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Form 2555: foreign earned income exclusion

Form 2555 claims the foreign earned income exclusion, and its instructions cover the qualification tests, income definitions, attachments, related forms and filing timing.

What Form 2555 calculates

Form 2555 calculates the foreign earned income exclusion and the housing exclusion or deduction for taxpayers who qualify. The combined amount excluded or deducted cannot exceed foreign earned income for the tax year.[1]

The instructions state that U.S. citizens living abroad remain subject to the same U.S. income tax laws as citizens living in the United States. Qualification requires a foreign tax home together with either bona fide residence or physical presence under the instructions' tests.[2]

How the qualification tests work

A tax home generally means the regular or principal place of business, employment or duty, regardless of the family residence's location. Where the nature of the business leaves no regular or principal business location, the instructions identify the regular place of abode as the tax home.[2]

  • For a U.S. citizen, the bona fide residence test requires residence in a foreign country or countries for an uninterrupted period covering an entire tax year. Intention about the stay's length and nature affects whether residence qualifies.[2]
  • The physical presence test requires at least 330 full days in a foreign country or countries within 12 consecutive months. Each full day is a 24-hour period beginning at midnight, and separate periods abroad can count toward the total.[2]

What foreign country and earned income mean

A foreign country means territory governed by a sovereign government other than the United States. The definition includes territorial waters and airspace, excludes international waters and their airspace, and excludes U.S. territories and Antarctica.[2]

Foreign earned income includes compensation for personal services performed abroad during a period meeting the tax home and residence or presence tests. Noncash compensation, allowances and reimbursements can also count. Pension and annuity income, interest, ordinary dividends and capital gains fall outside this definition.[2]

What information and attachments the instructions request

Part I requests the complete address and identifies tax homes and when they were established. The instructions call for completion of either Part II for bona fide residence or Part III for physical presence, with only one of those parts completed.[2]

Line 10 records the beginning and ending of bona fide residence, with an indication of continuing residence where applicable. Line 16 requires both endpoints of the physical presence period. Part IV requests total foreign earned income earned and received, including amounts constructively received, during the tax year.[2]

For qualifying income earned in the preceding tax year and received in the filing year, the instructions describe a separate calculation statement attached to Form 2555. That income is omitted from Part IV when the specified exclusion rule applies.[2]

How the housing calculation works

Line 28 requests reasonable foreign housing expenses paid or incurred by the taxpayer or on the taxpayer's behalf. Expenses for a spouse and dependents living with the taxpayer can also count.[2]

Listed expenses include rent, utilities other than telephone charges, property insurance and residential parking. House purchases, improvements, mortgage principal payments and purchases of furniture are excluded. Housing expense limits depend on location, and the qualifying period covers days meeting both the tax home test and the applicable residence or presence test.[2]

How Form 2555 connects to other forms

Form 2555 accompanies Form 1040 or 1040-SR. The instructions direct the line 45 amount to Schedule 1, line 8d, and provide subsequent steps for carrying Schedule 1 totals to the individual return.[2]

Tax on nonexcluded income uses the rates that would apply without the exclusions. The instructions reference the Foreign Earned Income Tax Worksheet in the Form 1040 instructions and a separate worksheet in the Form 6251 instructions for alternative minimum tax.[2]

What filing timing the instructions describe

An automatic two-month filing extension applies when, on the return's due date, both the taxpayer's residence and tax home are outside the United States and Puerto Rico. A statement attached to the return explains that both conditions are met.[2]

If a first claim's residence or presence requirement remains unmet at the filing deadline, the instructions describe a special extension through Form 2350 or a timely return followed by an amendment after qualification. Form 2350 is filed before the return's due date; Form 1040-X changes an already filed return.[2]

Questions and answers

Does my work abroad for the U.S. Government qualify?

Income earned abroad as a U.S. Government employee does not qualify for either exclusion or the housing deduction.

Can my spouse and I calculate one earned income exclusion?

When both spouses qualify and elect the foreign earned income exclusion, each calculates a separate amount. Each spouse completes Part VII on a separate Form 2555.[2]

Can I claim foreign tax credits on excluded income?

The instructions disallow a credit or deduction for foreign income taxes attributable to excluded income. When only part of the income is excluded, that restriction applies to the foreign taxes allocated to that part.[2]

Does my exclusion election continue into later tax years?

The election continues for subsequent tax years unless revoked. A prior election does not need revocation simply because a year has no foreign earned income or foreign housing costs.[2]

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Sources and data notes
  1. Internal Revenue Service, About Form 2555. https://www.irs.gov/forms-pubs/about-form-2555. Retrieved .
  2. Internal Revenue Service, Instructions for Form 2555. https://www.irs.gov/instructions/i2555. Retrieved .

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