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Deductions and Credits — How To Report Deductions: Taxes for Americans Abroad (2025 IRS Guide)

This guide covers “Deductions and Credits — How To Report Deductions” within taxes for americans abroad. The following material presents the IRS treatment of this topic, including the qualifications, exceptions, and examples in the source section. Read the rules alongside the facts of your own situation before deciding what to report, deduct, or document.

Adapted from Publication 54 (12/2025), Tax Guide for U.S. Citizens and Resident Aliens Abroad, published by the Internal Revenue Service. This guide retains the source edition’s years, amounts, deadlines, and examples. It is guidance for that edition, not a statement that the same figures apply to every tax year.

Context for these rules

  • The rules concerning items related to excluded income,

  • Contributions to foreign charitable organizations,

  • Contributions to individual retirement arrangements (IRAs),

  • Taxes of foreign countries and U.S. territories, and

  • How to report deductions.

Publication

  • 501 Dependents, Standard Deduction, and Filing Information

  • 514 Foreign Tax Credit for Individuals

  • 523 Selling Your Home

  • 526 Charitable Contributions

  • 590-A Contributions to Individual Retirement Arrangements (IRAs)

  • 597 Information on the United States–Canada Income Tax Treaty

Form (and Instructions)

  • 1116 Foreign Tax Credit

  • 2106 Employee Business Expenses

  • 2555 Foreign Earned Income

  • Schedule A (Form 1040) Itemized Deductions

  • Schedule C (Form 1040) Profit or Loss From Business

  • SS-5 Application for a Social Security Card

  • W-7 Application for IRS Individual Taxpayer Identification Number

See chapter 7 for information about getting these publications and forms.

Deductions and Credits — 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 adjusted 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 deduction 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 deduction(s) related to excluded income on line 44 of Form 2555.

If you have itemized deductions related to excluded income, 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 deduction by a fraction, the numerator of which is your foreign 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 accountant. 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 investment income was $8,890. After excluding $120,000, your adjusted gross income is $18,765.

Generally, mortgage interest is deductible on Schedule A (Form 1040). You paid mortgage interest on your foreign 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 deducted 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 business 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. Because your excluded income is 98.48% (0.9848) of your total income, 98.48% (0.9848) of your business expenses are not deductible. 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 exclusion.

  • Line 44, $66,666 (98.48% (0.9848) × $67,695), business 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). Because 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 deductible.

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. Because you incurred a net loss, the earned income limit of 30% of your net profit does not apply. The $77,000 is foreign 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 expenses ($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 parentheses) on line 45. Because this amount is negative, enter it as a positive (no parentheses) on line 8d of Schedule 1 (Form 1040), and combine it with your other income to arrive at total income on line 9 of Schedule 1 (Form 1040).

Tip:

In Example 4, if this was the first year you were eligible to claim the foreign earned income exclusion, you probably would not want to do so because you have a net loss. However, if you have a valid election in place from an earlier year and decide not to take the exclusion, you will be considered to have revoked your election and cannot claim the exclusion again for the next 5 tax years without IRS approval. See Effect of Choosing the Exclusions and Deduction in chapter 4.

Example 5.

You are a U.S. citizen, have a tax home in Panama, and meet the bona fide residence test. You have been performing services for clients as a partner in a firm that provides services exclusively in Panama. Capital investment is not material in producing the partnership's income. Under the terms of the partnership agreement, you are to receive 50% of the net profits. The partnership received gross income of $248,000 and incurred operating expenses of $102,250. Of the net profits of $145,750, you received $72,875 as your distributive share.

You choose to exclude $120,000 of your share of the gross income. Because you exclude 96.77% (0.9677) ($120,000 ÷ $124,000) of your share of the gross income, you cannot deduct $49,474, which is 96.77% (0.9677) of your share of the operating expenses (96.77% (0.9677) × $51,125). Report $72,875, your distributive share of the partnership net profit, on Schedule E (Form 1040). On Form 2555, show $120,000 on line 42 and show $49,474 on line 44. Your exclusion on Form 2555 is $70,521.

Using the guidance

Keep the documents that establish the dates, amounts, and circumstances described above. References to other chapters, forms, worksheets, or earlier and later sections refer to the linked IRS publication. Check the full publication and its updates before relying on a rule for a different tax year or a situation not addressed here.

Sources and further reading

The cited U.S. government text is in the public domain. Source accessed October 28, 2026. Fynoptic has organized this material for educational use and is independent of, and not endorsed by, the IRS.

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