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taxmap/pubs/p54-014.htm#TXMP3cc8d0e7 Chapter 5 Exemptions, Deductions, and Credits(p38)

Exemption, Deduction, and Credit

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taxmap/pubs/p54-014.htm#TXMP52b5e019 Items Related to Excluded Income(p38)

U.S. citizens and resident aliens living outside the United States generally are allowed the same deductions as citizens and residents living in the United States.

If you choose to exclude foreign earned income or housing amounts, you cannot deduct, exclude, or claim a credit for any item that can be allocated to or charged against the excluded amounts. This includes any expenses, losses, and other normally deductible items that are allocable to the excluded income. You can deduct only those expenses connected with earning includible income.

These rules apply only to items definitely related to the excluded earned income and they do not apply to other items that are not definitely related to any particular type of gross income. These rules do not apply to items such as:

• Personal exemptions,
• Qualified retirement contributions,
• Alimony payments,
• Charitable contributions,
• Medical expenses,
• Mortgage interest, or
• Real estate taxes on your personal residence.

For purposes of these rules, your housing deduction is not treated as allocable to your excluded income, but the deduction for self- 
employment tax is.

If you receive foreign earned income in a tax year after the year in which you earned it, you may have to file an amended return for the earlier year to properly adjust the amounts of deductions, credits, or exclusions allocable to your foreign earned income and housing exclusions.

taxmap/pubs/p54-014.htm#TXMP64e2f3c6
Example.(p38)

In 2006, you had $80,000 of foreign earned income and $7,500 of deductions allocable to your foreign earned income. You did not have a housing exclusion. If you excluded all of your foreign earned income, you would not have been able to claim any of the deductions on your 2006 return. If you received a $10,000 bonus in 2007 for work you did abroad in 2006, you can exclude $2,400 of the bonus because the limit on the foreign earned income exclusion for 2006 was $82,400 and you have already excluded $80,000. Since you must include $7,600 of the bonus ($10,000 − $2,400) for work you did in 2006 in income, you can file an amended return for 2006 to claim $633 of the deductions. This is the deductions allocable to the foreign earned income ($7,500) multiplied by the includible portion of the foreign earned income ($7,600) and divided by the total foreign earned income for 2006 ($90,000).

Previous Page:  Publication 54 - Tax Guide for U.S. Citizens and Resident Aliens Abroad - Form 2555 and Form 2555-EZ Next Page:  Publication 54 - Tax Guide for U.S. Citizens and Resident Aliens Abroad - Exemptions Use   to find additional occurrences of topic items.