I just received an email from someone based on the www.foreignbankaccountamnesty.com site. It raised a question that comes up often, so I figured I would answer it online.

Question: Are dividends or interest payments received by US citizens living overseas received from foreign financial institutions also included in above definition and application of foreign earned interest, or is only income earned from work/employment meant by the term “foreign earned income”?

As part of the ongoing offshore bank account so-called amnesty, I came across many expatriate Americans who assumed that the foreign earned income exclusion covers any foreign-source income — including bank interest. Not so. Unfortunately.

Earned income only

The foreign earned income exclusion just says that the first $87,600 (2009’s figure) of salary, wages, or self-employment income (plus maybe housing reimbursement) will be excluded from taxation in the USA. It does not cover any other type of income.

You must file to claim the exclusion

Also. Critical! Listen up! This is important!

You’ll be looking at more hoops to jump through than a circus poodle in order to get the exclusion. Most important hoop? The tax return has to be “timely” return.

If you want to make the first $87,600 of your salary into tax-free money, you have to file a U.S. tax return (Form 1040) and claim the exclusion using Form 2555. Read that form and the instructions and you’ll understand what I mean by circus poodles.

Too many people have reported a common assumption — if your earnings are under the threshold you don’t have to file. Nope.

It’s a race

If you haven’t filed to claim the exemption, run right now and file a late tax return. The basic idea is this. If you file a late tax return claiming the foreign earned income exclusion, you get it. If the IRS finds you before you claim the foreign earned income exclusion, they can reject it.

First past the post.

More info from your pals at the IRS: