The Form 2555 allows taxpayers to exclude up to $120,000 of their earned income, this is the Foreign Earned Income Exclusion (FEIE).  In addition, there is a Housing Deduction/Exclusion which can increase the amount of exclusion depending upon where the taxpayer lives.

For further information on topics discussed below, and all topics on working abroad, please consult Publication 54 (I especially advise to check out the informative Q&A at the end of the publication):

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How to qualify for the Form 2555

Simply working abroad will not automatically qualify you for this exclusion, the taxpayer needs to qualify for under one of two tests:

1. Physical Presence Test: In order to qualify under this test, the taxpayer must have 330 qualifying days in a period of 365 days, or have no more than 35 non qualifying days in this period. Qualifying days are days outside the US and not in International waters. The count starts on the first full day abroad. The 330 days do not have to be within a calendar year.

2. Bona Fide Residence Test: In order to qualify under this test, the taxpayer must be abroad for the full calendar year, January 1 to December 31. Unlike the Physical Presence Test there are no restrictions in qualifying days. Once a taxpayer establishes Bona Fide Residency that will continue until his or her relocation back to the US.  Once established, it can be carried over for a partial year, and carried back for a partial year.

Often a taxpayer will use the Physical Presence Test in the year of arrival, then the Bona Fide Residence Test until the date of repatriating to the US. In the case of a partial year qualification, the amount of the FEIE and Housing Deduction is pro-rated by the qualifying days in the year.

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What Income goes in the Form 2555?

The only income that you can put on the Form 2555 and get excluded is earned income. The intent behind this exclusion is to provide exclusion for Taxpayers working abroad; therefore, it essentially allows only wage income, such as salary, and does not include items such as interest, dividends, capital gains and other forms of passive income. It also does not include pension income. US Government employees working abroad do not qualify for this exclusion.  In effect for most staff members the only income included in Form 2555 is the Institutional Income from the Organization.

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Can joint filers file a joint Form 2555?

No. Each taxpayer can only file a Form 2555 individually.  Each taxpayer qualifies individually and uses the allocation of exclusion on the form; neither income nor exclusion amounts can be transferred from one spouse to another.

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​What is foreign earned income, and what does ‘Tax Home’ mean?

Foreign earned income is income earned abroad. Simply that. It doesn’t matter where the source of income is or where it is paid, if a taxpayer earns that income working abroad it is foreign earned income. Income is foreign earned even if a US company pays an employee working in London in US dollars, into a bank account in the US, and deducts social security from that income, and that employee may qualify for the Form 2555.

If a staff member is working abroad for the UN or some other International Organization, then it is safe to assume that where the staff member is working is the Tax Home as defined by the IRS. A staff member that works the occasional short-term contract would also have established the Tax Home abroad. If a staff member goes from one country to another then the Tax Home continues to be abroad. In general, independent of which test is used to qualify for Form 2555, the first full day of the staff member abroad the Tax Home is established and will continue until reparation back to the States.