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Publication 54

Chapter 5
Exemptions, Deductions, and Credits(p23)


Useful items

You may want to see:

 501 Exemptions, Standard Deduction, and Filing Information
 514 Foreign Tax Credit for Individuals
 521 Moving Expenses
 523 Selling Your Home
 590-A Contributions to Individual Retirement Arrangements (IRAs)
 597 Information on the United States—Canada Income Tax Treaty
Form (and Instructions)
 1116: Foreign Tax Credit
 2106: Employee Business Expenses
 2555: Foreign Earned Income
 2555-EZ: Foreign Earned Income Exclusion
 3903: Moving Expenses
 Schedule A (Form 1040): Itemized Deductions
 Schedule C (Form 1040): Profit or Loss From Business
 SS-5: Application for a Social Security Card
 W-7: Application for IRS Individual Taxpayer Identification Number
See chapter 7 for information about getting these publications and forms.

Items Related to Excluded Income(p23)

U.S. citizens and resident aliens living outside the United States generally are allowed the same deductions as citizens and residents living in the United States.
If you choose to exclude foreign earned income or housing amounts, you cannot deduct, exclude, or claim a credit for any item that can be allocated to or charged against the excluded amounts. This includes any expenses, losses, and other normally deductible items that are allocable to the excluded income. You can deduct only those expenses connected with earning includible income.
These rules apply only to items definitely related to the excluded earned income and they do not apply to other items that aren’t definitely related to any particular type of gross income. These rules don’t apply to items such as:
For purposes of these rules, your housing deduction isn’t treated as allocable to your excluded income, but the deduction for self-
employment tax is.
If you receive foreign earned income in a tax year after the year in which you earned it, you may have to file an amended return for the earlier year to properly adjust the amounts of deductions, credits, or exclusions allocable to your foreign earned income and housing exclusions.


In 2015, you had $93,600 of foreign earned income and $9,500 of deductions allocable to your foreign earned income. You did not have a housing exclusion. Because you excluded all of your foreign earned income, you would not have been able to claim any of the deductions on your 2015 return.
In 2016, you received a $14,000 bonus for work you did abroad in 2015. You can exclude $7,200 of the bonus because the limit on the foreign earned income exclusion for 2015 was $100,800 and you have already excluded $93,600. Since you must include $6,800 of the bonus ($14,000 − $7,200) for work you did in 2015 in income, you can file an amended return for 2015 to claim $600 of the deductions. This is the deductions allocable to the foreign earned income ($9,500) multiplied by the includible portion of the foreign earned income ($6,800) and divided by the total foreign earned income for 2015 ($107,600).