How to Figure the Foreign Earned Income Exclusion

Q: Can you walk me through the new formula for figuring the foreign earned income exclusion?
Katherine

A: Everyone first needs to read my post on the Foreign Earned Income Exclusion.

First, add together the current exclusion amount to the housing exclusion amount for the country you are in.  For most people, this should be a little over $100,000, so let's say this is what it is for you.

Then, assuming you have passed either the physical presence test (330 out of any 365 days) or the bona fide residence test, count how many days in the calendar year qualify as "exclusion days."  Let's say this is 150 for you.

Then, divide your exclusion days (150) by the number of days in the calendar year (let's ignore the leap year here and say 365 for this example).  You'd arrive at .41095.  Multiply this by your maximum exclusion amount ($100,000), and you get $41,095.  This is the most you can exclude in foreign income for this year.

Thanks to the new rules, any income earned above this income is taxed in the income tax bracket it would fall in if none of the income could be excluded.  This makes the exclusion far less lucrative than it used to be.  There's always the foreign tax credit, which has a totally different set of rules.

Bottom line--don't do this without software unless you like numbers...a lot.

Comments

[Nichole Parker]

Don't forget that to claim the housing exclusion your housing expenses have to be at least $13,712 (for 2007). For the first time in quite a while, I had a couple of clients this year whose housing expenses were slightly under that amount so they didn't get any benefit at all!

[Sandra Renteria]

Hi. I am moving to South America to focus on my Non-Profit foundation. I am currently applying for Peruvian Residencey.

I do not make an income, but my husband does. Since we file jointly does he qualify for this exemption?

Thanks!