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Is my bonus excluded from the foreign-earned tax exemption?

I am an overseas contractor and I qualify for the foreign-earned income tax exemption. Is my bonus excluded from the foreign-earned tax exemption?

Career / Compensation, Taxes, Income Tax
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February 2018

According to IRS publication 54, bonus falls into the earned income category which is eligible for the foreign earned income exclusion. However, there are some additional rules you need to be aware of. Here are two examples of the publication directly:

  • Income earned over more than 1 year.

Regardless of when you actually receive income, you must apply it to the year in which you earned it in figuring your excludable amount for that year. For example, a bonus may be based on work you did over several years. You determine the amount of the bonus that is considered earned in a particular year in two steps. 1. Divide the bonus by the number of calendar months in the period when you did the work that resulted in the bonus. 2. Multiply the result of (1) by the number of months you did the work during the year. This is the amount that is subject to the exclusion limit for that tax year.

  • Income received more than 1 year after it was earned.

You can’t exclude income you receive after the end of the year following the year you do the work to earn it. Example. You were a bona fide resident of Sweden for 2015, 2016, and 2017. You report your income on the cash basis. In 2015, you were paid $69,000 for work you did in Sweden that year and in 2016 you were paid $74,000 for that year's work in Sweden. You excluded all the income on your 2015 and 2016 returns. In 2017, you were paid $92,000; $82,000 for your work in Sweden during 2017, and $10,000 for work you did in Sweden in 2015. You cannot exclude any of the $10,000 for work done in 2015 because you received it after the end of the year following the year in which you earned it. You must include the $10,000 in income. You can exclude all of the $82,000 received for work you did in 2017.

It sounds like that you are confident that you are eligible for the foreign earned income exclusion. It never hurts to doublecheck with a qualified tax professional. He/she could not only make sure you understand the tax law correctly but also may help you figure out whether you could further benefit from the foreign housing exclusion or the foreign tax credit based on your specific situation. Hope it helps.