- 1 Form 2555: Foreign Earned Income Exclusion
- 2 Earned Income vs Passive Income
- 3 Do Not Gross-Up Pension Income
- 4 MFJ or RDP Each Spouse or Partner or Claim
- 5 Form 1116 Foreign Tax Credit
- 6 Part I of Form 2555
- 7 PART II of Form 2555: Bona-Fide Residence Test
- 8 PART III of Form 2555: Physical Presence Test
- 9 Form 2555 Housing Exclusion
- 10 Golding & Golding: About Our International Tax Law Firm
Form 2555: Foreign Earned Income Exclusion
How Form 2555 Foreign Earned Income Exclusion is Prepared: When it comes to US Persons residing overseas and generating foreign earned income, they may be able to qualify to exclude a portion of this income using IRS Form 2555. The foreign Earned Income Exclusion (FEIE) is available to certain Taxpayers who qualify for either the Bona-Fide Residence Test (BFR) or Physical Presence Test (PPT). When a taxpayer meets the requirements to qualify for foreign income exclusion using Form 2555 — they are able to exclude upwards of $107,600 of their foreign earned income from their US Tax Return, along with a portion of their housing expenses. Let’s go through the basics of the Foreign Earned Income Exclusion and how to understand who can qualify and claim the exclusion amount.
Earned Income vs Passive Income
The first, most important requirement is that the income relates to earned income such as employment or self-employment. Form 2555 cannot be used to offset “unearned” income such as passive investment income — although Foreign Tax Credits may be available to offset or eliminate any US tax liability on that passive income.
Do Not Gross-Up Pension Income
Foreign earned income that is deferred into foreign pension cannot be used as part of the foreign earned income exclusion. For example, if a US taxpayer residing overseas earns income that is deferred into a 401K equivalent foreign pension plan — that income is excluded from the calculation — since it is tax deferred.
MFJ or RDP Each Spouse or Partner or Claim
In a situation in which two taxpayers are filing Married Filing Jointly (MFJ) or as a Registered Domestic Partnership (RDP), each person has the foreign earned income exclusion available to them — it is not limited per return, but rather per taxpayer.
Form 1116 Foreign Tax Credit
Depending on how much income the taxpayer earned and how much they paid in tax abroad — they may qualify for both the foreign earned income exclusion and the foreign tax credit on the same earned income. But, a Taxpayer cannot claim both the foreign tax credit and the foreign earned income exclusion to the same dollar of income. Thus, if the Taxpayer uses both the foreign tax credit and the earned income exclusion for the same income – there is a calculation that is applied to limit the amount of the foreign tax credit available in relation to the amount of foreign earned income already claimed.
Part I of Form 2555
Part I of the Form 2555 is completed by all Taxpayers claiming the exclusion, and includes the following:
Your foreign address (including country)
Employer’s foreign address
Employer is (check any that apply):
A foreign entity
A foreign affiliate of a U.S. company
If you previously filed Form 2555 or Form 2555-EZ, enter the last year you filed the form.
If you didn’t previously file Form 2555 or Form 2555-EZ to claim either of the exclusions, check here, and go to line 7.
Have you ever revoked either of the exclusions?
If you answered “Yes,” enter the type of exclusion and the tax year for which the revocation was effective.
Of what country are you a citizen/national?
Did you maintain a separate foreign residence for your family because of adverse living conditions at your tax home? See Second foreign household in the instructions
If “Yes,” enter city and country of the separate foreign residence. Also, enter the number of days during your tax year that you maintained a second household at that address.
List your tax home(s) during your tax year and date(s) established.
PART II of Form 2555: Bona-Fide Residence Test
In addition to completing part I, Taxpayers also have to complete either Part II (BFR) or Part III (PPT). Part II is for the Bona-Residence Test and requires the following information:
Qualifying Under Bona Fide Residence Test Note: Only U.S. citizens and resident aliens who are citizens or nationals of U.S. treaty countries can use this test.
Date bona fide residence began and ended
Kind of living quarters in foreign country
Rented house or apartment
Quarters furnished by employer
Did any of your family live with you abroad during any part of the tax year? If “Yes,” who and for what period?
Have you submitted a statement to the authorities of the foreign country where you claim bona fide residence that you aren’t a resident of that country?
Are you required to pay income tax to the country where you claim bona fide residence? See instructions.
If you were present in the United States or its possessions during the tax year, complete columns (a)–(d) below.
List any contractual terms or other conditions relating to the length of your employment abroad.
Enter the type of visa under which you entered the foreign country.
Did your visa limit the length of your stay or employment in a foreign country? If “Yes,” attach explanation .
Did you maintain a home in the United States while living abroad? If “Yes,” enter address of your home, whether it was rented, the names of the occupants, and their relationship to you.
PART III of Form 2555: Physical Presence Test
Part II of Form 2555 refers to the Physical Presence Test and requires the Taxpayer to provide the following information:
U.S. citizens and all resident aliens can use this test. See instructions.
The physical presence test is based on the 12-month period from and through..
Enter your principal country of employment during your tax year.
18 If you traveled abroad during the 12-month period entered on line 16, complete columns (a)–(f) below.
Exclude travel between foreign countries that didn’t involve travel on or over international waters, or in or over the United States, for 24 hours or more.
Part IV All Taxpayers
Enter on lines 19 through 23 all income, including noncash income, you earned and actually or constructively received during your 2020 tax year for services you performed in a foreign country. If any of the foreign earned income received this tax year was earned in a prior tax year, or will be earned in a later tax year (such as a bonus), see the instructions.
Don’t include income from line 14, column (d), or line 18, column (f). Report amounts in U.S. dollars, using the exchange rates in effect when you actually or constructively received the income. If you are a cash basis taxpayer, report on Form 1040 or 1040-SR all income you received in 2020, no matter when you performed the service. 2020 Foreign Earned Income Amount (in U.S. dollars)
Total wages, salaries, bonuses, commissions, etc.
Allowable share of income for personal services performed (see instructions): In a business (including farming) or In a partnership. (List partnership’s name and address and type of income.)
Noncash income (market value of property or facilities furnished by employer—attach statement showing how it was determined):
Other property or facilities. List type and amount.
Allowances, reimbursements, or expenses paid on your behalf for services you performed:
Cost of living and overseas differential
For any other purpose. List type and amount.
Form 2555 Housing Exclusion
The foreign housing exclusion is a bit more complicated than the earned income exclusion. The amount of exclusion will vary based on the location of the Taxpayer and whether or not the location is considered high cost living. In addition, the full amount of the housing is not excluded. Rather, a “middle portion” of the total amount of the expenses may be deducted. For example, if a person has $30,000 of foreign housing, generally:
- the 1st 10,000 may not be excluded;
- the 2nd 10,000 may be excluded; and
- the 3rd 10,000 is also not excluded.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
Contact our firm for assistance.