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US Expat Tax Guide to Form 2555

Expat Tax Blog | Tax Tips for US Americans Abroad

US Expat Tax Guide to Form 2555

If you are living or working abroad as a US expat, you may have heard of the Foreign Earned Income Exclusion, Form 2555 or the FEIE. It’s a cool benefit to take advantage of if you qualify. It can help you save tons of money and reduce your tax bill to the IRS in the United States. 

What is Form 2555 – Foreign Earned Income Exclusion

You may have stumbled upon the FEIE or heard about it amongst your expat friends. The Foreign Earned Income Exclusion is a tax benefit that allows US expats to exclude up to $105,900, for the tax year 2019, of their income from foreign-sourced income. Then, for the 2020 tax season (in 2021), you can exclude up to $107,600. You can be a short-term or long-term/permanent expat to take advantage of this benefit.

To skip the easy form filing via MyExpatTaxes, you can fill out the form manually through Form 2555 or Form 2555-EZ (discounted after the 2018 tax season). Once it’s completed, carry over the calculations to your Form 1040. Then, attach it to your US Tax Return and send it in the mail.

Additionally, the Foreign Earned Income Exclusion is a great opportunity to prevent you from getting double-taxed on foreign income by the IRS.

How does this exactly work when filing your US expat taxes?

Let’s say you earned 104,000 Euros while working in Germany last year (2019, which is the tax year you’re filing for).

We need to convert it into US dollars, which is about $123K and some change in US dollars. Subtract your yearly salary from the exclusion rate ($105,900) leaving about $17,100 that becomes taxable by the IRS.

Remember! The taxable amount is taxable at the rate applying to what you originally earned (called the stacking rule). Your exclusion will only apply to foreign earned income too! 

Qualifying for the Foreign Earned Income Exclusion

It’s necessary to know if you are eligible to use the exclusion. Otherwise, you’ll be putting your time and effort into nothing.

The first thing you can do to see if you qualify for the foreign earned income tax credit by using either the bona fide residence test OR physical presence test.

Bona Fide residence test:

  • Did you move abroad at least a full year ago?
  • Are you a registered resident in your host country?
  • Are you subject to income taxes in your host country?

If you qualify as a bona fide resident, then you should be able to claim the Foreign Earned Income Exclusion for up to the maximum amount ($105, 900).

Physical Presence Test:

  • You will need to be outside of the US for 330 full days in a consecutive 12 month period, that begins or ends in the tax year. If yes, you qualify for the FEIE.
  • Even if you traveled to the US for more than 1 month in the tax year, there is a possibility you could still claim the Foreign Earned Income Exclusion. It depends on your unique, individual tax profile and situation. If the purpose of your trip to the United States was to work for a foreign company, you may have to claim. You can see what is available to you once you sign up through our app.

Additionally, the FEIE only applies to income that you earned. If you have an interest or capital gains, or dividends, you cannot claim these on the Foreign Earned Income Exclusion. 

Difference Between Form 2555 and 2555-EZ

Form 2555 and 2555-EZ each have its own level of difficulty.

Form 2555-EZ is the Foreign Earned Income Exclusion that has fewer pages to complete. The “EZ” for the latter form is a shorter version of the word “easy.” It’s meant for people looking for a simpler way to fill out the form.

But don’t just jump on the EZ train yet (see what we did there). You need to meet specific criteria as a US expat if you wish to use the form:

  • Must be a US citizen or resident alien
  • Must have filed a tax return for a period covering a calendar year
  • You earned less than $105,900 in 2019 of wages in a foreign country.
  • You were physically present with residence in a foreign country for at least 330 days in a 12-month period
  • No intention to claim the Foreign Housing Exclusion or deduction
  • Have no business or moving expenses associated with your job
  • If you are self-employed, your foreign income cannot be included in the EZ form. So you must fill out Form 2555 with your expat tax return.

You will also be surprised to learn that many US expats actually can’t use Form 2555-EZ because of ineligibility. If you are eligible, you’ll notice that you save a lot of time getting your taxes done. But it’s even faster if you go through our software.

How to Use Form 2555-EZ

In order to use the easier version of the FEIE form, you will need to have a few documents in order:

  • Your employer’s name and foreign address
  • An international travel calendar or printed calendar that includes all the days you might have worked in the US while living abroad
  • If applicable, your prior year Form 2555-EZ
  • Foreign income earnings statements
  • If you are a US couple living abroad, you will each need to fill out your own 2555-EZ forms in addition to your US expat tax return. This is because the IRS considers each Foreign Earned Income Exclusion claim separately.

Unfortunately though, after the 2018 tax season, Form 2555-EZ will be eliminated. So all expats will be forced to use the full and more “intense” version to exclude their income. If this worries you, you can simply use our software to handle the FEIE, which we make easy and smooth for our customers.

Need Assistance?

If for any reason the forms are too confusing or time-consuming, you can always reach out to us. Our tax professionals can answer any questions you have as an American abroad. Yes, US expats do have a tax obligation to complete every year. However, we try to make it as easy and smooth as possible. We also can gently direct you to use our app to get your FEIE forms done quickly and efficiently.

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