This is archived information that pertains only to the 2006 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.
Do not include on Form 1040, line 64 (federal income tax withheld), any taxes a foreign employer withheld from your pay and
paid to the foreign
country's tax authority instead of to the U.S. Treasury.
Exclusion amount.
The maximum foreign earned income exclusion is now adjusted annually for inflation. For 2006, the maximum exclusion
has increased to $82,400.
Figuring tax on income not excluded.
If you claim the foreign earned income exclusion or housing exclusion, you must figure the tax on your nonexcluded
income using the tax rates that
would have applied had you not claimed the exclusions. See the Instructions for Form 1040 and complete the
Foreign Earned Income Tax
Worksheet to figure the amount of tax to enter on Form 1040, line 44. When figuring your alternative minimum tax on Form 6251, you
must use the
Foreign Earned Income Tax Worksheet in the instructions for Form 6251.
If you qualify, you can use Form 2555-EZ instead of Form 2555, Foreign Earned Income, to exclude a limited amount of your
foreign earned income.
You cannot exclude more than your foreign earned income for the year.
U.S. citizens and U.S. resident aliens living in a foreign country are subject to the same U.S. income tax laws that apply
to citizens and resident
aliens living in the United States.
Note.
Specific rules apply to determine if you are a resident or nonresident alien of the United States. See Pub. 519, U.S.
Tax Guide for Aliens, for
details.
You can use Form 2555-EZ to claim the foreign earned income exclusion if all of the following apply.
-
You meet the seven conditions listed at the top of Form 2555-EZ.
-
Your total foreign earned income received in 2006 is reported on Form 1040, line 7.
-
You do not have a housing deduction carryover from 2005.
-
You meet either the bona fide residence test (see the instructions for lines 1a and 1b on page 2) or the physical presence
test (see the
instructions for lines 2a and 2b on page 2).
-
You meet the tax home test (see the instructions for line 3 on page 2).
Foreign country.
A foreign country is any territory (including the airspace, territorial waters, seabed, and subsoil) under the sovereignty
of a government other
than the United States.
The term “
foreign country” does not include U.S. possessions or territories. It does not include the Antarctic region.
Note.
If your only earned income from work abroad is pay you received from the U.S. Government as its employee, you do not
qualify for the foreign earned
income exclusion. Do not file Form 2555-EZ.
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 must each complete separate Forms 2555-EZ.
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.
Generally, if you were in Cuba in violation of U.S. travel restrictions, the following rules apply.
Note.
If you performed services at the U.S. Naval Base at Guantanamo Bay, you were not in violation of U.S. travel restrictions.
Pub. 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad, has more information about the bona fide residence test,
the physical presence
test, and the foreign earned income exclusion. You can get this publication from most U.S. embassies and consulates or by
writing to: National
Distribution Center, P.O. Box 8903, Bloomington, IL 61702-8903. You can also download this publication (as well as other forms
and publications) from
the IRS website at
www.irs.gov.
Waiver of Time Requirements
If your tax home was in a foreign country and you were a bona fide resident of, or physically present in, a foreign country
and had to leave
because of war, civil unrest, or similar adverse conditions, the minimum time requirements specified under the bona fide residence
and physical
presence tests may be waived. You must be able to show that you reasonably could have expected to meet the minimum time requirements
if you had not
been required to leave. Each year the IRS will publish in the Internal Revenue Bulletin a list of countries and the dates
they qualify for the waiver.
If you left one of the countries during the period indicated, you can claim the foreign earned income exclusion on Form 2555-EZ,
but only for the
number of days you were a bona fide resident of, or physically present in, the foreign country.
If you can claim the foreign earned income exclusion because of the waiver of time requirements, attach a statement to your
return explaining that
you expected to meet the applicable time requirement, but the conditions in the foreign country prevented you from the normal
conduct of business.
Also, enter “Claiming Waiver” in the top margin on page 1 of your 2006 Form 2555-EZ.
Form 1040 is generally due April 16, 2007.
However, you are automatically granted a 2-month extension of time to file (to June 15, 2007) if, on the due date of your
return, you live outside
the United States and Puerto Rico and your tax home (defined later) is outside the United States and Puerto Rico. If you take
this extension, you must
attach a statement to your return explaining that you meet these two conditions.
The automatic 2-month extension also applies to paying the tax. However, interest is charged on the unpaid tax from the regular
due date until it
is paid.
Special extension of time.
The first year you plan to take the foreign earned income exclusion, you may not expect to qualify until after the
automatic 2-month extension
period described above. If this occurs, you can apply for an extension to a date after you expect to qualify.
To apply for this extension, complete and file Form 2350, Application for Extension of Time To File U.S. Income Tax
Return, with the Internal
Revenue Service Center, Austin, TX 73301-0215, before the due date of your return. Interest is charged on the tax not paid
by the regular due date as
explained earlier.
To choose the foreign earned income exclusion, complete the appropriate parts of Form 2555-EZ and file it with your Form 1040
or Form 1040X,
Amended U.S. Individual Income Tax Return. Your initial choice to claim the exclusion must usually be made on a timely filed
return (including
extensions) or on a return amending a timely filed return. However, there are exceptions. See Pub. 54 for more information.
Once you choose to claim the exclusion, that choice remains in effect for that year and all future years unless it is revoked.
To revoke your
choice, you must attach a statement to your return for the first year you do not wish to claim the exclusion. If you revoke
your choice, you cannot
claim the exclusion for your next 5 tax years without the approval of the Internal Revenue Service. See Pub. 54 for details.
Earned income credit.
You cannot take the earned income credit if you claim the exclusion.
Foreign tax credit or deduction.
You cannot claim a credit or deduction for foreign income taxes paid on income you exclude. If all of your foreign
earned income is excluded, you
cannot claim a credit or deduction for the foreign taxes paid 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. For details on how to figure the amount allocable to the
excluded income, see Pub.
514, Foreign Tax Credit for Individuals.
IRA deduction.
If you claim the exclusion, special rules apply in figuring the amount of your IRA deduction. For details, see Pub.
590, Individual Retirement
Arrangements (IRAs).
