How do you qualify for the Foreign Income Exclusion? And do I need to File IRS Form 2555?
For U.S. expats who live abroad, they could be entitled to substantial tax savings because the IRS allows you to exclude a significant portion of your foreign earned income from U.S. taxation on IRS Form 2555. The basic gist of the tax form is that you can use Form 2555 to figure a taxpayers foreign earned income exclusion and also a taxpayer living outside of the countries housing exclusion or deduction. The main rule is that you cannot exclude or deduct more than your foreign earned income for the year. If you meet certain foreign residency requirements, you may be able to exclude up to $99,200 of earned income in 2014 and a portion of your foreign housing expenses from U.S. income tax. Note that this exclusion does not apply to self-employment taxes.
Form 2555 Foreign Income Exclusion Expat Tax
If you have your tax home in a foreign country and satisfy the requirements of the physical presence or the bona fide residence test, then you may be eligible to claim the exclusion and will be required to file Form 2555 and attach it to Form 1040 when you either e-file your tax return or mail it to the IRS.
Filing Form 2555 with your Tax Return Information
The main purpose of IRS Form 2555 is for the IRS to evaluate whether you qualify for the foreign earned income exclusion. The form asks questions related to establishing the physical presence and bona fide residence tests. If you qualify, you can use this form to figure your foreign earned income exclusion and your housing exclusion or deduction. You cannot exclude or deduct more than your foreign earned income for the year. You may use Form 2555 and Form 1116 on the same return, but cannot use the same earnings (and taxes paid relating to those earnings) on both forms.
Taxpayers only need to fill out either Part II or Part III, depending on whether a taxpayer qualifies for the foreign earned income exclusion under the physical presence or bona fide residence test. Before filing Form 2555 with the IRS, one should read the IRS publication on the matter to determine if they qualify for the foreign income exclusion. The following example will help determine if a taxpayer will need to file a From 2555.
Form 2555 Physical Presence and Bona Fide Resident Tests
The difference between the physical presence and bona fide resident requirements for the foreign exclusion are important to understand. You must meet one of these two tests to qualify for the Foreign Earned Income Exclusion of FEIE
- Under the physical presence test, a taxpayer must be in the foreign country for a total of 330 days during a consecutive 12-month period.
- To qualify for the exclusion using the bona fide residence test, the IRS requires you to maintain a residence in the foreign country for an entire calendar year.
Once the correct test is determined, the taxpayer can then focus on either Part II or Part III of the IRS Form 2555.
How long living out of country to file Form 2555?
For example, if you plan on living out of the country for more than 330 days out of the year, you can divide the number of days you have worked in the the foreign this year by 365. Then multiply that decimal by $92,900 (Or the amount of the exclusion for the foreign year). Whatever the product is, you may recognize that income as an exclusion for your tax return. Subsequently, when you file your next years tax return, you may divide the number of days in the next year you worked abroad by 365 and multiply that decimal by $95,100 (adjusted for inflation) to find your next exclusion.
IRS website and Form 2555
It is always important to check the IRS website and Form 2555 for the most accurate information on the amounts excluded under the Foreign Income Exclusion for expats who are filing american taxes will living abroad.The FEIE is generally advantageous to use when income tax rates in the foreign country are lower than in the U.S. and/or your total earned income is below the exclusion threshold.
Current IRS Links for Form 2555
The IRS has comprehensive information pages to help people with expat taxes . Below are links to Form 2555 from the IRS.