Foreign Earned Income Exclusion: Understanding Form 2555

Foreign Earned Income Exclusion Form 2555

If you’re living and working abroad, chances are, you’ll want to take advantage of the Foreign Earned Income Exclusion (FEIE). In order to do so, though, you must fill out Form 2555 and attached it to your US Tax Return. Here’s what you should know about this important form.

Breaking Down the Foreign Earned Income Exclusion

If you’ve filed your expat taxes before or if you’ve been researching your tax requirements while living abroad, you probably know at least a bit about the Foreign Earned Income Exclusion. This is an exclusion that allows qualified US expats to exclude up to $107,600 from 2020 US taxes ($108,700 on 2021 US taxes) of their income from their US expat taxes. This tax break is popular for both short-term and permanent expats.

There are two main ways to qualify:

1. Physical Presence Test

This is likely preferred for expats who may be living abroad temporarily. This test requires that you live abroad for 330 out of 365 days – it does not have to be in a calendar year, either.

2. Bona Fide Residence Test

You must live outside the US for a full calendar year to use this method. Also, you must prove that you don’t intend to return to the US to live for the foreseeable future and you must have established a residence in the host country. When it comes down to it, this test is more subjective, as it is based on intent.

What Is Earned Income?

The Foreign Earned Income Exclusion only applies to earned income. This means if you have dividends, interest or capital gains, they cannot be claimed on the FEIE.

Check out more about how to use the FEIE to save on your taxes in our free guide, Everything Americans Working Abroad Need to Know about US Taxes.

Form 2555 and US Expat Taxes

Use Form 2555 to claim the Foreign Earned Income Exclusion. Each expat is required to complete their own Form 2555, so if you’re a husband and wife working and living abroad, you’ll complete two forms to attach to your joint US expat taxes. Most of the information will likely be the same if you live and travel together, but the IRS will consider each Foreign Earned Income Exclusion claim separately.

The form may look confusing, but with the help of instructions on the IRS website, you should find that it isn’t too time-consuming.

Filling Out Form 2555

Having all of the required documentation before filing is the key for a smoother experience. As such, you’ll need the following in order to fill out Form 2555:

  • Your employer’s name and address (foreign and US, if applicable)
  • Your international travel calendar, including days you might have worked in the US
  • Your prior year Form 2555 (if available)
  • Your foreign income earnings statements

Filing Taxes for 2018 or Before? See If You Qualify for Form 2555-EZ

Form 2555-EZ is a simplified version of Form 2555 that was designed to make it easier for taxpayers to file. Starting with the 2019 tax year, Form 2555-EZ can no longer be used to claim the Foreign Earned Income Exclusion.

If you need to file taxes for a previous year, you may be able to use the Form 2555-EZ, provided you meet these requirements:

  • You must have been physically present in a foreign country for at least 330 days in a 12-month period.
  • You must be a US citizen or resident alien.
  • You must have earned less than $103,900 in 2018 of wages in a foreign country. If you have self-employment income, it is not included in this and requires Form 2555 with your expat tax return.
  • You must file a tax return for a period covering a calendar year (not a fiscal year).
  • You don’t intend to claim the Foreign Housing Exclusion or deduction.
  • You don’t have business or moving expenses associated with your job.

While these criteria may seem straightforward, a large number of US expats are ineligible to use Form 2555-EZ because they don’t meet these requirements. If you’re a lucky expat who is able to use Form 2555-EZ, you’ll find that you save a lot of time completing your taxes.

Get Your Tax Break Using the Foreign Earned Income Exclusion

You can always consult with an expat tax professional if you’re not sure where to begin with your US expat taxes and Form 2555. And if you’ve never filed, or are a few years behind, find out if you qualify for our special Streamlined Filing Package available to help you catch up, penalty-free.

Ready to Get Started on Your US Expat Taxes?

Our team of dedicated CPAs and IRS Enrolled Agents is here to help you become and stay compliant with your US expat tax obligation – get started today.