For U.S. citizens and residents living abroad, navigating the complexities of the tax code is a critical part of financial planning. The potential for double taxation—being taxed by both the host country and the United States—is a significant concern. But here’s the good news: there are tax provisions that allow you to reduce your U.S. taxable income. One of the most valuable of these is the Foreign Earned Income Exclusion, which can significantly lower your U.S. tax bill. While the thought of dealing with the IRS from thousands of miles away might feel daunting, there’s a powerful tool designed specifically for you: IRS Form 2555, the Foreign Earned Income Exclusion, and it allows you to exclude up to a certain amount of foreign-earned income from your U.S. taxes.
In this blog post, we’ll walk you through everything you need to know about Form 2555 and the Foreign Earned Income Exclusion—from eligibility requirements to how to fill out the form and common mistakes to avoid. If you’re looking for a way to reduce your U.S. tax burden while living abroad, read on!
What is Form 2555?
Form 2555, titled “Foreign Earned Income,” is used by U.S. citizens or resident aliens who qualify for the Foreign Earned Income Exclusion (FEIE). This form allows you to exclude a certain amount of income you earned while living and working outside the U.S. To sum up, it prevents double taxation by allowing you to exclude your foreign wages from being taxed by the U.S. government, to some extent.
To qualify for this exclusion, you must meet specific eligibility requirements, which we’ll get into in more detail later. But for now, it’s essential to understand that this exclusion is a major benefit for expats looking to reduce their U.S. tax burden.
Who Is Eligible to File Form 2555?
Eligibility for the Foreign Earned Income Exclusion is restricted to U.S. citizens or resident aliens who meet specific criteria established by the IRS. In order to take advantage of this exclusion, you must meet certain criteria.
- U.S. citizen or resident alien: You must be a U.S. citizen or a resident alien, meaning you must have a valid U.S. passport or green card.
- Foreign-earned income: The income you wish to exclude must be earned while you are physically working abroad. It’s not available for income you earn while you’re in the U.S.
- Qualifying residency status: You need to meet the requirements of either the Bona Fide Residence Test or the Physical Presence Test (we’ll go into these tests later in this post).
What Is the Foreign Earned Income Exclusion?
The Foreign Earned Income Exclusion (FEIE) allows qualifying U.S. expats to exclude up to a certain amount of foreign-earned income from U.S. taxable income. For the 2025 tax year, the maximum amount you can exclude is $130.000 per person. That means if you earned that amount or less while living abroad, you can exclude it from your taxable income. If your foreign earnings exceed this limit, you may be able to reduce the tax burden by utilizing other deductions or credits, such as the Foreign Tax Credit.
Foreign Earned Income vs. Other Income
It’s important to note that only earned income qualifies for the exclusion. The FEIE only applies to:
- Wages
- Salaries
- Tips
- Professional fees
- Other compensation for personal services performed abroad
It explicitly does not apply to:
- Investment income (interest, dividends)
- Capital gains
- Rental income
- Pension or annuity income
- Social Security benefits
These types of passive income remain fully taxable by the U.S., though other tax provisions, such as the Foreign Tax Credit, may apply.
So, if you’re a freelancer or working for a company overseas, your wages might qualify for the exclusion, but if you’re receiving income from investments or property rentals, that income is not eligible for the FEIE.
Eligibility Requirements for Form 2555
Now that you have a general understanding of what Form 2555 is, let’s dive into the specific requirements you’ll need to meet in order to claim the Foreign Earned Income Exclusion.
Bona Fide Residence Test
The Bona Fide Residence Test is for U.S. citizens and resident aliens who are living in a foreign country for an extended period. To pass this test, you must establish that you are a “bona fide resident” of a foreign country for an uninterrupted period that includes an entire tax year (from January 1 to December 31). This means that your primary residence must be in the foreign country, and you must have a real, physical connection to the country.
Examples of things that might show you are a bona fide resident include:
- Having a permanent residence in the foreign country.
- Working or being employed in the country for a long-term basis.
Physical Presence Test
If you don’t meet the Bona Fide Residence Test, you can qualify for the Foreign Earned Income Exclusion by passing the Physical Presence Test. To pass this test, you must be physically present in a foreign country for at least 330 full days during a 12-month period. The 330 days do not need to be continuous but must fall within the chosen 12-month period.
This test is more straightforward and typically applies to those who move around more frequently or don’t establish a long-term residence in one country.
Tax Home in a Foreign Country
Both tests require that your “tax home” be in a foreign country. Your tax home must be in a foreign country to qualify for the exclusion. The IRS defines a tax home as the location of your regular place of business or employment, regardless of where your family resides. If you don’t have a regular place of business and are working in multiple locations, your tax home is where you are living and working for the majority of the time. If your abode (your principal place of residence) is considered to remain in the U.S., you will not qualify for the FEIE, even if you meet the physical presence days.
How to Calculate Your Exclusion
Once you determine that you’re eligible for the Foreign Earned Income Exclusion, you can calculate how much of your foreign income is eligible to be excluded. Calculating the Foreign Earned Income Exclusion involves applying the annual limits and considering marital status.
Maximum Exclusion Limits for 2025
For the 2025 tax year, the maximum amount you can exclude is $130.000. If your total foreign earned income is below this threshold, you may exclude all of it.
If you earned more than the maximum exclusion limit, you’ll need to calculate the exclusion for the portion of income that is under the limit. Any income above that amount will be taxed as usual.
