I am an H1 with a H4 wife. Arrived in the US (having lived in Canada for the past 3 years) in Aug 2011.

Filed for an extension to be eligible for First Year Choice with a Joint Return Election to be treated as resident aliens for the entire year 2011. Am now in the process of filing my 2011 return.

I would like to know if I can use Form 2555 to exclude income earned in Canada during Jan-Aug 2011.

I have the option of using Form 1116 Foreign Tax Credit but Form 2555 works out better if I am eligible.

No, you cannot use form 2555, as you weren't a resident alien for the entire 12 month period (only for 8 month). You would need to use form 1116. Also have a look at the US-Canada tax treaty explained in publication 597: www.irs.gov/pub/irs-pdf/p597.pdf

Agreed; you must use Form 1116.

For filing 2555, you must meet both these:
1. Tax home test, and
2. Bona fide residence test or physical presence test.

You do not meet Bona fide residence test as it covers full year. However, you may meet physical presence test if you were in Canada from July 2010 to August 2011 for 330 days.

Now about tax home test. This is from instructions of form 2555: "To meet the test, your tax home must be a foreign country or countries, throughout the period of bona fide residence or physical presence test, whichever applies." So if you meet physical presence test, you may also meet tax home test for that period.

Thank you for your replies taxforaliens, AtlantaTaxExpert and MukatA. The two opinions put forward were exactly my dilemma.

I agree with the first two experts though I would like not to!

Just to clarify for anyone else that comes across this.

Even though I do meet the physical presence test, I do not meet it as a resident alien. The language in the instructions is as follows: "To meet this test, you must be a U.S. citizen or resident alien who is physically present in a foreign country, or countries, for at least 330 full days during any period..."

So even though I was present in Canada prior to Aug 11, I was not present as a resident alien. So no 2555, do not pass go, do not collect $200!

Very useful forum, cheers.

You have it exactly right.

Glad to help!

I agree with ATE