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What about exclusion, and should I take one?

If you are selling your personal home but did not meet the 2/5-year requirement, there are some reduced exclusions such as a change in employment, health, or other unforeseen events. Keep in mind this exclusion is only every two years, so use it wisely. If this is your case, consult with TaxMax and we can help determine what your eligible exclusion could be.

The exclusion of foreign earned income is voluntary. You can choose to exclude foreign earned income and/or exclude foreign living space by completing the relevant parts of Form 2555. The initial selection of exclusions on Form 2555, Foreign Income, must generally be done with:

a timely return (including any extensions),
a return to modify a return submitted on time or
a late return submitted within one year of the original return expiration date (regardless of renewals).
You may choose exclusion for a return filed after the periods described above, provided that no federal income tax is due after considering the exclusion.

If you are subject to federal income tax after considering the exclusion, you can select the exclusion for a return filed after the above periods, provided the filing is before the IRS determines that you have not selected the exclusions. You must type or print legibly "SUBMITTED UNDER SECTION 1.911-7 (a) (2) (i) (D)" at the top of the first page of the 1040 form.

If, after considering the exclusion, you are subject to federal income tax and the IRS determines that you did not choose the exclusion, you must request a private letter decision under the Income Tax Ordinance 301.9100-3 and following the instructions in the first tax procedure from the IRS each year.

As soon as you exclude your overseas income and/or overseas housing expenses, this selection remains in effect for this year and all subsequent years, unless you revoke it. For instructions on how to opt-out and its implications, see publication 54, Tax Guide for U.S. Citizens and Foreign Residents.

If you exclude income earned abroad, you will not be able to receive a foreign tax credit or a tax deduction for income taxes that you can exclude. If you credit or deduct any of these taxes in a subsequent year, your choice to exclude foreign earned income from that year will be revoked. tax services Sacramento See publication 54 for more information.

Additional tax credit for children. You cannot apply for the additional tax credit for children if you declare the exclusion of foreign earned income.

Earned Income Credits. If you are claiming foreign income exclusion, you are not eligible for the earned income of the year credit. 

Income tax not excluded. If you are applying for foreign earned income exclusion, housing exclusion, or both, you must calculate the tax on your non-excluded income using the tax rates that would have been applied if you had not applied the exclusions.

Foreign tax credit
Once you have chosen to exclude foreign income and / or overseas housing expenses, you may not receive a foreign tax credit for income taxes that you have excluded or may have excluded. In this case, one or both of the choices can be considered revoked. However, you can opt for a foreign tax credit for any amount of foreign earned income that exceeds the amounts you have excluded with the exclusion of foreign earned income and/or the exclusion of overseas housing.

References / related topics
Foreign earned income exclusion
Revocation of the decision to exclude foreign income

Note: This page contains one or more references to the Internal Revenue Code (IRC), Treasury regulations, legal proceedings, or other official tax policies. To access the relevant IRC sections, Treasury Regulations, or other official tax guidelines, visit the Official Tax ID, Regulations, and Guidelines page. Visit the US Tax Courts Opinion Search page to access tax court opinions issued after September 24, 1995.