Offices & Departments
IRS
Foreign Earned Income Exclusion
In 2007, if you had a tax home in a foreign country and you met either the bona fide residence test or the physical presence test, you may be able to claim a foreign earned income exclusion of up to $85,700 and a housing exclusion or deduction for certain reasonable qualified foreign housing costs. U.S. government employees do not qualify for either the foreign earned income exclusion or the housing exclusion with respect to their government salaries.
For 2007, the housing exclusion and/or deduction floor increased to $13,712.00 and the general limit on excluding or deducting certain reasonable housing expenses increased to $25,710 (or $70.44 per day if the qualifying period is less than 365 days), though the limits for certain cities may be higher. See page five of the Instructions for Form 2555 for further information.
The foreign earned income exclusion is claimed on either Form 2555 or Form 2555-EZ, and the foreign housing exclusion or deduction is claimed on Form 2555. Use Form 2555 if you are self-employed and/or claim the foreign housing exclusion or deduction. Use Form 2555-EZ if are a salaried employee and you do not claim the foreign housing exclusion.
Note: Beginning in 2006, if you claim the foreign earned income exclusion and/or the housing exclusion or deduction, you must now determine the tax on your non-excluded income using the tax rates that would have applied had you not claimed the exclusions by completing the Foreign Earned Income Tax Worksheet in the Instructions for Form 1040.