Form 673: Stop Overwithholding on Your Foreign Salary and Keep More Money Each Month
- Who Should Use Form 673?
- Form 673 vs. Form 2555: What's the Difference?
- How Form 673 Improves Your Cash Flow
- Two Main Requirements for Form 673
- Common Form 673 Scenarios
- What to Expect After Filing Form 673
- Common Mistakes to Avoid
- When Form 673 Might Not Be Right for You
- Your Next Steps
- Get Expert Help with Your Expat Tax Strategy
The Foreign Earned Income Exclusion allows you to exclude up to $130,000 of foreign-earned income for the 2025 tax year – but what if you’re already having too much tax withheld from your paycheck while working abroad? If you’re an American working overseas for a U.S. employer, Form 673 lets you reduce or stop federal income tax withholding on your foreign salary right now, rather than waiting until tax time for a refund.
Form 673 (Statement for Claiming Exemption from Withholding on Foreign Earned Income) tells your U.S. employer to stop withholding federal income tax on the portion of your foreign salary that qualifies for the Foreign Earned Income Exclusion. Instead of getting a large refund next year, you keep more of your paycheck every month. This form is particularly valuable for Americans who expect their entire foreign salary to be excluded from U.S. taxes.
Bottom line: If you qualify for the Foreign Earned Income Exclusion and work for a U.S. company abroad, Form 673 can immediately improve your monthly cash flow by reducing unnecessary tax withholding.
Who Should Use Form 673?
Form 673 is designed for a specific group of American expats who meet these criteria:
- You must be working for a U.S. employer that withholds federal income tax from your paycheck. This includes American companies with foreign offices, U.S. government contractors, or any employer paying you through U.S. payroll.
- You must expect to qualify for the Foreign Earned Income Exclusion by meeting either the Physical Presence Test (330 days abroad in a 12-month period) or Bona Fide Residence Test (tax resident of a foreign country for a full calendar year).
- Your foreign salary should fall within the exclusion limit. For 2025, you can exclude up to $130,000 of foreign-earned income. If your salary exceeds this amount, Form 673 can still reduce withholding on the excludable portion.
Form 673 can only be used by U.S. citizens and only applies to income earned from services performed outside the United States. Income earned during trips back to the U.S. doesn’t qualify for the exclusion.
Form 673 vs. Form 2555: What’s the Difference?
Many expats confuse these two forms, but they serve different purposes:
- Form 673 is filed with your employer to reduce current paycheck withholding. Think of it as preventing overwithholding before it happens.
- Form 2555 is filed with your annual tax return to actually claim the Foreign Earned Income Exclusion and get credit for foreign taxes already paid or withheld.
You’ll likely use both forms – Form 673 to optimize your monthly cash flow, and Form 2555 when filing your annual return to make the exclusion official.
How Form 673 Improves Your Cash Flow
Without Form 673, here’s what typically happens:
Sarah works in Germany for a U.S. tech company earning $90,000 annually. Her employer withholds about $15,000 in federal taxes throughout the year. When she files her tax return with Form 2555, she gets most of that $15,000 back as a refund because her entire salary qualifies for the Foreign Earned Income Exclusion.
With Form 673, Sarah can reduce that withholding to nearly zero, keeping an extra $1,250 per month instead of waiting for a large refund.
Who doesn’t love a tax break? Download our easy-to-use excel calculator to get an estimate of how the foreign earned income exclusion can save you money.
Two Main Requirements for Form 673
To use Form 673, you must expect to qualify for the Foreign Earned Income Exclusion through one of two tests:
Physical Presence Test
You must be physically present in foreign countries for at least 330 full days during any 12-month period. This test is perfect for:
- Digital nomads and location-independent workers
- Short-term overseas assignments
- Recent expats who haven’t established permanent residence yet
Mike moved to Singapore on April 1, 2024. By March 31, 2025, he spent 340 days abroad with only brief trips home. He qualifies for the Physical Presence Test and can file Form 673.
Bona Fide Residence Test
You must be a bona fide resident of a foreign country for an uninterrupted period that includes an entire calendar year. This test looks at your intention to live abroad permanently, not just your physical presence. It’s ideal for:
- Expats with permanent overseas positions
- Those who’ve established clear foreign residence and ties
- Americans who’ve been abroad for over a year
Unlike the Physical Presence Test, you can’t cherry-pick your 12-month period for the Bona Fide Residence Test – it must include a full calendar year.
