IRS Form 2555
What is Form 2555?
The US taxes income based on citizenship and residency – meaning that you’ll still have to pay taxes on any income you earned abroad. To prevent double-taxation on your income, the US government provides foreign tax credits, deductions and exclusions for expats to claim.
One of these is the Foreign Earned Income Exclusion (FEIE). Tax Form 2555 is used to claim this exclusion and the Housing Exclusion or deduction.
Table of Contents
What is Form 2555?
The US taxes income based on citizenship and residency – meaning that you’ll still have to pay taxes on any income you earned abroad. To prevent double-taxation on your income, the US government provides foreign tax credits, deductions and exclusions for expats to claim.
One of these is the Foreign Earned Income Exclusion (FEIE). Tax Form 2555 is used to claim this exclusion and the Housing Exclusion or deduction.
Who Should Use The Foreign Earned Income Exclusion?
The FEIE is ideal for people working in places where income tax is lower than it is in the United States. Dubai in the UAE is a prime example, because income tax is 0%.
It can also be used in other circumstances too, such as earning income in a foreign land without paying any or low income tax on that income.
Who Shouldn’t Use The Foreign Earned Income Exclusion?
As a general rule, we don’t use the FEIE for people working in high-income tax countries. Examples are countries such as the UK, Australia, Canada, most EU countries and New Zealand just to name a few.
That’s because people working there are likely paying more tax than they would pay in the United States for the equivalent salary.
For that reason, we don’t use the FEIE because it’s more beneficial to claim Foreign Tax Credits (FTC) instead.
How much income is excluded?
US taxpayers can exclude their foreign earnings up to an amount ($105,900 for 2019, $107,600 for 2020, $108,700 for 2021, and $112,000 for 2022) from taxation if they live and work outside of the US for a year or more. The amount is adjusted annually for inflation.
Who qualifies for the Foreign Earned Income Exclusion?
You need to pass either the bona fide residence test or the physical presence test to qualify for the Foreign Earned Income Exclusion.
- Physical Presence Test
– This is preferable for expats who are living abroad temporarily. The test requires that you live abroad for 330 out of 365 days, but does not have to be in a calendar year.
- Bona Fide Residence Test
– To use this test, you must live outside of the US for a full calendar year, prove that you don’t intend to return to the US to live for the foreseeable future, and you must have established a residence in the host country. This test is quite subjective and is based on intent.
What if I’m way behind on my U.S. tax returns?
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Do spouses need to submit separate Form 2555’s?
Each US expat is required to file their own Form 2555 to the IRS. Spouses working and living abroad will need to complete two forms to attach to their joint US expat taxes.
What is earned income?
Earned income is income from employment or self-employment. Earned income does not include income from passive means such as dividends, interest, or capital gains – which therefore can’t be claimed on the FEIE.
According to the IRS, non-foreign earned income is:
- Pay received as a military or civilian employee of the U.S. government or any of its agencies
- Pay for services conducted in international waters or airspace (not a foreign country)
- Payments received after the end of the tax year following the year in which the services that earned the income were performed
- Pay otherwise excludable from income, such as the value of meals and lodging furnished for the convenience of your employer on their premises (and, in the case of lodging, as a condition of employment)
- Pension or annuity payments, including social security benefits
What information is required for Form 2555?
When filling out Form 2555 you’ll need to provide information on the source of employment, foreign residence information, any information about the Foreign Housing Exclusion, and certain income details relating to employment in a foreign country.
To get an extension, file Form 2350, Application for Extension of Time to File US Income Tax Return, to the IRS office. Form 2350 needs to be filed by the due date of filing your return. This form doesn’t extend the time in which you need to pay your taxes.
When is Form 2555 due and Where should Form 2555 be filed?
Form 2555 or 2555-EZ is attached to your tax return and is due when your 1040 is due.
What are the penalties for not filing Form 2555?
Form 2555 is optional and used to the advantage of expats. It is not mandatory and there are no penalties.
Is there an extension for claiming the Foreign Earned Income Exclusion?
Generally, you can’t get an extension of time to file for more than 6 months. If you are outside of the US and meet certain tests, you may be eligible for a longer extension.
What is Form 2555-EZ?
Form 2555-EZ is a simplified version of Form 2555 to make it easier for taxpayers. However, beginning tax year 2019, Form 2555-EZ can no longer be used to claim the Foreign Earned Income Exclusion.
If you are filing taxes for a year prior to 2019, you may be eligible to use Form 2555-EZ if you satisfy the following conditions:
You were physically present in a foreign country for at least 330 days in a 12-month period
- You are a US citizen or resident alien
- You file a tax return for a period covering a calendar year
- You earned less than $103,900 in 2018 of wages in a foreign country. Income from self-employment is not included in this and requires Form 2555 with your tax return
- You don’t intend to claim the Foreign Housing Exclusion or deduction
- You don’t have business or moving expenses associated with your job
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