To qualify for the foreign earned income exclusion, you must have a foreign tax home, earn foreign income and satisfy the physical presence or bona fide resident test.
- Foreign Tax Home: Your tax home is in the country where you are permanently employed and not necessarily in the country where you maintain a family home. For example, if you work for an Italian company in Milan and maintain a residence in the U.S. that you return to periodically throughout the year; your tax home is in Italy.
- Foreign Earned Income: Foreign earned income refers to all compensation you receive for providing services to a foreign employer (or through self-employment) in a foreign country. This excludes the wages you receive as an employee of the U.S. government, pension or annuity payments and Social Security benefits. It does, however, include certain noncash allowances and reimbursements you receive such as cost of living allowances, overseas differentials, family allowances, education reimbursements, and home-leave pay.
- Physical Presence or Bona Fide Resident: You are a bona fide resident if you maintain a residence in the foreign country and reside there for an entire tax year, generally Jan 1 through Dec. 31. It is irrelevant whether you return to the U.S. periodically as long as you intend on returning to the foreign country each time. However, if you are in the foreign country for a temporary assignment, you are not a bona fide resident even when you reside there for a full tax year. If you cannot satisfy these requirements, you may still qualify under the physical presence test. This requires you be physically present in a foreign country for at least 330 days during a 12-month period.