If you’re a U.S. expat, you may be able to exclude foreign earned income from U.S. taxable income using IRS Form 2555. This form allows eligible taxpayers to claim the Foreign Earned Income Exclusion (FEIE), reducing or eliminating their U.S. tax liability on income earned abroad.
In this guide, we’ll walk you through who qualifies, how to file, and key requirements to ensure you maximize your tax savings.
What Is IRS Form 2555?
Form 2555 is an IRS tax form used to claim the Foreign Earned Income Exclusion, which allows qualifying U.S. expats to exclude up to a certain amount of foreign earned income from U.S. taxable income. The exclusion is adjusted annually for inflation.
In addition to excluding income earned abroad, Form 2555 also allows for the Foreign Housing Exclusion, which lets taxpayers deduct certain housing expenses while living in a foreign country. If you’re eligible, filing Form 2555 can reduce your U.S. tax burden.
Who Qualifies for the Foreign Earned Income Exclusion?
To qualify for the Foreign Earned Income Exclusion, you must:
✅ Have foreign earned income – This includes wages, salaries, self-employment income, and payments for services performed in a foreign country. Passive income (such as interest, dividends, and rental income) does not qualify.
✅ Have a tax home in a foreign country – Your tax home is generally your main place of business or employment. If your tax home remains in the U.S., you may not qualify for the exclusion.
✅ Meet either the Bona Fide Residence Test or the Physical Presence Test:
- Bona Fide Residence Test – You must be a bona fide resident of a foreign country for an entire tax year (January 1 – December 31).
- Physical Presence Test – You must be physically present in a foreign country for at least 330 full days within a 12-month uninterrupted period.
Meeting either test ensures that you can file Form 2555 to exclude foreign income and reduce your U.S. tax obligation.
How to File Form 2555?
- Enter General Information – Provide your name, Social Security number, foreign address, and tax year.
- Declare Your Foreign Tax Home – Indicate where you work abroad and confirm your tax home.
- Meet Residency Requirements – Choose the Bona Fide Residence Test or Physical Presence Test to qualify.
- Report Foreign Earned Income – List wages, salaries, and self-employment income.
- Calculate the Foreign Earned Income Exclusion – Determine the amount of foreign income you can exclude.
- Claim the Foreign Housing Exclusion – Deduct rent, utilities, and eligible housing expenses if applicable.
- Attach Form 2555 to Form 1040 – Ensure accuracy to avoid costly mistakes and IRS scrutiny.
Common Mistakes to Avoid When Filing Form 2555
Not Meeting the Residency Tests – Failing to qualify under the Bona Fide Residence Test or Physical Presence Test can lead to rejection of your foreign income exclusion claim.
Incorrectly Calculating the Exclusion – Ensure that your Form 2555 foreign earned income is accurately reported to avoid costly mistakes.
Failing to File on Time – Missing deadlines can result in penalties and the loss of valuable tax deductions.
Not Considering the Foreign Tax Credit – If you pay foreign taxes, you may benefit more from the Foreign Tax Credit than from Form 2555.
Overlooking the Foreign Housing Exclusion – Many expats forget to claim their housing expenses, missing out on additional tax savings.
Related: FEIE vs. Foreign Tax Credit: Which One to Choose?
Drawbacks of Using Form 2555
⚠ Ineligibility for Certain Tax Credits and Deductions – If you claim FEIE, you forfeit eligibility for the Additional Child Tax Credit (ACTC) and IRA deductions. This could result in a higher overall tax liability if you would otherwise qualify for these tax benefits.
⚠ Five-Year Restriction on Revocation – If you revoke the Foreign Earned Income Exclusion, the IRS prevents you from claiming it again for five consecutive years unless you obtain IRS approval. This can limit your flexibility if your tax situation changes.
Understanding these limitations and potential mistakes can help ensure you make the right choice between FEIE and the Foreign Tax Credit while remaining fully compliant with U.S. tax laws.
Should You File Form 2555?
If you earn income abroad, Form 2555 can help you exclude foreign earned income and reduce your U.S. tax liability. However, choosing between FEIE and the Foreign Tax Credit depends on your tax situation, income level, and foreign tax obligations.
At 1040 Abroad, we offer free tax advice for U.S. expats and can guide you through filing Form 2555 foreign earned income correctly. Contact us today to ensure you’re making the most of your expat tax benefits!
