Tax Form 2555 for Foreign Earned Income Exclusion

The Foreign Earned Income Exclusion (FEIE) allows certain taxpayers to exclude a portion of their foreign earned income from U.S. taxable income. The exclusion applies to income earned in a foreign country and is available to both U.S. citizens and resident aliens who meet the eligibility requirements. Tax Form 2555 may be your best friend during tax season. This form is crucial for those seeking to utilize the Foreign Earned Income Exclusion in order to reduce their taxable income. In this blog post, we will dive into what the Tax Form 2555 entails and how it can help save you money on your taxes while living overseas.

While traveling, living and studying abroad might be a great idea, nevertheless, it can be quite ‘taxing’ when the tax season comes around. However, this is where Tax Form 2555 comes into the picture. This particular tax type has been specially created to report the foreign earned income to the IRS or the Internal Revenue Service or IRS. Essentially, this form helps the taxpayers to better determine the exclusion related to the foreign earned income and housing to file the federal Income taxes.

What is the TAX Form All About?

By definition, this Tax form is all about being able to report the foreign earned income to the IRS, let us take a detailed look into this. Mainly, this form is intended to prevent double taxation by excluding income that has been taxed in another country from US taxation. Normally speaking, the IRS will tax your income earned worldwide, but if one is a US national then there are chances that you might be taxed twice on the same income. This is because the income received overseas is taxed in the foreign country and will be once again taxed by the IRS.

Read More-: Tax Form 8938

More About the Foreign Earned Income Exclusion

The IRS form 2555 has been elected to report the foreign earned income exclusion. Moreover, the taxpayers who are responsible to claim the exclusion make the domestic retirement plan contribution of any type that is based on this income or claim the foreign tax credited or deducted from any of the taxes paid for this income to a certain foreign government. Also, you must meet the certain qualification for this claim:

• The individual is either a residing Alien or a US citizen. A foreign person with a permanent residence but without the US citizenship of the country they are residing in. For a person to qualify for this, the individual needs to own a Green Card or own one on the last Calender year.
• The individual should have a qualifying presence in a foreign country. The ‘Qualifying Presence’ status is attained by satisfying the bona fide resident test by staying a resident in the country for a complete tax year. One also needs to qualify for the physical presence test; which essentially means that you need to be present in the country for a minimum of 330 days within a 12-month consecutive period.
• The individual has a foreign-earned income. This happens when you own a foreign-earned income by receiving wages either through compensation through self-employment for the services you perform in the foreign country or through employment. Also, the income one receives through foreign source pension, alimony, investments or also gambling does not qualifies as a foreign earned income.

The Foreign Housing Amount

There is a certain Foreign Housing Amount along with the statutory maximum exclusion that limits the exclusion. This can be prorated if the number of qualifying days in a foreign country is less than a complete tax year. 

The Foreign Housing amount is categorized as a housing cost you pay with the foreign earned income which is more than 16% of the base amount of maximum exclusion. The ‘cap’ on this amount is 30% of the maximum exclusion amount. As for Foreign housing, this comprises the deduction by the self-employed individuals and an exclusion by the employees. 

As for the year 2022, the maximum exclusion is $112000 and can go up to $120000 in the year 2023.

The Foreign Earned Income Exclusion: The Examples

To better understand how the Foreign Earned Income works, let us understand with the help of an example. Jack is an American who works in Vietnam. He has lived in Hanoi for 345 days for the tax year and was absent for 10 days for a trip back home for Thanksgiving. He earned a salary of $225000 and paid an amount of $30596 for a lease to a flat for the year. Jack paid $75000 as the Vietnamese Income tax and owed $81000 as the US income tax for this income. Here, the foreign-earned income is taxed twice. 

However, as Jack is an American citizen, who has paid his foreign taxes for the income he earned during the 335 (qualifying) days in a foreign country, they might exclude the foreign-earned income from the US taxable income. 

