If you need help with tax Form 2555 or any expatriate tax issue, consider calling us for a free phone consult at (910) 399-2705. Our virtual office makes it easy to work with us from abroad.
Form 2555, Foreign Earned Income Exclusion, is the key IRS tax form for Expats working abroad. The IRS, under certain conditions, allows taxpayers to exclude foreign earned income from taxable income on Form 1040. Form 2555 calculates the Foreign Earned Income Exclusion and Housing Exclusion/Deduction. It attaches to your annual Form 1040. 2555 is a three page form, with four pages of instructions, and another eight pages of housing allowance tables. The foreign earned income, usually from a W-2, appears on Line 7 of Form 1040, and the exclusion allowed, from tax Form 2555, appears as a negative number on Line 21. Here’s some FAQ providing insight into self-preparing tax Form 2555.
Also, here’s a related post on Form 673, Statement for Claiming Exemption from Withholding on Foreign Earned Income Eligible for the Exclusion(s) Provided by Section 911.
Should Expats File Tax Form 2555?
Yes. Ironically, most non-filers would owe little or nothing because of the $97,600 exclusion available on Form 2555 (2013).
Should you File Form 2555 or Form 2555-EZ
Generally, CPA accountants don’t use any EZ form. Why? It is too easy to miss something by taking a short cut. But Form 2555-EZ may be appropriate for you. Just read the instructions carefully.
What if you make mistakes on Form 2555?
If the IRS catches mistakes on Form 2555, they’ll probably send you a CP 2000 Notice. Here’s our post on IRS CP 2000 Notices. This is a low-level, automated IRS tax audit. The IRS may re-calculate your return and demand additional tax, interest, and penalties. At this point, you should consult a CPA. You can file an amended tax return using Form 1040-X. Here’s our post on amended tax returns and Form 1040-X.
What Documentation should Expats keep for Form 2555:
Everything a US-based taxpayer should, plus, proof of your physical presence in the foreign country. Your passport works for this.
Where to Get Info on Form 2555 preparation in 2013?
If you’ve never prepared Form 2555 before, I recommend:
- Reading the Form 2555 IRS instructions. But, although basic Form 2555 concepts are simple, application to a broad range of taxpayers is difficult.
- Google for IRS related Form 2555 verbiage. They offer a nice overview.
- Complement the instructions with non-IRS material. Be careful about info from the Internet. This post, for example, is general and may not cover your particular circumstances.
- Buy an appropriate tax book or spend an afternoon at a bookstore. Make sure the book is less than two years old. Tax Form 2555 and expat issues change rapidly.
- Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad is another source.
- Being ready to spend time learning the specifics for your expat circumstances. Remember, the first time is the hardest. It will go quicker next year!
“Want to pay no tax? Consider establishing residence in a non-income tax State before heading overseas.”
- Gary Bode, tax Form 2555 CPA accountant
Timing:
The physical presence requirement on tax Form 2555 dictates the filing date for Form 1040.
Form 1116:
You may able to deduct, under certain conditions, foreign taxes you paid.
The IRS Probably Screens Form 2555 Carefully
- Their FATCA program, to discover American’s foreign bank accounts, is in full force. Foreign Earned Income is a logical extension of this IRS thrust.
- Essentially, Form 2555 is an income document analogous to Form W-2 and Form 1099-MISC. The IRS has excellent revenue matching programs for those forms. Why? Tax payers somehow make fewer errors on issues that the IRS can cross correlate. Go figure!
- Form 2555 is complex, and when self-prepared I think the IRS looks for errors where errors most likely occur.
So my guess? They look at a good percentage of tax returns that include a Form 2555.
Should you have a CPA accountant prepare Form 2555?
It depends. Taxpayers working abroad are usually smart folks. Like anything else, Form 2555 preparation gets easier with experience. But some expats only file a few Form 2555(s) in their lifetime, so it’s hard to get that experience. The potential tax savings is significant. Expats helping other Expats can be great or problematic. Tax software will allow errors. Our virtual office makes the paperwork easy and the fees aren’t too bad.
Foreign tax issues? We’re an Expat CPA firm that offers Form 2555 tax preparation, via a virtual, international office. We offer a gratis initial phone consult at (910) 399-2705. Generally we prepare the entire tax return, not just Form 2555. Our goal is to keep you as an ongoing client, so our service is responsive.
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Given this article, I have a question. I was in Afghanistan for 330 which qualified me for FEIE, I met all the requirements. But I did my states taxesand calculated that NC owed me my taxes back because I payed over 10K in NC taxes while deployed. Do I get that all back? They wrote me and told me that I don’0t get anything back and that I may even owe them. How is this possible?
