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 during a period your tax home is in a foreign country and during which 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 that follows classifies many types of income into three categories. The column headed Variable Income lists income that may fall into either the earned income category, the unearned income category, or partly into both. For more information on earned and unearned income, see Earned and Unearned Income, below.
Classification of Types of Income
|Earned Income||Unearned Income||Variable Income|
|Salaries and wages||Dividends||Business profits|
|Professional fees||Gambling winnings|
|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
Reimbursement of Moving Expenses
Earned income may include reimbursement of moving expenses. You must include as earned income:
- Any reimbursements of, or payments for, nondeductible moving expenses
- Reimbursements that are more than your deductible expenses and that you do not return to your employer
- Any reimbursements made (or treated as made) under a nonaccountable plan, even if they are for deductible expenses (a nonaccountable plan is any plan that does not meet the rules for an accountable plan as described in Chapter 5 of Publication 15, (Circular E), Employer's Tax Guide), and
- Any reimbursement of moving expenses you deducted in an earlier year
A foreign move is a move in connection with the start of work at a new job location outside the United States and its territories. A foreign move does not include a move back to the United States or its territories.
When your new place of work is in a foreign country, your moving expenses are directly connected with the income earned in that foreign country. If you exclude all or part of the income that you earn at the new location under the foreign earned income exclusion or the foreign housing exclusion, you cannot deduct the part of your moving expense that is allocable to the excluded income.
Also, you cannot deduct the part of the moving expense related to the excluded income for a move from a foreign country to the United States if you receive a reimbursement that you are able to treat as compensation for services performed in the foreign country.
For more detailed information for determining when the reimbursement of moving expenses is considered earned income, or where the reimbursement is considered earned, see Moving Expenses in Chapter 5 of Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad.
Amounts Not Included In Foreign Earned Income
- The previously excluded value of meals and lodging furnished for the convenience of your employer
- 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
- Recaptured unallowable moving expenses
- 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. Some types of income are not easily identified as earned or unearned income. These types of income -specifically, income from sole proprietorships, partnerships, and corporations, stock options, pensions and annuities, royalties, rents, and fringe benefits - are further explained in 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 located 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 other than for foreign moves, 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 Country A, and working 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). The following shows how to figure the part for work done in the United States during the year. Number of days worked in the United States during the year (30) ÷ Number of days of work during the year for which payment was made (240) × Total income ($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.