Rules for Married Couples
If you’re married and both you and your spouse are eligible to claim the Foreign Earned Income Exclusion, each of you can exclude up to $130,000 of foreign-earned income. However, the income must be earned separately. This means that if both you and your spouse are working abroad and earning income, you could potentially exclude up to $260,000 from U.S. taxes in total. If filing a joint return, both forms must be included.
Step-by-Step Guide to Completing Form 2555
Form 2555 can be a bit tricky, but don’t worry—we’ve got you covered. Here’s a step-by-step guide to help you complete the form. Form 2555 is filed as an attachment to your Form 1040, U.S. Individual Income Tax Return. It is divided into several parts:
Part I – General Information
In this section, you’ll provide basic details about yourself, your citizenship status, and your residency in a foreign country.
Part II – Bona Fide Residence or Physical Presence Test
Here, you’ll confirm whether you qualify for the Foreign Earned Income Exclusion based on the Bona Fide Residence Test or Physical Presence Test. If you’re unsure which test to apply, you can consult with a tax professional to help guide you through this section.
Part III – Income Exclusion
In this section, you’ll list all the foreign income you earned that qualifies for exclusion. Make sure to include only the wages and salaries you earned while working abroad. Taxpayers report their total foreign earned income and then compute the amount to be excluded, subject to the annual limit.
Part IV – Housing Exclusion or Deduction
In addition to the FEIE, Form 2555 allows for a Foreign Housing Exclusion (for employees) or Foreign Housing Deduction (for self-employed individuals). If your employer provided housing, or if you paid for housing while living abroad, you may be eligible for a housing exclusion or deduction. This benefit covers reasonable housing expenses that exceed a base housing amount, such as rent, utilities (excluding telephone), and real estate taxes. This part of the form allows you to claim those expenses.
Filing With Your Form 1040
Once you’ve completed Form 2555, you’ll attach it to your Form 1040 when you file your U.S. tax return. Keep in mind that the income excluded on Form 2555 is not included in your gross income on Form 1040.
Common Mistakes and Tips
Missing or Incorrect Information
A common mistake expats make is leaving out important information or providing incorrect details, such as the dates they lived abroad or the amount of foreign income they earned. Double-check all of your entries to avoid errors. Inaccurate travel dates or simple clerical errors are common causes of processing delays and IRS inquiries. Keep detailed records, including passports, travel itineraries, and income statements, to substantiate your claims.
Miscalculating Exclusion Limits
It’s easy to miscalculate the amount of income you can exclude. Be sure to check the exclusion limits carefully to ensure you’re not claiming more than you’re entitled to.
Claiming Exclusion vs. Foreign Tax Credit
Remember, you can either claim the Foreign Earned Income Exclusion or take a Foreign Tax Credit, but you can’t do both for the same income. Be sure to review both options and choose the one that’s most beneficial to your situation.
How Manay CPA Can Help Expats
Filing taxes as an expat can be complicated, but you don’t have to do it alone. Manay CPA specializes in helping expats navigate U.S. tax laws, including the Foreign Earned Income Exclusion. Here’s how we can help:
Determining Eligibility for Form 2555
Our professionals will assess your unique circumstances, including your tax home, travel history, and residency status, to definitively determine your eligibility for the Foreign Earned Income Exclusion.
We’ll help you determine whether you qualify for the Foreign Earned Income Exclusion, ensuring you don’t miss out on valuable tax savings.
Accurate Completion and Filing
Our team can handle the complex paperwork for you, making sure Form 2555 is filed accurately and on time. Our team then integrates this form with your Form 1040 and handles the complete filing process with the IRS, providing peace of mind.
Maximizing Exclusions and Deductions
Beyond the FEIE, we identify all applicable exclusions and deductions, including the Foreign Housing Exclusion/Deduction, and advise on the optimal strategy between the FEIE and Foreign Tax Credit to minimize your overall U.S. tax liability.
We’ll help you take advantage of all available exclusions and deductions to minimize your U.S. tax burden.
Schedule a Free Consultation
Ready to get started? Schedule a free consultation with Manay CPA today and let us help you navigate the world of expat taxes.
Frequently Asked Questions
What is the foreign income exclusion for 2555 for 2025?
For the 2025 tax year, you can exclude up to $130,000 of foreign-earned income.
How many days do you need for Form 2555? (330-day rule)
To meet the Physical Presence Test, you must be physically present in a foreign country for at least 330 days during a 12-month period.
What are the common mistakes on form 2555?
Common mistakes include missing information, incorrectly calculating exclusion limits, and failing to claim the right tax benefits.
How does form 2555 affect my state taxes?
Generally, the Foreign Earned Income Exclusion applies only to federal income tax and does not directly exempt income from state income taxes. If you maintain residency in a U.S. state while abroad, you may still be subject to state tax on your worldwide income. State tax obligations for expats vary significantly by state.
How much foreign income is exempt from US taxes?
In 2025, up to $130,000 of foreign-earned income can be excluded from U.S. taxes.
What’s the difference between the foreign tax credit and exclusion?
The Foreign Earned Income Exclusion (FEIE) allows you to exclude a portion of your foreign earned income from your gross income, reducing your taxable income. The Foreign Tax Credit (FTC) allows you to directly reduce your U.S. tax liability by the amount of income taxes you’ve paid to a foreign government. These two benefits generally cannot be used simultaneously on the same income.
How do I know if I have foreign earned income?
Foreign earned income is any income you receive for services you perform while living and working abroad. This includes wages, salaries, or fees for freelance work.