Common Form 673 Scenarios
Low-Tax Countries
If you live in a country with little to no income tax (like the UAE or Saudi Arabia), Form 673 combined with the Foreign Earned Income Exclusion often eliminates your entire U.S. tax liability.
High-Tax Countries
In countries like Germany or France where you pay substantial local taxes, you might use Form 673 for the exclusion portion and apply Foreign Tax Credits for any remaining U.S. tax liability.
Partial Year Abroad
Moved overseas mid-year? Your exclusion gets prorated. If you moved abroad on July 1st, you’d qualify for roughly half the maximum exclusion amount for that tax year.
What to Expect After Filing Form 673
Once you submit Form 673 to your employer:
- Immediate effect: Your employer should adjust withholding for future paychecks. The change typically takes 1-2 pay periods to implement.
- No retroactive changes: Form 673 doesn’t recover taxes already withheld. You’ll need to wait for your tax refund to get those back.
- Annual verification: Your employer may ask you to submit a new Form 673 each tax year to confirm your continued eligibility.
- Record keeping: Keep copies of your Form 673 and track your days abroad carefully. The IRS may request documentation during an audit.
Common Mistakes to Avoid
- Filing too early: Don’t submit Form 673 unless you’re confident you’ll meet the qualifying tests. If you don’t actually qualify for the Foreign Earned Income Exclusion, you’ll owe taxes plus potential penalties and interest.
- Ignoring state taxes: Form 673 only affects federal withholding. You may still need to address state tax obligations separately.
- Mixing up income types: The form only applies to earned income from work performed abroad. Investment income, rental income, or work performed in the U.S. doesn’t qualify.
- Forgetting annual filing requirements: Form 673 reduces withholding but doesn’t eliminate your requirement to file Form 1040 and Form 2555 annually.
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When Form 673 Might Not Be Right for You
- Uncertain qualifying status: If you’re not sure you’ll meet the Physical Presence or Bona Fide Residence tests, wait until you’re certain before reducing withholding.
- Variable income: If your income fluctuates significantly or you might exceed the $130,000 exclusion limit, conservative withholding might be safer.
- State tax complications: Some states don’t recognize the Foreign Earned Income Exclusion, so reducing federal withholding might create state tax issues.
- First year abroad: If this is your first year overseas, you might prefer to play it safe with normal withholding until you understand your full tax situation.
Your Next Steps
If Form 673 sounds right for your situation:
- Verify your qualifying status – Confirm you’ll meet either the Physical Presence or Bona Fide Residence test
- Calculate your expected exclusion – Determine how much of your income will qualify for the Foreign Earned Income Exclusion
- Obtain the form – Download Form 673 from the IRS website or request it from your employer
- Complete and submit – Fill out the form accurately and submit it to your employer’s payroll department
- Monitor your paystubs – Verify that withholding adjustments take effect within 1-2 pay periods
You’ll still need to file your annual tax return with Form 2555 to officially claim the Foreign Earned Income Exclusion, even if you use Form 673 to reduce withholding.
Get Expert Help with Your Expat Tax Strategy
Form 673 can be a powerful tool for managing your cash flow as an American expat, but it’s just one piece of your overall tax strategy. Greenback is an American company founded in 2009 by US expats for expats. We’ve helped over 23,000 expats file over 71,000 returns while maintaining a 4.9 star average on TrustPilot. Many of our CPAs and Enrolled Agents are expats themselves, living in 14 time zones, so they experience firsthand the challenges of living abroad.
Whether you’re trying to decide between Form 673 and normal withholding, optimizing between the Foreign Earned Income Exclusion and Foreign Tax Credit, or handling more complex situations like multiple employers or partial-year residence, our team has the knowledge and patience to help you get it right.
No matter how late, messy, or complex your return may be, we can help. You’ll have peace of mind, knowing that your taxes were done right.
Have questions about Form 673 or your expat tax strategy? If you’re ready to be matched with a Greenback accountant, click the get started button below. For general questions on expat taxes or working with Greenback, contact our Customer Champions.
This article is for informational purposes only and should not be considered tax advice. Tax situations vary, and you should consult with a qualified tax professional about your specific circumstances.
