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An Overview of the Section 911 Income and Housing Exclusion Rules

An Overview of the Section 911 Income and Housing Exclusion Rules

Internal Revenue Code Section 911 was enacted to mitigate U.S. federal income tax and other economic burdens imposed on U.S. persons working outside the U.S. by providing for an exclusion from U.S. taxation of up to a specified amount of foreign earned income and housing costs. Internal Revenue Code Section 911(a)(1) permits a U.S. citizen who has his or her “tax home” in a foreign country and who meets either of two foreign residence-based eligibility requirements to elect to exclude a certain amount of foreign source income from U.S. taxable income. The foreign source income that can be excluded from U.S. taxation includes wages, salaries and income received for personal services performed outside the United States, including from self-employment. In 2024, the maximum exclusion amount is $126,500.

Section 911 also permits individuals to exclude or deduct housing cost amounts incurred by individuals. For purposes of Section 911, the term “housing cost amount” refers to the total housing expenses for a tax year minus a base housing amount. See IRC Section 911(c)(1). The housing amount for a tax year is limited to an amount indexed to the foreign earned income exclusion of $126,500 (for the 2024 calendar year). The base housing amount is 16 percent of the maximum foreign earned income exclusion multiplied by the number of days the applicable period. For example, the base housing amount for the 2024 calendar year is $20,240 ($126,500 x .16 = $20,240).

Similarly, the housing expense amount is also limited, based on a percentage of the maximum foreign earned income exclusion amount. Specifically, the limit on such housing expenses generally equals 30 percent of the maximum foreign earned income exclusion amount (computed on a daily basis), multiplied by the number of days in the applicable period for which the individual is a so-called “qualified individual.” See IRC Sections 911(c)(2)(A) and (d)(1). Thus, under this general limitation, a qualified individual whose entire taxable year is within the applicable period is limited to maximum housing expense of $37,950 ($126,300 x .30 = $37,950).

To qualify for the Section 911 exclusion, an individual must have a “tax home” in a foreign country and either be a bona fide resident of a foreign country for at least an uninterrupted period that includes at least one entire taxable year, or be present in a foreign country or countries for at least 330 full days of any twelve consecutive month period. The individual must file an election to claim either or both the foreign earned income exclusion or the housing cost amount exclusion.

U.S. citizens who have a tax home in a foreign country and meet either the bona fide residence test or the bona fide foreign residence test or the foreign physical presence test are qualified to elect to exclude their foreign earned income and their housing cost amount from gross income. A U.S. resident alien can qualify for Section 911 benefits under the physical presence test, but Section 911(d)(1)(A) limits the bona fide residence test to citizens.

The physical presence test requires presence in one or more foreign countries for at least 330 full days during a period of twelve consecutive months. A full day means a continuous period of 24 months from midnight to the following midnight. The days do not have to be consecutive.

To qualify under the bona fide residence test, the taxpayer must establish that he or she has been a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire taxable year in order to meet the bona fide residence test. For these purposes, residency is determined under Internal Revenue Code Section 871 rather than Internal Revenue Code Section 7701(b). The determination of bona fide residence for Section 911 purposes requires both physical presence in the foreign country and intent to make a home in that foreign country for an indefinite period of time. The following factors are considered in determining bona fide foreign residence:

1. The individual’s length of stay;

2. The individual’s intent to abandon his or her U.S. residence and establish a home in the foreign country for an indefinite period;

3. Meaningful participation by the individual in the foreign community’s social and cultural activities of the foreign country;

4. The individual’s marital status and location of his or her family.

5. The nature and duration of the individual’s employment and physical presence in the foreign country; 

6. Assumption of economic burdens in the foreign country such as the payment of taxes;

The period of bona fide residence must include the entire tax year, and begins when the individual actually reaches the foreign country.

To use either or both the foreign earned income exclusion or the housing cost amount exclusion, the individual must file a Form 2555 with the IRS. Generally, the electing individual must be a U.S. citizen or resident alien in the tax year in which the election is to take effect. In cases of married taxpayers, the foreign earned income exclusion must be made separately for each spouse. The Form 2555 must be attached to a Form 1040.

Anthony Diosdi is one of several tax attorneys and international tax attorneys at Diosdi & Liu, LLP. As a domestic and international tax attorney, Anthony Diosdi provides international tax advice to individuals, closely held entities, and publicly traded corporations. Diosdi & Liu, LLP has offices in San Francisco, California, Pleasanton, California and Fort Lauderdale, Florida. Anthony Diosdi advises clients in international tax matters throughout the United States. Anthony Diosdi may be reached at (415) 318-3990 or by email: adiosdi@sftaxcounsel.com

This article is not legal or tax advice. If you are in need of legal or tax advice, you should immediately consult a licensed attorney.

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