Living and working abroad can be an exciting opportunity to experience a different lifestyle, see the world, and possibly even save on your taxes. However, it can also complicate your filing when tax season comes around. This guide to IRS Form 2555 Foreign Earned Income can help you understand your tax obligations and how to go about filing your income taxes.

What Is Form 2555?

IRS Form 2555 is intended for the reporting of foreign earned income to the Internal Revenue Service (IRS). The main purpose of tax form 2555 is to help taxpayers determine their exclusions relating to foreign earned income and housing in order to properly file federal income taxes.

Do I Need to File Form 2555?

If you are a U.S. citizen living and working abroad, you may need to file Form 2555. However, there are a few requirements to qualify for foreign income exclusion benefits. You must:

  • Meet the tax home test: Your tax home is the location where you indefinitely work. For this qualification, your tax home must be outside the U.S. and you cannot have an abode in the U.S.
  • Meet either the bona fide residence test or the physical presence test:
  1. You are a U.S. citizen who is a bona fide resident of one or more foreign countries for an uninterrupted period that includes an entire tax year.

         or

  1. You are a U.S. resident alien who is a citizen or national of a country with which the U.S. has an income tax treaty and are a bona fide resident of one or more foreign countries for an uninterrupted period that includes an entire tax year.
    • Physical presence test: You are a U.S. citizen or resident alien who is physically present in one or more foreign countries for at least 330 full days during any period of 12 months in a row.

How Much Foreign Income is Tax Free?

With the Foreign Earned Income Exclusion, you may qualify to exclude up to $105,900 of your income. However, for certain income to be tax free, it must be deemed eligible.

What Income Qualifies for Foreign Income Exclusion?

These general guidelines will help you determine which income you’ve earned, if any, qualifies for the foreign income exclusion:

  • Earned income (wages, salary, tips, bonuses, etc.)
  • Can include self-employed income
  • Does not include unearned income such as dividends, interest, or capital gains
  • Certain meals and lodging
  • Some of your foreign housing costs (cannot be considered lavish or extravagant)

Income you have earned from working abroad as an employee of the U.S. Government or any of its agencies does not qualify.

Filling out Form 2555

To claim your foreign earned as well as any related deductions or exclusions, you can complete tax form 2555. Among other information, taxpayers using this form need to submit information about where they are currently living, overseas employment, and may need to determine whether they qualify for this consideration.

There are nine sections you will need to complete when filling out Form 2555, including:

  • Part I: Provide general Information about your employer and previous foreign income exclusion claims.
  • Part II or III: Complete the required information depending on whether you’re qualifying under the bona fide residence test or the physical presence test.
  • Part IV: Report your annual foreign earned income.
  • Part V: Indicate whether or not you’re claiming the housing exclusion or deduction.
  • Part VI: Enter information regarding the housing exclusion or deduction.
  • Part VII: Provide information regarding your claim for the foreign income exclusion.
  • Part VIII: Complete the required calculations to determine how much you will adjust your income for the exclusion or deduction.
  • Part IX: Calculate the housing deduction that will apply to your adjusted income.

You must provide Form 2555 with Form 1040 when filing your federal income taxes. In addition to the IRS Form 2555 instructions, it is recommended that you keep records of:

  • Dates of international travel and work
  • Foreign income earning statements
  • Any 2555 forms from previous years

You will also need this information in case of an IRS audit.

What If I Need Help Completing Form 2555?

If you’re having difficulty completing Form 2555, the professionals at Community Tax are here to help. Completing your U.S. expat taxes can be time consuming and confusing, whether it’s your first or tenth time filing. Don’t risk making a mistake that can cost you. Instead, submit a request online or call us today at (844) 325-4360 for a free tax consultation.