If you are living and working abroad you may be entitled to the Foreign Earned Income Exclusion. Here are some important facts about the exclusion:

1. The Foreign Earned Income Exclusion: United States Citizens and resident aliens who live and work abroad may be able to exclude all or part of their foreign salary or wages from their income when filing their U.S. federal tax return. They may also qualify to exclude compensation for their personal services or certain foreign housing costs.

2. The General Rules: To qualify for the foreign earned income exclusion, a U.S. citizen or resident alien must have a tax home in a foreign country and income received for working in a foreign country, otherwise known as foreign earned income. The taxpayer must also meet one of two tests: the bona fide residence test or the physical presence test.

3. The Exclusion Amount: The foreign earned income exclusion is adjusted annually for inflation. For 2008, the maximum exclusion is up to $87,600 per qualifying person.

4. Claiming the Exclusion: The foreign earned income exclusion and the foreign housing exclusion or deduction are claimed using Form 2555, which should be attached to the taxpayer’s Form 1040. A shorter Form 2555-EZ is available to certain taxpayers claiming only the foreign income exclusion.

5. Taking Other Credits or Deductions: Once the foreign earned income exclusion is chosen, a foreign tax credit or deduction for taxes cannot be claimed on the excluded income. If a foreign tax credit or tax deduction is taken on any of the excluded income, the foreign earned income exclusion will be considered revoked.

For more information about the Foreign Earned Income Exclusion get Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad and the instructions for Form 2555. Both are available on the IRS Web site at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Links:

• Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad (PDF 348K)
• Form 2555, Foreign Earned Income
• Form 2555-EZ, Foreign Earned Income Exclusion

Source: irs.gov

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AskTaxGuru - Free Tax Resource

Hi,

As a citizen living abroad in China, I wanted to know about the state level of the foreign earned income exclusion, specifically NY and NJ. Do either of these conform to Sec 911 and allow for the foreign earned income exclusion? I believe I read that NJ does not, but NY does, although I'm having trouble finding references to support these claims. Any advice would be greatly appreciated! I'm just trying to figure out if I need to pay any state taxes given that I was out of the country for the entire year and do not have to pay federal b/c of the FEIC and the fact that I paid taxes abroad in China. If the state does conform, then I can write off such payments similar to the federal return.

Thanks!

B