Foreign Earned Income Exclusion Increases for 2006
Both of these changes were made in light of the Tax Increase Prevention and Reconciliation Act (TIPRA). The foreign earned income exclusion amount is now indexed for inflation starting with the 2006 tax year. Prior to TIPRA, the exclusion was set at $80,000 per year with indexing for inflation scheduled for tax year 2008. TIPRA also changed how the foreign housing exclusion is calculated. The IRS and Treasury Department have provided higher maximum housing exclusions for foreign cities with higher costs of living.
Both the foreign earned income exclusion and the foreign housing exclusion are available for expatriates who qualify under the physical presence or bona fide residence tests.
Expatriates will pay tax on their non-excluded income at their ordinary income tax rates. Under TIPRA, expatriates must use the tax bracket that would apply had they not claimed the exclusion. For many expatriates, that means they will start with the 25% or 28% tax brackets, instead of the more favorable 10% bracket.
IRS News:
- Rev Proc 2006-51 for the foreign earned income exclusion amount
- Notice 2006-87 for foreign housing exclusion
Hello Mr. Perez,
I came across your articles and want to congratulate you on their excellent content. Understandable by a layman, professional, and focused to the point!
Hopefully you will get this and possibly be able to reply quickly since I’m trying to file my 2006 taxes (yes I did file for an extension).
I’m an American US born citizen that worked as a contractor in Baghdad Iraq for just over 3 months. However, after our compound in the green zone was bombed and 9 people lost their lives, it was necessary for me to return home when my wife found out about it. I mention that because your article “Foreign Earned Income Exclusion” mentioned that if someone had planned on staying the full year (more than the 330 days) yet it became necessary to leave due to risk of life etc., that person can still receive a tax exclusion for income up to $82K. My income was $40K and I would like to know if I can use the Foreign Earned Income Exclusion for my situation? And if so (I hope) how?
I have been using tax cut for many years and it has served me well. However, after preparing my 2006 taxes last night and even though it stated after the error checking that all was done correctly (and yes it did take me through the details of the Foreign Earned Income Exclusion). But when I filled
electronically last night, I received an email from them a couple of hours later saying I have rejection code 30-FD-7865 – Form 2555, Part III, Physical Presence must be for at least 330 days.
Can you PLEASE help me with this? I’m leaving for a family trip on Tuesday Oct 7th and wanted to get this filled correctly because I will be away over the deadline of the extension of Oct 15th.
There’s a three-part test to demonstrate that you would be eligible for a prorated foreign earned income exclusion. This three-part test is laid out in Internal Revenue Code section 911 paragraph (d)(4).
This provision of the tax law is explained briefly in Publication 54 in the section on the Waiver of Time Requirements.
Basically, you need to show that
(1) you were a bona fide resident or were physically present in a foreign country
(2) the IRS has certified that US citizens were required to leave the country due to civil unrest, war or similar adverse conditions, and
(3) you would have meet the bona fide resident or physical presence test had not you been compelled to leave.
This 3-part test requires that all three tests be meet. The major stumbling block I see for your return is the 2nd test. Each year the IRS releases a list of countries that would qualify for the prorated foreign exclusion. For 2006, the only countries for which the IRS is allowing a prorated exclusion for adverse conditions are East Timor, Lebanon, and Nepal. See Revenue Procedure 2007-28.
The last time Iraq was on this list was 2004. US citizens working in Iraq had to exit the country by July 29, 2004, and still be eligible to claim the foreign exclusion. After that date, the IRS is denying the foreign exclusion unless the taxpayer has been issued a license from the Office of Foreign Assets Control called a General License #1. This license waives the time and travel restrictions for taxpayers working in Iraq. Absent a license to this effect, you will not be eligible for the foreign exclusion. I note that the IRS has written this into their internal manual for processing returns. That manual directs IRS employees to disallow the foreign exclusion for any taxpayer working in Cuba, Iraq, or Libya.
http://www.irs.gov/irm/part3/ch12s09.html
(This is a rather long page, use the Find feature to search for “Iraq”.)
I’m sorry this could not be a more favorable answer.
Let me know if you have any questions.
William