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Category: Tax Questions

Foreign Earned Income Exclusion (Form 2555)

If you qualify, you can use Form 2555 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.

Select the links below to show/hide additional information:

 What Is Foreign Earned Income?

Foreign earned income is defined as wages, salaries, professional fees, and other amounts received as compensation for personal services performed in a foreign country.  The place where the services are performed is what defines the income as foreign, not where or how you are paid.  It does not matter whether earned income is paid by a U.S. employer or a foreign employer however, wages paid by the U.S. government to its employees are not eligible for the exclusion.  (Amounts paid to independent contractors by the U.S. government may be eligible for the exclusion).  Foreign earned income does not include the following amounts:

  • The previously excluded value of meals and lodging furnished for the convenience of your employer.
  • Pension or annuity payments including social security benefits.
  • Payments by the U.S. Government, or any U.S. government agency or instrumentality, to its employees.
  • Amounts included in your income because of your employer's contributions to a nonexempt employee trust or to a nonqualifying annuity contract.
  • Recaptured unallowable moving expenses.
  • Payments received after the end of the tax year following the tax year in which you performed the services that earned the income.

 Foreign Earned Income Exclusion

A taxpayer may be able to claim an exclusion for income earned while the taxpayer lived and worked in a foreign country.  To claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, you must have foreign earned income, your tax home must be in a foreign country.  You must also meet either the bona fide residence test or the physical presence test and you must be one of the following:

  • A U.S. citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year
  • A U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, or
  • A U.S. citizen or a U.S. resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months

    Here are some important facts about the exclusion:
  • The Foreign Earned Income Exclusion: U.S. Citizens and Resident Aliens who live and work abroad may be able to exclude all or part of their Foreign Salary or Wages from their Income when filing their U.S. Federal Tax Return.  They may also qualify to exclude compensation for their personal services or certain Foreign Housing costs.
  • The General Rules: To qualify for the Foreign Earned Income Exclusion, a U.S. Citizen or Resident Alien must have a Tax Home in a Foreign Country and income received for working in a Foreign Country, otherwise known as Foreign Earned Income.  The Taxpayer must also meet one of two tests: the Bona Fide Residence Test or the Physical Presence Test.
  • The Exclusion Amount: The Foreign Earned Income Exclusion is adjusted annually for inflation.
  • Claiming the Exclusion: The Foreign Earned Income Exclusion and the Foreign Housing Exclusion or Deduction are claimed using Form 2555, which should be attached to the Taxpayer’s Form 1040.  A shorter Form 2555-EZ is available to certain Taxpayers claiming only the Foreign Earned Income Exclusion.
  • Taking Other Credits or Deductions: Once the Foreign Earned Income Exclusion is chosen, a Foreign Tax Credit or Deduction for Taxes cannot be claimed on the Excluded Income.  If a Foreign Tax Credit or Tax Deduction is taken on any of the Excluded Income, the Foreign Earned Income Exclusion will be considered revoked.

Earned and Unearned Income

Some Types of Income are not easily identified as Earned or Unearned Income.  These types of Income - specifically income from Sole Proprietorships, Partnerships, and Corporations, Stock Options, Pensions and Annuities, Royalties, Rents, and Fringe Benefits - are further explained in Chapter 4 of Publication 54.

 Earned Income

Compensation from participation in a business, including wages, salary, tips, commissions and bonuses.

In addition to the Types of Earned Income listed above, certain noncash income and allowances or reimbursements are considered Earned Income.
  • The Fair Market Value of Property or Facilities provided to you by your Employer in the form of lodging, meals, or use of a car is Earned Income.
  • Any reimbursements of, or payments for, nondeductible moving expenses.
  • Reimbursements that are more than your deductible expenses and that you do not return to your employer.
  • Any reimbursements made (or treated as made) under a Non Accountable Plan, even if they are for Deductible Expenses.
  • Any reimbursement of moving expenses you deducted in an earlier year.
  • Amounts paid to you as allowances or reimbursements for the following items: Cost of Living - Overseas Differential - Family - Education - Home leave - Quarters - Moving.

 Unearned Income

An individual's income derived from sources other than employment, such as interest and dividends from investments, or income from rental property.

To display instructions for accessing Form 2555 in the tax program click here.

NOTE: This is a guide on entering Foreign Tax Credit into the TaxSlayer Pro program.  This is not intended as tax advice.

If the information you need is not addressed here, you may call the IRS International Tax Law hotline.  The number is 215.516.2000. (This is not a toll-free number)

Additional links:
Instructions for Form 2555, Foreign Earned Income
Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad
Publication 514, Foreign Tax Credit for Individuals
Publication 519, U.S. Tax Guide for Aliens
Publication 901, U.S. Tax Treaties

Last Updated: 5/31/2018

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