Here, Jack has an exclusion amount of $112000 for 2022 and the foreign housing amount is around $ 15040 (($33,600 in housing costs – $16,944 base amount). As $ 13652 is lower as compared to $31770 of the cap amount, no reductions are required. 

According to foreign earned income exclusion, Jack is allowed to exclude $111000, from the taxable income. However, $114000 is also included and since an amount of $37000 is included and since a foreign tax of $37000 has been paid, and still owe US tax of $36000, it is still double taxed.

The Foreign Earned Income: Who Qualifies

As mentioned earlier, there are some basic rules for qualifying for the Foreign Earned Income. In this case, the individual has to be either a US citizen or a US residing Alien who has been physically present in a different country for 330 days for 12 consecutive months. Here, the uninterrupted period qualifies as refers to a scenario where the individual is a legal resident of a foreign country and this period includes an entire tax year. 

Likewise, the other qualifying feature is a case when the individual is a US resident Alien, who is either a citizen or a national of a country that is under an income tax treaty with the United States. Also, this individual should be a legal resident of the foreign national in question for an uninterrupted period which is inclusive of an entire tax year. These scenarios qualify for the foreign-earned income exclusion. 

For the year 2022, the foreign earned income exclusion is an amount of $112000, and for the year the amount rises to $120000. In case of any income which is earned below this amount by the individual does not qualify for taxation.

Filing the Form 2555

To claim the foreign earned along with any other related deductions or exclusions, one can complete the tax form 2555. Also, this form is used by the taxpayers to submit information about where they are residing currently, and their overseas employment and may also need to state if they qualify for this consideration.

This form comprises Nine sections when filing out, which are as follows:

Part 1: Offer the general details about the employer and the previous foreign income exclusion claims as well.

Part 2 and 3: Complete the details according to whether you have qualified as a bona fide residence test or the physical presence test.

Part 4: Reporting of the annual foreign earned income.

Part 5: indicate whether you are claiming the housing exclusion or deductions.

Part 6: To enter the details regarding the deductions and exclusion of taxing.

Part 7: Offer the details about claiming the foreign income exclusion.

Part 8: To correctly calculate as required to determine how much needs to be adjusted according to your income for your deduction and exclusion

Part 9: Calculate the housing deductions that are applied to your adjusted income.

It is required, to submit Form 2555 along with Tax Return Form 1040 when you are filing the federal income taxes. Additionally, along with the IRS form 2555 instructions, you also need to keep the records of:

• The dates of International travel and work.
• The Foreign income earning statement.
• Any other 2555 forms for the earlier years

The above details are also required when you opt for the IRS audit.

The Bona Fide Residency Test and the Form 2555

In case you need to qualify for the FEIE using the Bona Fide Residence test, you will need to:

• Prove that the individual has more ties with the foreign country than America
• Prove that the individual has been a resident of the country for the entire uninterrupted tax year.
• To be either a resident Alien of the foreign country or a US citizen that enjoys an income tax treaty. 
• To ensure that they earn an active income. However, other sources like Pension payouts, interests, Un earned or inactive income and dividends are not considered. 
• To stay overseas for work for a period that extends more than a year.
• To own a permanent place of work in a foreign country.

Note: It is possible that you can be a Bona Fide resident for a part of the year if you have spent a minimum of the full tax year outside of the US in the previous year. Hence, you can file Form 2555 for the part of the year.

The Physical Presence Test and Form 2555

It is necessary to qualify for the Physical Presence test for form 2555. In this case, you need to prove that you have been residing outside of the US for a complete 330 days out of the entire year. Here, the ‘Full day’ is an entire 24 Hours starting at midnight and one needs to be in the country for every moment of that 24 hours. 

Read Also-: Tax Form 8621

Conclusion

One has to ensure that Form 2555 has been duly completed for every ex-pat. Even in the case of a husband and wife who live abroad, are required to separately file and complete form 2555 and have the two forms attached to their joint US tax return. However, if you still encounter any problems with the same, feel free to reach out 1800 964 3096 to our team of experts and we will be more than happy to help you out.

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