Calculate the deductions allocable to Foreign Earned Income (1040)

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Question

How are the deductions allocable to Foreign Earned Income calculated?

Answer

All foreign source deductions allowed in figuring adjusted gross income report in full on Form 1040 and the related forms and schedules. The amounts allocable to the excluded income are calculated and reported on Form 2555, Page 3, Part VIII. Enter information relevant to the deductions on the 2555-2 screen in the Foreign Exclusion folder.

The following types of deductions may be used in this calculation.

The activity's allocation code is used to allocate any related self-employment items. A reduction ratio is applied to the deductions allocated to foreign earned income during the assignment to determine the amount that is definitely related to the excluded income. The ratio calculates as foreign earned income and housing exclusions over total foreign earned income. The Form 2555, Page 3, Part VIII calculation is reported on the Form 2555 Deductions Allocable to Excluded Income Worksheet and "See Wrksheet" prints to the left of Form 2555, Line 44. You can submit this as the required Form 2555, Page 3, Part VIII calculation.

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