Form 1040 and the Foreign Earned Income Exclusion
Filing taxes as a US expat can be complicated, but it doesn’t have to be a hassle. And when filing your expat tax return, you can claim the Foreign Earned Income Exclusion to reduce (or even erase!) your US tax bill. Here’s how it works.
Key Takeaways
- For the 2024 tax year, the Foreign Earned Income Exclusion (FEIE) allows expats to exclude up to $126,500 of foreign-earned income from US taxation.
- To claim the FEIE, you must pass either the bona fide residence test or the physical presence test.
- You can claim the FEIE by completing Form 2555 and attaching it to your expat tax return (IRS Form 1040).
Understanding the Foreign Earned Income Exclusion (FEIE)
The FEIE allows qualifying US expats to exclude a portion of their foreign earned income from their US taxable income. This helps prevent double taxation on income already taxed by a foreign country.
The maximum exclusion amount changes every year. For 2024, you can exclude up to $126,500 in foreign income. This allows many Americans living overseas to erase their US tax bill entirely.
Eligibility for the FEIE
To claim the FEIE, you must qualify under either the bona fide residence test or the physical presence test:
- Bona Fide Residence Test: This means you must be a resident of a foreign country for an uninterrupted period that includes a full calendar year, which is from January 1st until December 3. Once you meet this requirement, the time before and after the calendar year generally also qualifies for the foreign earned income exclusion.
- Physical Presence Test: This means you must be physically outside of the US for at least 330 full days during any 12-month period, which can start on any day. For example, it could start on July 1st of one year and end on June 30th of the following year.
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Step-by-Step Guide to Completing Form 1040 with the FEIE
1. Gather Personal and Financial Information
Start by ensuring you have all your personal tax information ready, such as your:
- Social Security number or tax identification number
- Tax home address
- Foreign earnings
- Employment or self-employment details
2. Complete Form 1040
Begin by filling out Form 1040, the standard US tax return form.
- Personal information: Complete your name, address (if applicable), and other identifying information at the top of the form.
- Report worldwide income: Even though the FEIE will allow you to exclude a portion of your foreign earnings, you must report your full worldwide income. This includes salary, wages, and any other forms of compensation earned abroad. It also includes income such as interest income no matter where earned in the world.
3. Complete Form 2555 to claim the FEIE
Next, you will need to complete Form 2555 to claim the FEIE.
- Part I: General information: Fill out your basic personal information, such as your employer, occupation, and tax home location. Your tax home must be outside of the US to qualify. This section helps determine whether you’re eligible to claim the FEIE.
- Part II: Bona Fide Residence or Physical Presence Test:
- For the bona fide residence test, you must have lived in a foreign country for an uninterrupted period that includes a full tax year.
- For the physical presence test, you must spend at least 330 full days in a foreign country during any consecutive 12-month period.
- Part III: Foreign Earned Income: Report your foreign-earned income, including wages and salaries from foreign sources. The income must be earned through work done while living abroad. Foreign-earned income includes wages, bonuses, self-employment income, and other compensation earned while abroad.
4. Calculate the Exclusion Amount
Next, calculate how much of your income you can exclude from US taxation. For the 2024 tax year, the maximum exclusion amount is $126,500 per person. (If you are married and filing jointly, your spouse can also exclude up to $126,500 of their salary for a potentially combined total of $253,000.
5. Foreign Housing Exclusion (if applicable)
If your housing costs abroad exceed a certain base amount, you may be able to claim the Foreign Housing Exclusion. This allows you to deduct qualifying housing expenses like rent, utilities, and insurance from your taxable income. To calculate this, fill out Part VI of Form 2555.
6. Complete Form 1040 Line Items
Once Form 2555 is completed, the amount of excluded foreign-earned income will transfer to Line 7 of your Form 1040. This reduces your total taxable income by the amount of the exclusion. If you claimed the Foreign Housing Exclusion as well, it will also be included here.
7. File Your Tax Return
After filling out both Form 1040 and Form 2555, review the forms for accuracy. Ensure all your income is reported, and all eligible deductions and exclusions are applied correctly. You can file your return electronically or via mail.
Always keep copies of your return and supporting documents, including travel records and residency permits, in case of an audit or future inquiries by the IRS.
When you live in the US, tax day is simple: April 15th! When you move abroad, it’s not so straightforward! Learn about all the expat deadlines and extensions you need to know to file.
Common Mistakes to Avoid with Form 1040
- Not filing Form 2555: Many expats mistakenly believe the FEIE applies automatically, but you must file Form 2555 to claim it. Without this, the exclusion won’t be granted, potentially leading to a higher tax liability.
- Not filing a return: Even if you qualify for the FEIE and won’t owe any tax, you still need to file a US tax return. Many expats mistakenly believe they don’t have to file if their foreign income is below the exclusion limit.
- Not meeting the physical presence test: Expats often miscalculate the 330-day rule. Remember, even a few days short can disqualify you from claiming the FEIE for that tax year. One second spent in the US is considered a full day. The only exception is if you have a flight that connects through the US, the connection time is less than 24 hours, and you don’t leave the airport.
- Failing to report all income: Some believe that if their foreign income is below the exclusion limit, they don’t have to report it. However, you must always report your full worldwide income, regardless of how much is excluded.
- Missing out on other benefits: Relying solely on the FEIE may cause you to overlook other valuable benefits, such as the Foreign Tax Credit or tax-advantaged retirement contributions.
- Revoking the FEIE prematurely: Once you revoke the FEIE, you cannot claim it again for five years, so be careful when making this decision.
Form 1040 FAQs
1. Do I still need to file if my income is below the exclusion limit?
Yes, you must file a US tax return and report your worldwide income, regardless of the amount.
2. Can I claim both the FEIE and Foreign Tax Credit?
You cannot claim both for the same income. However, you may use the FEIE for one source of income and the Foreign Tax Credit for another. This is useful for covering forms of income that do not qualify for the FEIE. Also, if your salary is more than the foreign earned income exclusion, you can apply for the foreign tax credit on the amount of your income that is more than the exclusion.
3. What income qualifies for the FEIE?
Only earned income from employment or self-employment qualifies. Passive or unearned income, such as rental income and interest, is excluded. Pension and retirement income also do not qualify.
Get Reliable Help with Form 1040 and the Foreign Earned Income Exclusion!
Claiming the Foreign Earned Income Exclusion on Form 1040 can significantly reduce your tax bill — or erase it entirely! If you’d like some help optimizing your overseas taxes, we can help.
Greenback Expat Tax Services is an American company built by and for US expats. We give Americans around the world the support they need to file their taxes accurately and on time. Over the past fifteen years, we’ve filed 60,000 tax returns for expats in 193 countries. Now, we’re ready to do the same for you!
Contact us, and one of our customer champions will be happy to help. If you need very specific advice on your specific tax situation, you can also click below to get a consultation with one of our expat tax experts.
