For U.S. citizens and resident aliens living abroad, the obligation to file a U.S. tax return doesn’t end at the border. However, the IRS offers a powerful tax-saving provision known as the Foreign Earned Income Exclusion (FEIE), which can significantly reduce your taxable income. This benefit is claimed using Form 2555.
This blog explores Form 2555 in detail—its eligibility rules, benefits, filing procedures, and how it compares with other tax credits like the Foreign Tax Credit. If you’re working overseas, understanding Form 2555 could help you avoid double taxation and keep more of your earnings.
What Is Form 2555?
Form 2555 is used to exclude a portion of foreign earned income from U.S. taxation. For tax year 2024 (filed in 2025), the maximum exclusion is up to $126,500 per qualifying taxpayer. If both you and your spouse qualify, you may each exclude up to that amount, doubling the potential benefit.
The form also allows for the exclusion of certain foreign housing expenses if your cost of living abroad is significantly high.
Who Can Use Form 2555?
You must meet all of the following conditions to use Form 2555:
- You are a U.S. citizen or a resident alien.
- You have foreign earned income.
- Your tax home is in a foreign country.
- You meet either the Bona Fide Residence Test or the Physical Presence Test.
Foreign Earned Income
This refers to wages, salaries, or self-employment income earned while working in a foreign country. It does not include:
- Passive income (interest, dividends, capital gains)
- Pay received as a U.S. government employee
- Payments after you return to the U.S.
Tax Home in a Foreign Country
Your tax home is the location of your main place of business or employment. To claim the FEIE, your tax home must be outside the U.S. for the qualifying period.
Bona Fide Residence Test
You qualify if you are a bona fide resident of a foreign country for an uninterrupted period including an entire tax year. This test is subjective and depends on factors like your intent to stay, length of stay, and ties to the foreign country.
Physical Presence Test
You qualify if you are physically present in a foreign country or countries for at least 330 full days during any 12-month period. This test is based purely on time and not residency status.
Foreign Housing Exclusion and Deduction
If you incur qualified housing expenses while living abroad, you may be able to exclude or deduct a portion of those costs. This is claimed in Part VI of Form 2555.
Qualified expenses include:
- Rent
- Utilities (excluding telephone and cable)
- Repairs
- Property insurance
There is a base housing amount (16% of the maximum FEIE), and only housing costs above that amount can be excluded or deducted. The IRS sets higher limits for taxpayers living in high-cost locations.
Steps to Complete Form 2555
Form 2555 is attached to your Form 1040. Below is a breakdown of its key sections:
Part I – General Information
- Personal details and residency or physical presence dates
- Details about your foreign residence and employer
Part II & III – Tests for Residency
- Select either the bona fide residence or physical presence test
- Include specific dates and documentation
Part IV – Foreign Earned Income
- Report all wages, salaries, or self-employment income earned abroad
- Include employer details and compensation information
Part VI – Housing Exclusion/Deduction
- Calculate total housing expenses
- Subtract the base housing amount
- Report allowable exclusion or deduction
Part VII – Calculation of Exclusion
- Apply the $126,500 limit (or pro-rata amount for partial year)
- Adjust if claiming both earned income and housing exclusions
Form 2555 vs. Form 1116 (Foreign Tax Credit)
You cannot claim both the exclusion (Form 2555) and the Foreign Tax Credit (Form 1116) on the same income. Consider the following:
- Use Form 2555 if you live in a country with low or no taxes.
- Use Form 1116 if you pay high foreign taxes and want to avoid double taxation.
In some cases, a combination of partial exclusion and partial credit may yield the best result. Tax planning is key.
Important Deadlines and Extensions
If you’re living abroad on April 15, you automatically get a two-month extension to June 15 to file your return. However, you must still pay any tax due by April 15 to avoid interest charges.
To qualify for FEIE, your foreign residence or physical presence must span the relevant periods by the time you file. If you haven’t met the time requirements, you can request an extension using Form 2350.
Recordkeeping and Documentation
The IRS may request supporting documents to verify your eligibility. Be sure to keep:
- Passports and travel records
- Employment contracts
- Foreign residence leases or utility bills
- Foreign tax returns, if applicable
Common Mistakes to Avoid
- Using the wrong 12-month period for the Physical Presence Test
- Double-claiming housing expenses not related to employment
- Claiming FEIE on passive or non-earned income
- Failing to reduce deductible expenses by the amount of excluded income
IRS Resources
- IRS Form 2555 and Instructions
- IRS Foreign Earned Income Exclusion Overview
- IRS Publication 54: Tax Guide for U.S. Citizens and Resident Aliens Abroad
Conclusion: Maximize Savings While Living Abroad
Form 2555 is a powerful tool for Americans living and working overseas. By properly excluding up to $126,500 in earned income and claiming foreign housing benefits, you can significantly reduce your U.S. tax burden. However, rules around eligibility, timing, and documentation are strict—making careful recordkeeping and tax planning essential.
If your foreign income situation is complex, or if you are unsure whether Form 2555 or the Foreign Tax Credit is more advantageous, consult a tax professional familiar with expat tax issues. With proper use, Form 2555 can help you legally lower your tax liability while fulfilling your obligation to the IRS.
