The Lisbon Assignment: FEIE, Housing, Treaty-Based Credits, and Disclosure
Priya, 34 and single, is a U.S. citizen who transferred to her employer's Lisbon subsidiary on September 1, 2023, on an indefinite assignment. She was physically in Portugal 305 days in 2024 and spent 45 days in the United States; her Portuguese lease runs through 2026. Her 2024 wages of $142,000 were all earned in Portugal and were subject to $19,800 of Portuguese income tax. She also has $2,400 of U.S. bank interest and $3,100 of U.S. dividends. Rent on her Lisbon apartment is $2,900 a month. She holds a Portuguese bank account whose balance peaked at the equivalent of $50,000 during 2024, and she has never filed an FBAR or Form 8938. She asks, "Can I just exclude my whole salary and be done with it?"
1. Does Priya qualify for the foreign earned income exclusion for 2024, and how much can she exclude?
Read the worked answer
Yes - the bona fide residence test, not physical presence.
- Physical presence is a problem here: it requires 330 full days outside the U.S. in any 12-month period. With 305 days abroad and 45 in the U.S. in calendar 2024, she cannot claim a full calendar-year exclusion on that route, and choosing a different 12-month window would force proration.
- Bona fide residence works: she moved in September 2023, has a lease through 2026, transferred at her employer's direction, and intends an indefinite stay. Residence established in 2023 continues through all of 2024, so she is a bona fide resident for the entire tax year and no proration applies.
- Amount: the 2024 maximum is $126,500, and her foreign earned income of $142,000 exceeds it, so the full $126,500 is excluded on Form 2555. Her $2,400 of interest and $3,100 of dividends are U.S.-source and cannot be excluded.
Mechanics: the election is made on a timely filed Form 2555 with the 1040 (or on an amended return within the refund statute). Revoking it requires IRS consent, and after a revocation she generally cannot re-elect for five years - a real cost if her plans change, so the election should be deliberate.
2. Compute her foreign housing exclusion and her remaining includible foreign earned income.
Read the worked answer
Housing exclusion is available to employees on Form 2555 Part VI, computed after the base exclusion:
- Cap on housing expenses: 30% of the $126,500 exclusion = $37,950.
- Actual housing expenses: $2,900 × 12 = $34,800 - under the cap, so the full $34,800 is eligible.
- Base housing amount: 16% of $126,500 = $20,240 (this is the amount treated as covered by the base exclusion).
- Housing exclusion: $34,800 − $20,240 = $14,560.
The housing exclusion can only shelter foreign earned income that remains after the base exclusion. Here, $142,000 − $126,500 = $15,500 remains, and $14,560 of it is excluded, leaving $940 of foreign earned income includible.
Practical points: rent qualifies, but utility deposits, furniture, and the cost of buying a home are not currently deductible (a purchased home uses a different limitation); she must be able to substantiate the rent in U.S. dollars using the exchange rate on the payment date. If she were self-employed, the same economics would appear as a deduction rather than an exclusion, but the arithmetic is the same.
3. She also wants to claim the $19,800 of Portuguese tax as a credit, and she assumes the foreign account needs no separate filing. Address both.
Read the worked answer
Foreign tax credit and the exclusion compete; you must run both.
Under Reg. §1.911-6(c), foreign taxes allocable to excluded income cannot be credited - you must reduce them by the ratio of excluded income to total foreign earned income. Here, roughly $141,060 of $142,000 is excluded, so only about $130 of the $19,800 survives as creditable - and since her remaining U.S. taxable income is zero after the standard deduction, even that is wasted.
Compare the alternative of skipping the exclusion:
- AGI = $142,000 + $2,400 + $3,100 = $147,500; taxable income $132,900; U.S. tax ≈ 12%
- U.S. tax ≈ $24,291. The §904 limitation is roughly $24,291 × ($142,000/$147,500) ≈ $23,385, so the credit is the full $19,800.
- Residual U.S. tax ≈ $4,491.
Conclusion: exclusion plus the tiny credit produces $0 of U.S. tax - better by about $4,500. She should exclude and let the excess foreign tax go unused.
Disclosures:
- FBAR is required. One Portuguese account peaking at $50,000 exceeds the $10,000 aggregate threshold. FinCEN Form 114 is due April 15, 2025, with an automatic extension to October 15, 2025 - no request needed - and is filed electronically through BSA E-Filing, not with her 1040. Note that 2023 was also a foreign-residence year, so the prior FBAR should be reviewed; FBAR penalties have no statute of limitations when the form was never filed.
- Form 8938 is not required. A single filer living abroad has thresholds of $200,000 at year-end / $300,000 at any time, far above $50,000. This is the opposite of the answer she would have received while living in the U.S. ($50,000/$75,000).
- Advise her in writing that "exclude and be done" is not the end of the analysis - the FBAR is a separate, easily missed obligation.