How to Expats Should Use Form 2555 to Exclude Foreign Income on Tax Returns

The official way expats say, “Hey, Uncle Sam, gimme a break.”

Managing your expat taxes can be tricky, but Form 2555 is one of your most important tools. As an expat, you get to Form 2555 to exclude your foreign income on your federal income taxes with the U.S. This form allows you to claim the Foreign Earned Income Exclusion (FEIE) and reduce your taxable income.

Here is a step-by-step guide on how to fill out Form 2555:

1. Determine your eligibility: To qualify for the FEIE, you must meet either the Physical Presence Test or the Bona Fide Residence Test.
2. Fill out the personal information: Provide your name, address, and social security number. If you have a foreign address, mention it as well.
3. Add up your foreign income earnings information: This includes every dollar of income from wages, salaries, and self-employed income earned in a foreign country. Be sure to include any noncash income sources, such as investment income, property or meals. Exclude unearned income or wages taxed by another country.
4. Determine your foreign housing expenses: If eligible, you can claim the Foreign Housing Exclusion or the Foreign Housing Deduction to further reduce your taxable income.
5. Calculate your foreign income exclusion: Take the lesser of your Foreign Earned Income or the maximum exclusion amount allowed by the IRS for the tax year.
6. Complete the rest of the form: Include any additional income, deductions, and credits that apply to your situation.
7. Sign and date the form: Ensure you have entered accurate income details and attach any supporting documents required.

The foreign income exclusion explained

The foreign income exclusion benefit helps individuals living abroad. It allows them to exclude a certain amount of their foreign income from their US income tax return, letting expats minimize their tax liability and keep more of their hard-earned money, so long as it’s below an income reporting threshold.

The foreign earned income exclusion applies to various types of income sources, including common income types such as wages, salary, tips, and self-employment income earned in a foreign country. Certain housing costs may also qualify for the exclusion, such as rent, utilities, and the cost of purchasing or renting a home abroad.

Generally, your annual income in a foreign country gets subjected to foreign income taxes, and this foreign tax credit for individuals ensures you aren’t hit with double taxation when tax season rolls around. It’s like a tax break, except you’ve already paid foreign taxes.

To claim the foreign income exclusion, expats need to complete Form 2555 when filing their US income tax return. This form is specifically designed to report the foreign earned income and calculate the exclusion amount. It requires individuals to provide their personal information, such as name, address, and social security number. Additionally, they need to calculate their foreign earned income and determine their foreign housing expenses, if applicable.

The foreign earned income exclusion (FEIE) is different from your foreign tax credit. But if you qualify for the exclusion, you may also qualify for the foreign tax credit for income taxes.

Filing Form 2555 on Your U.S. Individual Income Tax Returns

If you earn income in a foreign location and want to exclude it from your US tax return, income tax laws allow you to do so by completing IRS Tax Form 2555. This form allows individuals to claim the foreign earned income exclusion, which reduces their taxable income.

To fill out Form 2555, you will need to provide your personal information, such as your name, address, and social security number. You will also need to calculate your foreign earned income, which includes wages, salary, tips, and self-employment income earned abroad.

If you have housing expenses that qualify for the exclusion, you will also need to determine those costs. This may include rent, utilities, and the purchase or rental of a home in a foreign country.

Foreign Country Requirements for the Foreign Earned Income Exclusion

To be eligible for the foreign earned income exclusion on Form 2555, you must meet certain requirements related to your foreign residence. Firstly, you must have a tax home in a foreign country, which is the general area of your main place of business, employment, or post of duty. Your tax home must be in a foreign country for an uninterrupted period that includes an entire tax year. If you are a calendar year taxpayer, this generally means being present in the foreign country for at least 330 full days during a 12-month period. Additionally, you must be either a bona fide resident or meet the physical presence test. Being a bona fide resident means establishing and maintaining a regular, ongoing presence in a foreign country. Meeting the physical presence test requires being physically present in a foreign country or countries for at least 330 full days during a 12-month period.  

Physical Presence Requirement

To meet this test, you must spend a certain number of full days outside of the United States. The specific requirement is that you must be physically present in a foreign country for at least 330 full days in a 12-month period. This qualifying period does not need to align with the calendar year returns and can start on any date. Be sure to add all the separate periods you were a foreign location.

It is important to note that any travel between foreign countries and the United States will not count towards the 330-day requirement. However, if you are in transit through the United States in a 24-hour period or less, this will not be considered a day spent in the U.S.

Bona Fide Residence Test

The Bona Fide Residence Test is one of the requirements for claiming this foreign income tax deduction on your expat taxes. In short, establish and maintain a substantial period of residence in a foreign country.

To provide evidence of your foreign residency, you may need to submit documentation such as residency cards, records of foreign taxes paid, rental contracts, utility bills, or any other document that supports your claim. This documentation will prove that you have a genuine and ongoing presence in the foreign country.

