The foreign earned income exclusion, the foreign housing exclusion, and the foreign housing deduction are based on foreign earned income. For this purpose, foreign earned income is income you receive for services you perform in a foreign country in a period during which your tax home is in a foreign country and you meet either the bona fide residence test or the physical presence test.
Earned income is pay for personal services performed, such as wages, salaries, or professional fees. The list below classifies many types of income into three categories. The column headed "Variable Income" lists income that may fall into the earned income category, the unearned income category, or partly into both.
Classification of Types of Income
|Earned Income||Unearned Income||Variable Income|
|Salaries and wages||Dividends||Business profits|
|Professional fees||Gambling winnings||Scholarships and Fellowships|
|Social security benefits|
In addition to the types of earned income listed, certain noncash income and allowances or reimbursements are considered earned income. The fair market value of property or facilities provided to you by your employer in the form of lodging, meals, or use of a car is earned income.
Allowances or Reimbursements
Earned income includes amounts paid to you as allowances or reimbursements for the following items:
- Cost of living
- Overseas differential
- Home leave
- Moving (unless excluded from income)
Amounts Not Included in Foreign Earned Income
- Reimbursements for expenses you incur on behalf of your employer under an accountable plan
- The value of meals and lodging furnished for the convenience of your employer that was not included in your income
- Pension or annuity payments including social security benefits
- Pay you receive as an employee of the U.S. government
- Amounts included in your income because of your employer's contributions to a nonexempt employee trust or to a nonqualified annuity contract
- Payments received after the end of the tax year following the tax year in which you performed the services that earned the income
Earned and Unearned Income
Earned income was defined earlier as pay for personal services performed. For further information on specific types of income – such as income from sole proprietorships, partnerships, and corporations, stock options, royalties, rents, and fringe benefits – refer to Chapter 4 of Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad.
Source of Earned Income
The source of your earned income is the place where you perform the services for which you received the income. Foreign earned income is income you receive for performing personal services in a foreign country. Where or how you are paid has no effect on the source of the income. For example, income you receive for work done in France is income from a foreign source even if the income is paid directly to your bank account in the United States and your employer is in New York City.
If you receive a specific amount for work done in the United States, you must report that amount as U.S. source income. If you cannot determine how much is for work done in the United States, or for work done partly in the United States and partly in a foreign country, determine the amount of U.S. source income using the method that most correctly shows the proper source of your income. In most cases you can make this determination on a time basis. U.S. source income is the amount that results from multiplying your total pay (including allowances, reimbursements, and noncash fringe benefits) by a fraction. The numerator (top number) is the number of days you worked within the United States. The denominator (bottom number) is the total number of days of work for which you were paid.
You are a U.S. citizen, a bona fide resident of a foreign country, and working in the foreign country as a mining engineer. Your salary is $76,800 per year. You also receive a $6,000 cost of living allowance, and a $6,000 education allowance. Your employment contract did not indicate that you were entitled to these allowances only while outside the United States.
Your total income is $88,800. You work a 5-day week, Monday through Friday. After subtracting your vacation, you have a total of 240 workdays in the year. You worked in the United States during the year for 6 weeks (30 workdays). To figure the part for work done in the United States during the year, divide the number of days you worked in the United States during the year (30) by the number of days you worked during the year (240) and multiply that by your total income ($88,800), as follows:
30/240 × $88,800 = $11,100
Your U.S. source earned income is $11,100.
For more information refer to "Foreign Earned Income" in Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad.