If you are a U.S. citizen or a resident alien of the United States and you live abroad, you are taxed on your worldwide income and as such must file a U.S. return for all the years that you are residing abroad. However, as a U.S. expat you may qualify to reduce your U.S. taxable income up to an amount of your foreign earnings that is adjusted annually for inflation ($99,200 for 2014). In addition, you can exclude or deduct certain foreign housing amounts. This is known as the foreign earned income exclusion and foreign housing exclusion.
Form 2555 – Foreign Earned Income Exclusion
If you qualify, you can use the 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.
General Information About The Form 2555
If you are a U.S. citizen or a U.S. resident alien living in a foreign country, you are subject to the same U.S. income tax laws that apply to citizens and resident aliens living in the United States.
A foreign country is any territory under the sovereignty of a government other than that of the United States.
The term “foreign country” includes the country’s territorial waters and airspace, but not international waters and the airspace above them. It also includes the seabed and subsoil of those submarine areas adjacent to the country’s territorial waters over which it has exclusive rights under international law to explore and exploit the natural resources.
The term “foreign country” does not include U.S. possessions or territories. It also does not include the Antarctic region.
Who Qualifies For The Foreign Earned Income Exclusion
People who live and work outside the United States may be able to exclude all or part of their foreign-source wages and self-employment income from the federal income tax through a provision called the foreign earned income exclusion. To qualify for the foreign earned income exclusion and to make a claim on the Form 2555, a person needs to:
- Meet the tax home test
- Meet either the bona fide residence test or the physical presence test
If you have income from working abroad as an employee of the U.S. Government, this income does not qualify for either of the exclusions or the housing deduction. Do not file Form 2555.
Tax home Test
To meet the tax home test to make a claim on Form 2555, your tax home must be in a foreign country, or countries, throughout your period of bona fide residence or physical presence, whichever applies. For this purpose, your period of physical presence is the 330 full days during which you were present in a foreign country, not the 12 consecutive months during which those days occurred.
Your tax home is your regular or principal place of business, employment, or post of duty, regardless of where you maintain your family residence. If you do not have a regular or principal place of business because of the nature of your trade or business, your tax home is your regular place of abode (the place where you regularly live).
You are not considered to have a tax home in a foreign country for any period during which your abode is in the United States. However, if you are temporarily present in the United States, or you maintain a dwelling in the United States (whether or not that dwelling is used by your spouse and dependents), it does not necessarily mean that your abode is in the United States during that time.
What Income Qualifies For The Foreign Earned Income Exclusion
The foreign earned income exclusion that can be claimed on Form 2555 applies only to income arising from performing services either as an employee or as an independent contractor. The term “earned income” means wages, salaries, or professional fees, and other amounts received as compensation for personal services actually rendered.
When To File Form 2555
The Form 2555 should be filed for the first year you plan to take the foreign earned income exclusion and/or the housing exclusion or deduction, even though you may not yet have met either the physical presence test or the bona fide residence test by the due date of your return (including the automatic 2-month extension). If this occurs, you can either:
- Apply for a special extension to a date after you expect to qualify on Form 2350 , or
- File your return timely without claiming the exclusion and then file an amended return after you qualify.
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Click on link to read more about the foreign earned income exclusion.
Tax Samaritan is a team of Enrolled Agents with over 25 years of experience focusing on US tax preparation and representation. We maintain this tax blog where all articles are written by Enrolled Agents. Our main objective is to educate US taxpayers on their tax responsibilities and the selection of a tax professional. Our articles are also designed to help taxpayers looking to self prepare, providing specific tips and pitfalls to avoid.
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