In addition to maintaining a physical residence, there are certain criteria that you must meet to qualify for the Bona Fide Residence Test:

• Having more ties to the foreign country than to the United States. This includes having a permanent place of work and family residence in the foreign country.
• Being a U.S. citizen or a resident alien eligible for an income tax treaty.
• Earning active income, not passive income. The IRS is looking for employment wages or self-employment income. This might be your entire income if you’re not receiving income from property or passive investment income.

Habitual Abode Test

The Habitual Abode Test is another method you can use to establish your eligibility for the foreign earned income exclusion. This test focuses on assessing the nature and regularity of your living arrangements in a foreign country.

To pass the Habitual Abode Test, you must meet certain requirements. Firstly, you should have a “tax home” in a foreign country. This means that you have a regular place of business or employment in that country. Secondly, you should have a “habitual abode” in a foreign country. This refers to having a regular place of residence in your country of residence, whether it is owned, rented, or provided by your employer. It is important to note that simply owning property or having a family residence with a foreign household in a different country is not enough to pass this test. You must demonstrate that you have actually established a regular living arrangement in the foreign country.

Housing Exclusion and Deduction Eligibility Requirements

To be eligible for the foreign housing exclusion or deduction, there are specific requirements that you must meet.

Firstly, you must qualify for the foreign earned income exclusion, which means you have foreign earned income and a home in a foreign country.

Then you have to pass the bona fide residence test or the physical presence test.The bona fide residence test requires that you are a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year. On the other hand, the physical presence test requires that you are physically present in a foreign country or countries for at least 330 full days during a 12-month period. Additionally, the housing expenses must be considered qualified for the exclusion or deduction. These expenses include rent, utilities, real estate taxes, and other necessary expenses directly related to housing.

12-Month Period Requirement

The 12-Month Period Requirement is an important criteria for claiming the foreign earned income exclusion on Form 2555. To meet this requirement, you must live and work in a foreign country for a continuous 12-month period. This means that you must physically be present in the foreign country for the entire duration of this period.

The purpose of this requirement is to ensure that you have established a true foreign residence and that your income earned in that country is eligible for exclusion. This period can start at any time during the tax year, but you must complete the full 12 months to qualify.

It’s important to note that temporary or brief trips back to your home country do not interrupt the 12-month period. However, if you are traveling for business or pleasure, those days will not count towards the required 12 months.

Meeting the 12-Month Period Requirement is crucial for claiming the foreign earned income exclusion on Form 2555. It ensures that you have spent a significant amount of time living and working in a foreign country, making your foreign income eligible for exclusion from your taxable income. So if you’re planning on using this tax break, make sure you meet this requirement and keep accurate records of your time spent abroad.

Uninterrupted Period of Time Requirement

The uninterrupted period of time requirement for claiming the foreign earned income exclusion on Form 2555 is an essential aspect of establishing eligibility for this tax benefit. To meet this requirement, you must have a continuous qualifying period of time, typically 12 consecutive months, during which you are physically present in a foreign country and paying foreign taxes.

This means that you must maintain a physical presence in the foreign country for the entire 12-month period without any significant interruptions or absences. It’s important to note that temporary trips back to your home country, such as for business or pleasure, do not interrupt this period. However, any days spent outside the foreign country for non-business-related reasons will not count toward the required 12 months.

Maintaining a Foreign Residence Requirement

Maintaining a foreign residence is a crucial requirement for expatriates who wish to claim the foreign earned income exclusion on Form 2555. This exclusion allows individuals to exclude a certain amount of their foreign earned income from their U.S. taxable income, hence reducing their overall tax liability.

To meet the foreign residence requirement, you must establish a genuine foreign residence during the 12-month period covered by Form 2555. This means more than just physically being present in the foreign country for a continuous period; you must also demonstrate that you have made it your true residence.

To establish your foreign residence, you should maintain a permanent home in the foreign country. This can include owning or renting a property and having a physical address there. Additionally, you should establish ties to the local community, such as through social activities, memberships, or involvement in local organizations. This helps showcase your integration into the community and your intention to make the foreign country your home.

The Information You Need to Fill Out Form 2555

To accurately fill out Form 2555 for your federal income taxes, you’ll need to provide the following information:

1. 1. Foreign Address: This includes your complete residential address in the foreign country, including the street name, house or apartment number, city, and postal code.
   2. Foreign Employer’s Name: Provide the full name of your foreign employer or the company you work for in the foreign country.
   3. Foreign Employer’s Address: Include the complete address of your foreign employer, including the street name, building number, city, and postal code.
   4. Occupation at a Foreign Company: State your profession or occupation at the foreign company or employer stated above.

1. Total Foreign Wages: Report the total amount of and type of income you earned from your foreign employer during the tax year. This includes all wages, salaries, bonuses, tips, commissions, and any other forms of compensation.
2. Previous Filings of Form 2555: Indicate whether you have previously filed Form 2555 in any other tax years. If you have, provide the specific tax years in which you submitted this form.

---