Hi John. I don’t have enough info to base an answer on, sorry. You can call if you’d like, but I would need to see the tax return.
my question is I now work and paid in China so in 2012 I am without a W2, I have been paying taxes to the Chinese gov. Do I have any tax exemption from working over seas and if I am under this exemption then do I still have to file with the IRS? thans in advance
Hi. Yes if you are a US citizen you need to file a tax return if no tax is due secondary to the Foreign Earned Income Exclusion.
Does the IRS regularly contact or verify employment with foreign companies? After a very bad experience with a particular overseas employer, I wish no further contact with the company, but would like to exclude the income from my taxes (I’ve read publications and meet requirements for physical presence test, etc.).
Thank you.
Sounds like you should exclude it Ron. The IRS is all powerful in the US. If they audited you, I think most foriegn companies would send them info. But I doubt they can cross correlate foreign pay routinely. So, after all that, I don’t know.
Hi,
I have a question for you to find out if I need a CPA. I have been living in South Korea for 3 years and doing my own return. I also have a son back in the states though, and been paying for his tuition, and now someone tells me I could have been claiming the American Opportunity credit and getting a refund.
I was under the understanding that I could not get a refundable credit while filing the form 2555 asking for my income to be excluded (my income has been around 50k per year every year).
Can I get a refund, and if so can I amend the past 3 years of taxes?
Sorry James I don’t know the answer off hand. Contact me again after 4/15 and I’ll research the issue.
Can you put K1 earnings from your S Corp on form 2555?
I believe the Foreign Earned Income Exclusion is for wages from S Corp for work you did out of the country. Distributions from you S Corporation aren’t earned income. I hope that helps. Maybe I misunderstood the question.
I have a Canadian/US resident. He lives in Canada year round and is self employed. He received a 1099 misc for work that was done in the US. He never stayed in the US just worked for a short period of time. Can we exclude the amount on the 1099? He did already pay taxes on it in Canada.
Hi Angela: if he qualifies for the bona fide Canadian residency you could exclude the Form 1099-MISC income through Form 2555. But you have to include it and then exclude it. Hope that helps.
Hello,
I am a military spouse working as a contractor overseas. I completed the form 673 expecting to be here for the full 330 but now I am looking at divorce and leaving early. I will have been living in Germany from October 2012 through at least Sep 2013 so I will have lived abroad for over 330 days but I only started my job Jan 4th, 2013 so I will have been working for less than 330. Can I still claim exemption and file form 2555 or should I immediately retract my form 673 and expect to be paying back a lot of taxes this year? Thank you very much for your help.
Erin
Sorry to hear about the divorce Erin. I would research your tax question to be sure but I think your residency fills the requirement even though you worked part of that time. Hope that helps.
Hi Erin. I think you’re OK with the residency requirement. If you were my client I’d check to make sure. We have a tax database to make that simple but I bet your issue is discussed in the IRS instruction.
My tax year is January 01, 2013 to Dec 31, 2013. I may not make my 330 days before my company makes me return to the states (We lost the contract in Afghanistan: Projected return date to the states September 10th, 2013. Will I have to Pay the full tax amount back to the IRS or just a small percentage.
Thanks
Leroy
OK Leroy. Even though you’re using a calendar tax year, the 330 physical presence days requirement for Form 2555 can span January 1st. If you don’t have the 330 days overseas you get no foreign earned income tax exclusion - ouch. Maybe you need to calculate the numbers to see if staying somewhere outside the US makes sense. Hope that helps.
This makes since. It is also what I thought to be true. Some one told me that there was a way out, but as I thought I will just get another Job over here, or Hang out until I make 330 days. Thanks!
Hi, thanks for the great info!
I keep seeing conflicting information on my question below, even on some expat tax professional’s websites who make it sound like they can they can “help” with this issue (legitimately?), but it sounds like you know what you are talking about, so I’m hoping you can give a straightforward answer.
Is it possible to only exclude SOME of one’s foreign earned income? Or is the exclusion an all or nothing thing (up to the FEIE limit, of course)? I ask from the standpoint of an expat with ONLY foreign income wanting to contribute to a Roth IRA back home (and who is otherwise eligible, except for the bit in Pub 590 about “Compensation for Purposes of an IRA…Does not include…any amounts you exclude from income,” which leads to this question about not excluding the entire amount…). If not, is there some other legitimate way that you know of to accomplish roughly the same thing?
A million thanks in advance for your help!
Well Maggie I believe you can limit the amount you wish to exclude on Form 2555. But it would take some research to answer your entire question. We can provide that service. It’s just beyond the scope of a post comment, sorry.
Thank you, Gary. What’s the best way to find out, and how much will it cost to get the answer? I am really just trying to determine whether I need an accountant to help or not. So far, I’ve been fine doing my own taxes, even overseas. Thanks again!