1040-US: Allocating moving expenses related to foreign earned income

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Question

My client's moving expenses related to foreign earned income were allocated over two years. How does the tax application make the determination to allocate moving expenses?

Answer

If the qualifying days under either the bona fide residence test or the physical presence test are not at least 120 days during the current tax year, the expense is connected with earning the foreign income in two years (per IRS Publication 54). The moving expense is connected with the current tax year and the following year, if the move is from the U.S. to a foreign country, or the current tax year and the preceding year, if the move is to the U.S. from a foreign country.

To calculate the amount of the moving expense that is allocable to excluded foreign earned income, the tax application multiplies the moving expense deduction by a fraction. The numerator is the total excluded foreign earned income and housing amounts for both years and the denominator is the total foreign earned income for both years. The tax application reports the moving expense deduction on the Form 2555 Deductions Allocable to Excluded Income Worksheet.

The tax application uses the preceding or following year amounts entered in the Foreign income exclusion and Foreign earned income fields in the Deductions Allocable to Foreign Earned Income section of Screen 2555-2, located in the Foreign exclusion folder, to calculate the numerator and denominator.

Related topic: Foreign tax credits and earned income FAQs (1040)

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