If you are a United States citizen or a resident alien who lives and works abroad, you may qualify to exclude all or part of your foreign earnings from your income. If you are a U.S. 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 $72,000 of foreign earned income for tax year 1998. The $72,000 exclusion amount will increase by $2,000 a year until it reaches $80,000 in the year 2002 and thereafter. Resident aliens with a tax home in a foreign country may be eligible for the exclusion if they meet the physical presence test, or if they are citizens or nationals of a country with which the United States has an income tax treaty and meet the bona fide residence test. Specific guidelines for these two tests are covered in Topic 854. The maximum annual exclusion is prorated on a daily basis if there is any part of your year that you do not qualify under either test.

If you qualify under either test, you may also claim an additional exclusion or deduction, based upon what you spend for foreign housing. The foreign earned income exclusion and the foreign housing exclusion or deduction are figured on Form 2555, which you attach to Form 1040. However, if you claim only the foreign earned income exclusion, you may be able to use Form 2555-EZ instead.

If you would like more information on who qualifies for the exclusion, select Topic 854. For more information on what type of income qualifies for the exclusion, select Topic 855.

Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad, can be downloaded from this site, or ordered by calling 1-800-829-3676.

If the information you need relating to this topic is not addressed in Publication 54, you may call the IRS National Office hotline. The number is area code (202) 874-1460. This is not a toll-free number.

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