Form 2555 - Foreign Income Exclusion

[huynguyen1992]

Hi everyone,

I have a customer who is qualified for the partial foreign income exclusion, but the system gave him the full exclusion.

Form 2555, Part VII, Line 38, does anyone know how to change from 365 days to the exact days we have without overriding this information? (When clicking to this line, it leads to Line 29 which has the default number - 365 days).

Thanks in advance.

Huy

[jeffmcpa2010]

Without looking up the form when you are claiming the # of days exclusion (Which does not have to be the calendar year by the way) there is an actual schedule you fill out which shows enter dates, exit date, and number of days spent in each country involved. There are special rules on travel days where you cross a border as well. you will need to read up on those to fill out the form correctly. As I recall the 2555 instructions were pretty helpful, but it has been a few years since I completed one.

After seeing sjrcpa's question - My answer is related to the physical presence test I believe, which I think is the only one I have ever used.

And the Schedule I referenced is part III top of page 2

[sjrcpa]

Did you select physical presence test or bona fide resident?

[huynguyen1992]

I selected the physical presence test, and I entered the exact days the customer worked oversea, and the days the customer stayed in the USA.

[huynguyen1992]

I just tried to use Part II (Bona Fide Residence Test) instead of Part III (Physical Presence Test), and it worked out. In fact, it showed exactly how many days the customer lived in the foreign country. However, it asked me more questions than the Physical Presence Test.

I think I have to choose this Bona Fide Residence Test for this year.

Thanks for your help!!!

[rbynaker]

I haven't looked at this in a while but the Bona Fide test has a long more conditions than the Physical one.  I don't think you can use Bona Fide if this is the first year (just shooting from the hip on this one).

For Physical, you have to manually select the period for prorating in ProSeries.  It's not like its big sister Lacerte which will calculate this for you and maximize the exclusion.  You are allowed to choose any 1 year period (consecutive 365 days) that meets the 330 day test.  So if there were no visits back to the U.S. for holidays, etc. then this period will start 35 days prior to when they moved to the foreign country.  Once you have that start date that will determine how much of the annual exclusion will be allowed for the current tax year (based on number of days out of that 365 day period that fall within the tax year).

These things are not for the faint of heart.  I've had a few government contractors with temporary (2-3 year) overseas positions that have worked out okay, but if you're dealing with someone actually moving to a foreign country it's best to just refer them to someone who is an expert in this stuff.  They may also run into FBAR issues, Form 8938, possible foreign trust issues if there is a foreign retirement plan, plus various tax treaty clauses which break the "normal" rules and may require disclosure.

Good luck!

Rick