J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

36.6 Claiming Deductions

You may not deduct expenses that are allocable to the foreign earned income and housing exclusions. If you elect the earned income exclusion, you deduct expenses as follows:

Personal or nonbusiness deductions, such as medical expenses, mortgage interest, and real estate taxes paid on a personal residence, are deductible if you itemize deductions. Business expenses that are attributable to earning excludable income are not deductible. Dependency exemptions are fully deductible; see Example 1 below.

If your foreign earnings exceed the exclusion ceiling, you allocate expenses between taxable and excludable income and deduct the amount allocated to taxable earned income; see Example 2 below.

EXAMPLES

1. You were a resident of Denmark and elect to exclude your wages of $70,000 from income. You also incurred unreimbursed travel expenses of $2,000. You may not deduct the travel expenses, since the amount is attributable to the earning of tax-free income.

2. You earn wages of $118,875 in Germany and satisfy the physical presence test. Your unreimbursed travel expenses for 2012 are $5,000, after reducing meals and entertainment by 50%. If you elect the $95,100 exclusion (80% of your foreign earnings), 20% of the travel expenses, or $1,000, attributable to the taxable 20% of earnings, may be claimed as a miscellaneous itemized deduction on Schedule A (Form 1040) subject to the 2% AGI floor.

If your job expenses are reimbursed and the expenses are adequately ...