| Instructions for Form 2555 |
2006 Tax Year |
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.
Housing expenses—base amount.
The computation of the base housing amount (line 32 of Form 2555) has changed and is now tied to the maximum foreign
earned income exclusion. The
amount is 16 percent of the exclusion amount (computed on a daily basis), multiplied by the number of days in your qualifying
period that fall within
your 2006 tax year.
Housing expenses—maximum amount.
The amount of qualified housing expenses eligible for the housing exclusion and housing deduction is now limited.
If you are claiming the housing
exclusion or deduction, see page 3 of these instructions to figure the amount to enter on Form 2555, line 29b.
Figuring tax on income not excluded.
If you claim the foreign earned income exclusion, the housing exclusion, or both, 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 are a U.S. citizen or a U.S. resident alien living in a foreign country, you are subject to the same U.S. income tax
laws that apply to
citizens and resident aliens living in the United States. But if you qualify, use Form 2555 to exclude a limited amount of
your foreign earned income.
Also, use it to claim the housing exclusion or deduction. You cannot exclude or deduct more than your foreign earned income
for the tax year.
You may be able to use Form 2555-EZ, Foreign Earned Income Exclusion, if you did not have any self-employment income for the
year, your total
foreign earned income did not exceed $82,400, you do not have any business or moving expenses, and you do not claim the housing
exclusion or
deduction. For more details, see Form 2555-EZ and its separate instructions.
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 qualify for the tax benefits available to taxpayers who have foreign earned income if both of the following apply.
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 either of the
exclusions or the housing deduction. Do not file Form 2555.
Tax home test.
To meet this test, your tax home must be in a foreign country, or countries (see Foreign country, later), throughout your period of bona
fide residence or physical presence, whichever applies. For this purpose, your period of physical presence is the 330 full
days during which you were
present in a foreign country, not the 12 consecutive months during which those days occurred.
Your tax home is your regular or principal place of business, employment, or post of duty, regardless of where you
maintain your family residence.
If you do not have a regular or principal place of business because of the nature of your trade or business, your tax home
is your regular place of
abode (the place where you regularly live).
You are not considered to have a tax home in a foreign country for any period during which your abode is in the United
States. However, if you are
temporarily present in the United States, or you maintain a dwelling in the United States (whether or not that dwelling is
used by your spouse and
dependents), it does not necessarily mean that your abode is in the United States during that time.
Example.
You are employed on an offshore oil rig in the territorial waters of a foreign country and work a 28-day on/28-day
off schedule. You return to
your family residence in the United States during your off periods. You are considered to have an abode in the United States
and do not meet the tax
home test. You cannot claim either of the exclusions or the housing deduction.
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.
Generally, if you were in Cuba in violation of U.S. travel restrictions, the following rules apply:
-
Any time spent in Cuba cannot be counted in determining if you qualify under the bona fide residence or physical presence
test,
-
Any income earned in Cuba is not considered foreign earned income, and
-
Any housing expenses in Cuba (or housing expenses for your spouse or dependents in another country while you were in Cuba)
are not
considered qualified housing expenses.
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, the foreign earned income exclusion, and the housing exclusion and deduction. 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 tax benefits on Form 2555, 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 either of the exclusions or the housing deduction 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.
A 2006 calendar year 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, for a 2006 calendar year return)
if, on the due date
of your return, you live outside the United States and Puerto Rico and your tax home (defined earlier) 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 (April 16,
2007, for a 2006 calendar year return) until it is paid.
Special extension of time.
The first year you plan to take the foreign earned income exclusion and/or the housing exclusion or deduction, you
may not expect to qualify until
after the automatic 2-month extension period described earlier. 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.
Choosing the Exclusion(s)
To choose either of the exclusions, complete the appropriate parts of Form 2555 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 details.
Once you choose to claim an 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(s). If you revoke
your choice, you cannot
claim the exclusion(s) for your next 5 tax years without the approval of the Internal Revenue Service. See Pub. 54 for more
information.
Earned income credit.
You cannot take the earned income credit if you claim either of the exclusions or the housing deduction.
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