Do Services Provided to U.S. Based Clients Qualify as Foreign Earned Income

[Outlook]

I have a client that has provided professional services to U.S. clients for many years. The client moved to Panama this past year and continues to provide the same professional services for the same U.S. based clients. This client does not provide the services to any individuals or businesses in Panama or any other foreign county. Assuming my client meets the bona fide residence test or the physical presence test, is the income earned while living in Panama, but working only for U.S. Based clients considered foreign earned income for purposes of claiming the foreign earned income exclusion? In other words, for purposes of defining foreign earned income, does it matter what county your clients reside (U.S. vs Panama)? I have reviewed Publication 54 and the instructions for Form 2555 and have not been able to find a clear answer to this question.

[Burke]

I don't think it matters what country he lives in. As long as he has not given up citizenship in the US, he is required to file income taxes in the US on worldwide income. He may qualify for some exclusion based on the rules. To whom he provides the services is not a factor either, IMO.

[mactoolsix]

From Pub 54
Source of Earned Income

The source of your earned income is the place where you perform the services for which you received the income. Foreign earned income is income you receive for working in a foreign country.

Foreign earned income does not include the following amounts.
. The value of meals and lodging that you exclude from your income because the meals and lodging were furnished for the convenience of your employer.
. Pension or annuity payments you receive, including social security benefits (see Pensions and annuities, later).
. Pay you receive as an employee of the U.S. Government. (See U.S. Government Employees, later.)
. Amounts you include in your income because of your employer's contributions to a nonexempt employee trust or to a nonqualified annuity contract.
. Any unallowable moving expense deduction that you choose to recapture as explained under Moving Expense Attributable to Foreign Earnings in 2 Years in chapter 5.
. Payments you receive after the end of the tax year following the tax year in which you performed the services that earned the income.

Thus the source is considered foreign if earned in a foreign country, when you meet one of the two residency tests, UNLESS you are an employee of the US government. In this case you do not look actual "source" of the income, rather you look at where the client's tax home or residency was when the income was earned.

Mike