As a US expat, you’re likely hoping to save as much as possible on your US expatriate taxes. That’s why you should know about the Foreign Earned Income Exclusion (FEIE) – it allows qualifying US taxpayers the ability to exclude up to $100,800 of foreign earned income from their 2015 expatriate taxes and $101,300 from their 2016 expatriate taxes. In order to utilize this exclusion, you must attach Form 2555 or Form 2555-EZ to your US tax return. Here’s what you should know about this form in order to claim the FEIE.
What are Form 2555 and Form 2555-EZ?
Form 2555 is a three-page form that has nine sections, each addressing different aspects of the FEIE. Because this form can be quite overwhelming and difficult to navigate for a self-preparer, there is another option – Form 2555-EZ, which makes it comparatively simple and has only two pages and four parts. In order to use Form 2555-EZ with your US expatriate taxes, you must meet the following criteria:
- You must be a US citizen or resident alien.
- You must have earned less than $100,800 for 2015 or $101,300 for 2016 of wages in a foreign country. Note: this must be income from employment, not self-employment. If you are self-employed, you must file the full Form 2555 instead of Form 2555-EZ.
- You must file a US tax return covering a calendar year (not fiscal year).
- You don’t plan to claim the Foreign Housing Exclusion or deduction.
- You don’t have business or moving expenses associated with your position of employment.
While these standards are quite straightforward, they actually eliminate many US expats from being eligible to file Form 2555-EZ. If you do happen to meet the criteria listed above, it will save you quite a bit of time filing your expatriate taxes.
How Can I Prepare to File Form 2555-EZ?
One of the best ways to prepare for filing your US expatriate taxes is to keep accurate records throughout the year, and this also goes for Form 2555-EZ since you’ll need specific information in order to complete the form. You should have the following information available:
- Employer’s name and address (foreign and US, if applicable),
- International travel calendar, including days you might have worked in the US,
- Prior year Form 2555-EZ, if available, and
- Foreign income earnings statements
When you’ve gathered this information and have downloaded Form 2555-EZ, you’ll be ready to complete the form to accompany your US expatriate taxes. You’ll need one form for each expat, so if you and your spouse live and work abroad, you’ll need to complete two Form 2555-EZ and attach both to your joint tax return. While most of the information is likely to be the same for both spouses if they live and travel together, each FEIE claim will be considered separately by the IRS.
Form 2555-EZ Example: Blake and Lauren Expat
Blake and Lauren were married in their small Montana hometown and lived there for three years before deciding to move to Brazil to pursue careers as professional samba dancers. In late 2014, they received their work visas and said goodbye to their family and friends. Because of her great skill, Lauren was immediately hired by a professional dance group and worked all of 2015, earning 2,400 REA (Brazilian Real) per week. During 2015, she traveled to the US to do a five-day long performance as part of her dance group. Although Blake did eventually receive work in April 2015, we will complete Lauren’s Form 2555-EZ as an example.
Part I – Determine if You Can Take the Foreign Earned Income Exclusion
To eligible to claim the FEIE on your US expatriate taxes, you must meet either the Bona Fide Residence Test or Physical Presence Test. If you lived in a foreign country for the entire tax year and intend to remain there, you will meet the Bona Fide Residence Test. Because Blake and Lauren moved to Brazil in December 2014, lived in Brazil for all of 2015, and intended to remain in Brazil, they qualified for the FEIE under the Bona Fide Residence Test. If they hadn’t lived in Brazil for the entire calendar year, they could still qualify for the FEIE under the Physical Presence Test if they had been physically present for 330 days during a 12-month period. The 12-month period can be flexible but must start or end within the tax year. Your tax return due date can be extended to meet the requirements. For more details about extensions and other expat tax tips, check out our guide for Americans working overseas.
Part II – General Information
This is likely the easiest part of the entire form. Each of the questions is straightforward, and requests information that you will likely know without referencing additional paperwork. The thing to remember about this part is that there are no predefined answers. You will answer as applicable for your particular situation. For example, the answer to Question #5 (below) could be Professional Dancer, Samba Dancer or just Dancer.
Part III – Listing Days Present in the United States
This is where things may begin to get tricky. If you work in the United States at all while residing abroad, that income will be considered earned in the US and will reduce the amount of income eligible for the FEIE on your US expatriate taxes. In Lauren’s example, she worked as a dancer in the US for five days. Because she earns $692.04 USD each week, this amount was considered as earned in the US and will be fully taxable at US tax rates. We will discuss this more in Part IV, but it’s important to note that what you put in columns (c) and (d) are very important to your expatriate taxes.
If you earned money while in the US and listed these dollars in column (d), you are required to attach a statement supporting your calculation with your US expat taxes. Again, there is no predefined format. The IRS just wants to know how you calculated the amount earned in the US, and will usually expect to see the exchange rate used, which can be obtained from the IRS website. In Lauren’s example, she could attach a statement that looked like this:
|Brazilian Real (REA)||United States Dollar (USD)|
|2014 Conversion Rate||3.468||*from IRS website|
|Amount Earned in US||2400||692.04|
|Foreign Earned Income||122400||35,294.12|
Part IV – Calculate Your Foreign Earned Income Exclusion
This is the part that calculates the actual amount of eligible foreign earned income you can exclude on your US expat taxes. The IRS has already been kind enough to complete Line 13 for you. Line 14 asks you to enter the number of days within your qualifying period. If you met the Bona Fide Residence Test, such as Lauren, then you will put 365 days here because you were a resident of the foreign country for the entire year. If you qualify for the FEIE on your US expat taxes under the Physical Presence Test, though, things get a little trickier. Your qualifying period begins when you take up residence in a foreign country. If you did this on May 1, 2014 and lived there through your filing date of June 15, 2015 (expats get an automatic two-month extension on their US expat taxes), then your “qualifying period” would be May 1, 2014 through June 15, 2015. The numbers of days during your qualifying period that fall within 2015 would be 165 (January 1, 2015 through June 15, 2015).
Line 15 calculates a percentage of time for the amount of the year that you lived abroad. Because Lauren was in Brazil for the entire calendar year, her percentage is 100% (1.00 on line 15). Use this percentage to multiply against the total eligible FEIE ($100,800), to calculate the maximum FEIE for which you’ll be eligible. Again, because Lauren lived abroad for the entire calendar year, she will be eligible for the maximum FEIE on her US expat taxes. On Line 17, enter the amount of income that was earned in a foreign country. If you have income that was earned in the US while you maintained a foreign residence, exclude this from the amount that you enter on Line 17. Lauren earned $35,986 USD for the entire 2015 calendar year. However, the week that she worked in the US would not be considered “foreign earned” and will be excluded from Line 17. However, both amounts should be included on Line 7 of Form 1040 of her US expat taxes, for total wages and salaries. Enter the lesser of Line 16 or Line 17, and you will have your final FEIE for the year. Enter the FEIE as a negative amount on Line 21 “Other Income” of Form 1040 of your US expat taxes. Because Lauren qualified for the FEIE and correctly claimed it on her Form 2555-EZ, she eliminated her US expat taxes. Completing Form 2555-EZ may look difficult at first, but armed with a good example, instructions from the IRS website, and all of your organized records, you should be able to wrap up this form in 30 minutes!
Have More Questions About the Foreign Earned Income Exclusion or Filing Form 2555?
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