One of the most asked question is how do I qualify for the foreign earned income and foreign housing exclusion? This column will answer that question.US citizens and resident aliensUnited States citizens and resident aliens are taxed on their global income, whether they reside inside or outside of the United States. Qualifying US citizens and resident aliens who live and work abroad may be able to exclude all or part of their foreign compensation and they may also qualify to exclude certain foreign housing costs.A common myth is that if you earn less that the excludable foreign earned income amount ($91,500 in 2010) that you do not have to file a US tax return. All global income must be reported on a timely filed US tax return and on that return you may elect the foreign earned income and foreign housing exclusions. The foreign exclusions are elective, not automatic, and if you reside in a high tax country you likely would not elect the foreign earned income and foreign housing exclusions.Qualifying for the Foreign Earned Income and Housing ExclusionsTo qualify for the foreign earned income and foreign housing exclusions a US citizen or resident alien must:l Have foreign earned income, and;l Have an abode and a tax home in a foreign country, and;l Meet either the bona fide residence or physical presence testForeign Earned IncomeForeign earned income is income you receive for working in a foreign country. The source of your earned income is the place where you perform the services for which you received the income. Where you live, who your employer is or how or where you are paid has no effect on the source of the income.For example, you live and work in Bermuda, work 200 days a year and earn $100,000 a year. Your employer sends you to the US for 20 days during the year to work. Your foreign earned income is 180/200 x $100,000 = $90,000. The remaining $10,000 is considered US source income as it was earned while you were working in the US. The $10,000 of US source income cannot be excluded from US income tax.Abode and Tax HomeInternal Revenue Code Section 911 defines the term tax home by reference to another code section dealing with travel away from home. It further states that an individual cannot have a tax home in a foreign country for any period for which his abode is in the United States.Thus, to be able to have a tax home outside the United States, you must first be able to show that your abode is not in the United States. The definition of the term abode is subjective and has been variously defined as one's home, habitation, residence, domicile or place of dwelling. It does not mean your principal place of business. The location of one's abode will depend on where you maintain your economic, family, and personal ties.Tax home is defined as the general area of your main place of business, employment or post of duty, regardless of where you maintain your family home. Your tax home is the place where you are permanently or indefinitely engaged to work as an employee.Bona Fide Residence TestTo meet the bona fide residence test you must be a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year, that is midnight on January 1 to midnight on the following December 31. You can use the bona fide residence test to qualify for the foreign earned income and foreign housing exclusions if you are a US citizen or a US resident alien who is a citizen of a country with which the United States has an income tax treaty in effect.You do not automatically acquire bona fide resident status merely by living in a foreign country for one year. If you go to a foreign country to work on a particular job for a specified period of time, you ordinarily will not be regarded as a bona fide resident of that country even though you work there for one tax year or longer. The length of your stay and the nature of your job are only two of the factors to be considered in determining whether you meet the bona fide residence test.Physical Presence TestTo meet the physical presence test you must be physically present in a foreign country or countries 330 full days during a period of 12 consecutive months. A full day is a period of 24 consecutive hours, beginning at midnight. Any US citizen or resident alien can use the physical presence test to qualify for the foreign earned income and foreign housing exclusions.The physical presence test is based only on how long you stay in a foreign country or countries. This test does not depend on the kind of residence you establish, your intentions about returning, or the nature and purpose of your stay abroad. You can count days you spent abroad for any reason. You do not have to be in a foreign country only for employment purposes.The 330 days do not have to be consecutive. For example, suppose you arrive in Bermuda on June 30, 2010. July 1, 2010 would be your first full day abroad. On December 1, 2010 you return to the US for vacation and return to Bermuda on December 31, 2010 where you remain until June 27, 2010 when you permanently return to the US.As you will have been physically present outside the US for 153 days in 2010 and 177 days in 2011 or 330 days in total in a 365 day period, July 1, 2010 to June 30, 2011, you will qualify for a partial foreign earned income and foreign housing exclusion in both 2010 and 2011.Pursuant to the requirements relating to practice before the Internal Revenue Service, any tax advice in this communication is not intended to be used, and cannot be used, for the purpose of (i) avoiding penalties imposed under the United States Internal Revenue Code, or (ii) promoting, marketing or recommending to another person any tax related manner.The tax advice given by this column is, by necessity, general in nature. You should, of course, check with your own US tax consultant as to how specific transactions affect you since tax advice varies with individual circumstances.James Paul Sabo, CPA, is the president of ETS Ltd, PO Box HM 1574, Hamilton HM GX, Bermuda. Questions should be sent to: jsabo[AT]expatriatetaxservices.com