. For details, see Pub. 590, Individual Retirement Arrangements (IRAs).

Foreign taxes. You cannot take a credit or deduction for foreign income taxes paid or accrued on income that is excluded under either of the exclusions.

If all of your foreign earned income is excluded, you cannot claim a credit or deduction for the foreign taxes paid or accrued on that income.

If only part of your income is excluded, you cannot claim a credit or deduction for the foreign taxes allocable to the excluded income. See Pub. 514, Foreign Tax Credit for Individuals, for details on how to figure the amount allocable to the excluded income.

Housing Deduction Carryover Worksheet—Line 49

1.	Enter the amount from your 2006 Form 2555, line 46		1.
2.	Enter the amount from your 2006 Form 2555, line 48		2.
3.	Subtract line 2 from line 1. If the result is zero, stop; enter -0- on line 49 of your 2007 Form 2555. You do not have any housing deduction carryover from 2006		3.
4.	Enter the amount from your 2007 Form 2555, line 47		4.
5.	Enter the amount from your 2007 Form 2555, line 48		5.
6.	Subtract line 5 from line 4		6.
7.	Enter the smaller of line 3 or line 6 here and on line 49 of your 2007 Form 2555. If line 3 is more than line 6, you cannot carry the difference over to any future tax year	▶	7.

Part IX

If line 33 is more than line 36 and line 27 is more than line 43, complete this part to figure your housing deduction. Also, complete this part to figure your housing deduction carryover from 2006.

One-year carryover. If the amount on line 46 is more than the amount on line 47, you can carry the difference over to your 2008 tax year. If you cannot deduct the excess in 2008 because of the 2008 limit, you cannot carry it over to any future tax year.

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