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$10,000. You received dividends from Country X of
$2,000 on which you paid income tax of $600.
You can deduct the $600 tax payment because the divi-
dends relating to it are subject to U.S. tax. Because you
exclude your wages, you cannot deduct the income tax of
$10,000.
If you exclude only a part of your wages, see the earlier
discussion under Foreign taxes paid on excluded income.
Deduction for Other Foreign Taxes
You cannot deduct other foreign taxes, such as real prop-
erty or personal property taxes, unless you incurred the
expenses in a trade or business or in the production of in-
come.
On the other hand, you can generally deduct real prop-
erty or personal property taxes when you pay them to U.S.
territories. But if you claim the territory exclusion, see Pub.
570.
The deduction for foreign taxes other than foreign in-
come taxes isn’t related to the foreign tax credit. You can
take deductions for these miscellaneous foreign taxes and
also claim the foreign tax credit for income taxes imposed
by a foreign country.
How To Report Deductions
If you exclude foreign earned income or housing amounts,
how you show your deductions on your tax return and how
you figure the amount allocable to your excluded income
depend on whether the expenses are used in figuring ad-
justed gross income (Form 1040 or 1040-SR, line 11) or
are itemized deductions.
If you have deductions used in figuring adjusted gross
income, enter the total amount for each of these items on
the appropriate lines and schedules of Form 1040 or
1040-SR. Generally, you figure the amount of a deduction
related to the excluded income by multiplying the deduc-
tion by a fraction, the numerator of which is your foreign
earned income exclusion and the denominator of which is
your foreign earned income. Enter the amount of the de-
duction(s) related to excluded income on line 44 of Form
2555.
If you have itemized deductions related to excluded in-
come, enter on Schedule A (Form 1040) only the part not
related to excluded income. You figure that amount by
subtracting from the total deduction the amount related to
excluded income. Generally, you figure the amount that is
related to the excluded income by multiplying the total de-
duction by a fraction, the numerator of which is your for-
eign earned income exclusion and the denominator of
which is your foreign earned income. Attach a statement
to your return showing how you figured the deductible
amount.
Example 1. You are a U.S. citizen employed as an ac-
countant. Your tax home is in Germany for the entire tax
year. You meet the physical presence test. Your foreign
earned income for the year was $129,875 and your invest-
ment income was $8,890. After excluding $120,000, your
adjusted gross income is $18,765.
Generally, mortgage interest is deductible on Sched-
ule A (Form 1040). You paid mortgage interest on your for-
eign home of $15,000. Your mortgage is under $750,000.
Reduce the $15,000 of your mortgage interest by 92.3%
(0.923) ($13,845) because you excluded 92.3% (0.923)
($120,000/$129,875) of your foreign earned income.
The remaining mortgage interest of $1,155 can be de-
ducted on line 8a or 8b of Schedule A (Form 1040).
Example 2. You are a U.S. citizen, have a tax home in
Spain, and meet the physical presence test. You are
self-employed and personal services produce the busi-
ness income. Your gross income was $121,842, business
expenses were $67,695, and net income (profit) was
$54,147. You choose the foreign earned income exclusion
and exclude $120,000 of your gross income. Since your
excluded income is 98.48% (0.9848) of your total income,
98.48% (0.9848) of your business expenses are not de-
ductible. Report your total income and expenses on
Schedule C (Form 1040). On Form 2555, you will show
the following.
•
Line 20a, $121,842, gross income.
•
Lines 42 and 43, $120,000, foreign earned income ex-
clusion.
•
Line 44, $66,666 (98.48% (0.9848) × $67,695), busi-
ness expenses attributable to the exclusion.
Example 3. Assume in Example 2 that both capital
and personal services combine to produce the business
income. No more than 30% of your net income or $16,244
($54,147 x 30% (0.30)), assuming that this amount is a
reasonable allowance for your services, is considered
earned and can be excluded. Your exclusion of $16,244 is
13.33% of your gross income ($16,244 ÷ $121,842). Be-
cause you excluded 13.33% of your net income, $9,024
(13.33% (0.1333) x $67,695) of your business expenses
is attributable to the excluded income and is not deducti-
ble.
Example 4. You are a U.S. citizen, have a tax home in
Brazil, and meet the physical presence test. You are
self-employed and both capital and personal services
combine to produce business income. Your gross income
was $146,000, business expenses were $172,000, and
your net loss was $26,000. A reasonable allowance for the
services you performed for the business is $77,000. Be-
cause you incurred a net loss, the earned income limit of
30% of your net profit does not apply. The $77,000 is for-
eign earned income. If you choose to exclude the
$77,000, you exclude 52.74% of your gross income
($77,000 ÷ $146,000), and 52.74% of your business ex-
penses ($90,713) is attributable to that income and is not
deductible. Show your total income and expenses on
Schedule C (Form 1040). On Form 2555, exclude $77,000
and show $90,713 on line 44. Subtract line 44 from
line 43, and enter the difference as a negative (in paren-
theses) on line 45. Because this amount is negative, enter
it as a positive (no parentheses) on line 8d of Schedule 1
Publication 54 (2023) Chapter 5 Deductions and Credits 35