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IRS Tax Form 2555 | CPA accountant augments the IRS instructions for Form 2555 | tax exclusion

IRS tax Form 2555 CPA accountant explains the tax exclusion beyond the instructions for Form 2555

Here’s some concepts and tips to help expat Folks understand the instructions to Form 2555. I offer a free phone consult on Form 2555 and the tax exclusion. (910) 399-2705.

Full exploitation of the IRS Form 2555 tax exclusion takes planning. I’ll review components of Form 2555 and offer tips to both avoid common pitfalls and maximize the tax exclusion. I hope this post provides expat Folks a framework to help understand the instructions for Form 2555. But this post isn’t a guide to help you self-prepare Form 2555. Calculating the tax exclusion isn’t rocket science, but first time self-preparation of Form 2555 is tricky and the tax savings, high (potentially around $34). Due diligence is prudent.

Hi, I’m Gary Bode, a CPA accountant with a special interest in IRS tax Form 2555 preparation. Our virtual office makes it easy to deal with us from outside the United States. I offer a free phone consult on Form 2555 expat issues (910) 399-2705. We’re on Eastern Time but extend business hours for scheduled international consults.

Form 673 and its Relationship to Form 2555

Form 2555 allows you to exclude up to $97,600 (2013) of Gross Income, that you earn outside the US, from taxable income on your Form 1040. There are three ways to receive the tax savings:

  • Allow your employer to withhold payroll taxes from your paycheck as though you were in the US.  Then get a large refund when you file Form 1040. Some expat Clients worry about under payment penalties and this technique is safest for that concern.
  • Use IRS tax Form 673 to keep your employer from withholding an appropriate amount of federal tax, and then receiving more of your Gross pay on each paycheck. Prediction and estimates are just predictions and estimates. So this technique is the most likely to incur IRS penalties. This is a big deal if you inadvertently violate the 330 day rule, for example, and inadvertently lose all the tax exclusion on Form 2555. But you don’t want the IRS holding your refund up to 14 moths or so either.
  • A combination of the above.

So, as a CPA accountant who deals with Form 2555, I suggest planning to factor in your risk sensitivity. Here’s an earlier post on Form 673 and Form 2555.

On Form 2555, Timing is Crucial

Read up on the physical presence and bona fide resident tests for tax Form 2555. Be careful to observe the 330 day rule. I’m not aware of any way to circumvent it. Both tests for Form 2555 starts the day you leave the US. So, if you start your foreign assignment on July 31st 2013, the tests use June 30, 2014 as the end date. So you can’t file your Form 1040 until June 30th, 2014. There’s actually a special IRS tax extension form to cover this contingency. Here’s prior post on Form 2350 and extending your expat return. No extension means no tax exclusion – ouch!

“Want to broaden the tax exclusion beyond tax Form 2555? Establish a residence in a non-income tax State before going overseas.”
– Gary Bode, CPA accountant with a special interest if Form 2555 issues

Logistics of Form 2555 and Form 1040

You generally include the foreign wages you earn as Gross Income on line seven, page one of Form 1040. Then it  percolates through Form 2555, both for the tax exclusion and foreign housing allowance. The tax exclusion on Form 2555 is a negative number on Form 1040, line 21, excluding it from taxable income.

Understand the Foreign Housing Exclusion Component of Form 2555

Potential Form 2555 tax exclusion doesn’t stop at just your wages earned on a foreign assignment. $13,644 (after all the IRS wrinkles) of potential tax exclusion for Qualified Housing Expenses exist in a special section of Form 2555. Read up on qualifying foreign housing expenses. The IRS is surprisingly broad-minded here. Note IRS Notice 2012-19 lists cities where that $13,644 cap could increase.

Non Form 2555 Expat Tax Compliance Issues

Some expats set up foreign bank accounts. Naturally the IRS wants information on your foreign assets. Here are two posts on this issue:

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