If you are a U.S. citizen or a resident alien of the United States and you live abroad, you are taxed on your worldwide income. However, you may qualify to exclude from income up to an amount of your foreign earnings that is adjusted annually for inflation and is $107,600 for 2020. In addition, you can exclude or deduct certain foreign housing amounts. Foreign Earned Income Exclusion - Requirements To claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, you must have foreign earned income, your tax home must be in a foreign country, and you must be one of the following: A U.S. citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, A U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, or A U.S. citizen or a U.S. resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months. Changes in the Foreign Earned Income Exclusion The amount of foreign earned income (and foreign housing costs) excluded from an individual's gross income will be used for purposes of determining the rate of income tax and alternative minimum tax (AMT) that applies to his or her non-excluded income. An individual’s tax on any foreign earned income above the exclusion amount and on any unearned income is computed as if the foreign earned income exclusion was not claimed. The individual's tax will be the excess of the tax that would be imposed if his or her taxable income were increased by the amount(s) excluded, and the tax that would be imposed if his or her taxable income were equal to the excluded amount(s). For this purpose, the excluded amount(s) will be reduced by the aggregate amount of any deductions or other exclusions otherwise disallowed. Figuring the Foreign Earned Income Exclusion A common misconception about the foreign earned income is that it is exempt income not reportable on a U.S. tax return. In fact, only a qualifying individual with qualifying income may elect to exclude foreign earned income, and the qualifying exclusion applies only if the qualifying individual files a tax return and reports the income. Limit on Excludable Amount The foreign earned income exclusion amount is adjusted annually for inflation. For tax year 2020, the maximum foreign earned income exclusion is up to $107,600 per qualifying person. If the individuals are married and both work abroad and meet either the bona fide residence test or the physical presence test, each one can choose the foreign earned income exclusion. In addition, the amount of qualified housing expenses eligible for the housing exclusion and housing deduction is also limited. The limitation on housing expenses is generally 30% of the maximum foreign earned income exclusion. However, the limit will vary depending upon the location of the qualifying individual’s foreign tax home and the number of qualifying days in the tax year. The foreign earned income exclusion is limited to the actual foreign earned income minus the foreign housing exclusion. Therefore, to exclude a foreign housing amount, the qualifying individual must first figure the foreign housing exclusion before determining the amount for the foreign earned income exclusion. What to file You must attach Form 2555 to your Form 1040 or 1040X if you claim the foreign housing exclusion or the foreign housing deduction. Form 2555 shows how you qualify for the bona fide residence test or physical presence test, how much of your foreign earned income is excluded, and how to figure the amount of your allowable foreign housing exclusion or deduction. 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 IRS 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 IRS Pub. 54 for more information. Figuring tax on income not excluded. If you claim either of the exclusions or the housing deduction, 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. Earned income credit. You cannot take the earned income credit if you claim either of the exclusions or the housing deduction. Foreign tax credit or deduction. You cannot take a credit or deduction for foreign income taxes paid or accrued on income that is excluded under either of the exclusions. If all of your foreign earned income is excluded, you cannot claim a credit or deduction for the foreign taxes paid or accrued on that income. If only part of your income is excluded, you cannot claim a credit or deduction for the foreign taxes allocable to the excluded income. See IRS Pub. 514, Foreign Tax Credit for Individuals, for details on how to figure the amount allocable to the excluded income.