Foreign Earned Income Exclusion (FEIE) Tax Form 2555

Simon Misiewicz

Expat & Property Tax Specialist

9th May 2022

Foreign Earned Income Exclusion (FEIE) on Form 2555

If you're working abroad, understanding the Foreign Earned Income Exclusion can significantly impact your tax situation. To apply for this exclusion, you need to file Form 2555 with the IRS, which allows qualifying expats to exclude a certain amount of their foreign earned income from U.S. taxation. It's essential to differentiate between foreign income exclusion and foreign tax exclusion, as each has specific qualifications and implications for your earned income exclusion

The Foreign Earned Income Exclusion (FEIE) and foreign housing exclusion are for Americans to reduce their income tax return Form 1040 taxable income payable to the IRS for earned income in the United Kingdom.

It is essential to understand how to accurately complete an FEIE form (Form 2555/Form2555-EZ) and establish if you can claim for FEIE.

You can see how much money you will pay the IRS by using our free online US tax estimator calculator.

What are the basics of FEIE on Form 2555

It is important to understand the definition of foreign-earned income and how much is earned (non-US).

Americans can also benefit from foreign earned income housing exclusion using form 2555 on their Income tax return Form 1040.

FEIE (form 2555) includes wages, salaries, professional fees or other amounts paid for personal services rendered.

The IRS considers overseas earnings if payments are made outside the US. A clear indication of the location of the activity is necessary on all supporting documentation.

US citizens must pay tax to the IRS on foreign earnings if they meet the filing thresholds, usually equivalent to the standard deduction for your filing status.

US citizens pay taxes on money earned abroad because IRS tax is based on citizenship, not the country of residence. You need to understand from 2555 to get the most benefit.

What is the FEIE

The Foreign Earned Income Exclusion (FEIE) reported on form 2555 is an IRS exemption that American ex-pats can claim when they file their US tax return from abroad to reduce (and in some cases eliminate) their US tax bill.

It allows ex-pats to exempt the first $126,500 of their earned income from US taxation (for 2024).

The exact threshold rises annually based on inflation.

The FEIE can only be used to exclude certain types of earnings.

To find out more about qualifying for overseas earned income exclusion, read these IRS guidelines.

Some ex-pats may be able to use a shorter and simpler version of Form 2555 called Form 2555-EZ.

To qualify for using Form 2555-EZ, ex-pats must meet the following criteria:

– They are not also claiming the Foreign Housing Exclusion or Deduction

– The period they are claiming for is a calendar year

– They have no self-employed earnings

– They do not earn more than the threshold for that year

– They have no business or moving expenses for that year

How do I qualify for the Foreign Earned Income Exclusion?

To claim the FEIE on Form 2555, ex-pats must demonstrate that their tax home is abroad by meeting one of two IRS definitions.

The first of these two tests is called the Physical Presence Test.

The Physical Presence Test requires ex-pats to prove they were physically present for at least 330 full days outside the US in a 12-month period that coincides with the tax year.

The second of the two IRS tax home tests is the Bona Fide Residence Test.

The Bona Fida Residence Test requires ex-pats to prove that they are a permanent resident in a foreign country.

This might be by having a permanent residency visa, paying foreign income taxes based on their country of residence, or through proof of housing rental and utility bills in their name.

The Physical Presence Test is helpful for ex-pats who are moving between countries or who cannot demonstrate permanent residence in any one country.

It does require ex-pats to limit the number of days they spend in the US to ensure they spend at least 330 full days abroad.

The Bona Fide Residence Test is useful for ex-pats who can demonstrate their tax home is in another country, and they do not want limits placed on the number of days they spend in the US each year.

The Foreign Earned Income Exclusion can only exclude some earnings types rather than all income from US taxation.

How do I report foreign income to the IRS?

You must attach Form 2555 to your Form 1040 or Form 1040X to claim the FEIE, the housing exclusion or the housing deduction.

Do not submit Form 2555 by itself.

A qualifying individual may claim the FEIE on overseas earned self-employment income.

The excluded amount will reduce your regular income tax, not your self-employment tax.

Also, as a self-employed individual, you may be eligible to claim the Foreign Housing Deduction instead of a Housing Exclusion.

It is also advisable to understand the UK and US tax treaty rules before reporting income to the IRS.

Who should claim?

The Foreign Earned Income Exclusion is a legal way for ex-pats to reduce their US tax bill, although they still have to continue filing a US tax return each year reporting their worldwide income.

Ex-pats who earn less than the annual FEIE threshold, whose only money is earned, who either don’t pay foreign income tax or who pay tax at a lower rate than the US rate, and who can prove that they live abroad according to IRS criteria often benefit from claiming the FEIE.

The FEIE may be used by:

– Ex-pats with unearned money

– Those who earn over the annual FEIE threshold

– Anyone who pays foreign income taxes at a higher rate than the US rate

– Those who are unable to prove that they live abroad.

Ex-pats whose income is paid in an overseas country and pay taxes may be better off claiming the US Foreign Tax Credit. 

Ex-pats can claim the US Foreign Tax Credit by filing Form 1116 as part of the 1040 federal return.

If they pay foreign tax at a higher rate than the US rate, they will eradicate their US income tax liability and give them excess US tax credits that they can carry forward for up to 10 years.

Another advantage of claiming a Tax Credit rather than the FEIE for ex-pats is that there is no IRS limit set on the number of tax credits that can be claimed.

It also doesn’t matter whether the money is earned or unearned, as long as foreign income tax is paid.

Ex-pats can claim the Tax Credit (form 1116) and the FEIE (form 2555) but not on the same income.

Maximize your tax savings as a U.S. expatriate with the Foreign Earned Income Exclusion (FEIE) on Form 2555, designed to exclude up to $112,000 of your foreign income from U.S. taxes. Our comprehensive guide helps you understand and efficiently utilize Form 2555, ensuring compliance with U.S. tax laws while minimizing your tax liabilities. With detailed insights, we make navigating the complexities of the FEIE easy, explaining eligibility, benefits, and the process of claiming the exclusion, making it an essential tool for successful tax planning abroad

FEIE on Form 2555 on Form 1040 tax return

What does the Foreign Earned Income Exclusion (FEIE) offer to U.S. taxpayers working abroad?

The FEIE allows qualifying U.S. taxpayers working abroad to exclude a certain amount of their foreign earned income from U.S. income tax.

Who is eligible to claim the Foreign Earned Income Exclusion?

To be eligible, you must meet certain criteria: you must have foreign earned income, your tax home must be in a foreign country, and you must meet either the Bona Fide Residence Test or the Physical Presence Test. This is done on form 2555 of the Form 1040 return

What is Form 2555, and why is it used?

Form 2555 is the form used by U.S. taxpayers to claim the FEIE. It's filed along with the annual tax return (Form 1040). It requires detailed information about your foreign earned income, the nature of your foreign residency, and the qualifications that make you eligible for the exclusion.

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