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Form 2555 CPA Tax Accountant discusses preparing IRS Tax Form 2555 | 2014 Form 2555 instructions | Foreign Earned Income Exclusion for Expats | Expatriate Tax Issues |Foreign housing exclusion

Form 2555 CPA expatriate tax issues

If you need help with tax the Form 2555 instructions, 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 CPAs know it’s the key IRS tax form for Expats working abroad. Form 2555, Foreign Earned Income, calculates the Foreign Earned Income exclusion and the Housing Exclusion and/or Deduction (sic). The 2015 Form 2555 instructions cover most expat nuances, meaning the instructions contain too much info and get confusing. Conversely some expat issues that aren’t covered in the Form 2555 instructions. The IRS tries, but the tax terminology and writing style makes the Form 2555 instructions tough to read. Personally I read the Form 2555 instructions every year but I keep up with emerging and twilighting Form 2555 issues through a third party paid database subscription that is much easier to understand. I’ll provide some tips, presented as FAQs, I’ve learned over the years as a Form 2555 CPA tax accountant that should be in the IRS Form 2555 instructions but aren’t.

There are lots of other expat posts on the website dealing with Form 2555, Form 673 and Form 1116. 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. Basically Form 673 just allows your employer to not with hold federal income tax. The Form 673 premise? Will you qualify to use Form 2555, along with Form 1040, and owe no federal income tax thanks to the foreign earned income exclusion? The Form 673 instructions are good but the Form 1116 instructions aren’t all that helpful if you’re not familiar with the IRS jargon.

The IRS, under certain conditions, allows expats to exclude foreign earned income from taxable income on Form 1040. Form 2555, aptly named Foreign Earned Income, is a three page tax form that calculates the Foreign Earned Income Exclusion and Housing Exclusion/Deduction. It attaches to your annual Form 1040.  The foreign earned income, usually from a W-2,  appears on Line 7 of Form 1040, and the foreign earned income exclusion allowed, from tax Form 2555, appears as a negative number on Line 21 of Form 1040.

What is at stake

For 2015 you can exclude $100,800 of gross income from taxable income. That’s the foreign earned income exclusion. Plus you can additionally exclude up to 30% of that, $30,240, for the foreign housing deduction.

“In 2015 Expats can exclude up to $131,040 of wages from taxable income. It depends on your circumstances, but that means saving $45,864 of taxes.”
– Gary Bode, Form 2555 CPA

Should Expats File Tax Form 2555? Yes! Amend the tax return if you didn’t

Yes. Ironically, most non-filers would get a refund because of the $100,800 exclusion available on Form 2555 (2014). Every expat CPA has seen a few cases where the expat didn’t file Form 2555. We can amend the original tax return to include the Form 2555 tax reporting and generate a tax refund. But there’s an IRS three-year limit on refunds. Ouch. If you need a Form 2555 CPA to amend those returns please consider using as for tax preparation.

Should you File Form 2555 or Form 2555-EZ

Generally, CPA tax accountants don’t use any EZ form. Why? It is too easy (pun intended) to miss something by taking a short cut. But Form 2555-EZ may be appropriate for you. Just read the Form 2555 instructions carefully. There’s a lot of potential taxes due here, maybe $45,864 for 2016 (depending on you salary of course), so the foreign earned income exclusion deserves the longer Form 2555.

What if you make mistakes on Form 2555? IRS CP2000 Notice

If the IRS catches mistakes on Form 2555, they’ll probably send you a CP2000 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 “propose” additional tax, interest, and penalties. At this point, you should consult a Form 2555 CPA if you don’t understand the issues on the IRS CP2000. You can file an amended tax return using Form 1040X if you disagree with CP2000. 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 or bona fide residence in the foreign country. Your passport works for this. Be sure to understand the IRS definitions if you’re cutting it close on the physical presence test.

Danger with filing Form 673,Statement for Claiming Exemption from Withholding on Foreign Earned Income Eligible for the Exclusion(s) Provided by Section 911, with your employer

I’ve seen a few cases where the expat taxpayer filed Form 673, had no taxes taken, and then didn’t qualify for the required physical presence test. So no foreign earned income exclusion or Housing Exclusion and/or Deduction was allowed. That means Federal income tax is due. Figure that number as 35% if your gross income. The 35% includes the state income taxes (if applicable) too.

Where to Get Info on Form 2555 preparation in 2015?

If you’ve never prepared Form 2555 before, I recommend:

  • Reading the IRS tax Form 2555 IRS instructions.
  • Google IRS related Form 2555 verbiage. This is published by the IRS. They offer a nice overview. I think they read easier than the actual Form 2555 instructions.
  • 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. 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. But like the Form 2555 instructions, it’s a hard read in my opinion.
  • 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!
  • Be wary of tax advice from other expats, at least on the first Form 2555.

What about Form 673?

Form 673 allows your employer to not with hold federal income tax from your paychecks. Which sounds great. Your cash flow improves. The IRS doesn’t hold your money for a year. Here’s two extremes that neither the Form 673 instructions of Form 2555 instructions cover:

  • A: Your employer doesn’t with hold federal income tax. You file your tax return and get no refund. But if you fail to qualify for the physical presence test or bona fide residence test you’ll owe taxes. I’ve seen this happen many times. It causes a cash flow crisis that can last years.
  • B: Your employer does with hold federal income taxes. You file and receive a large refund. The IRS holds your money for a year.

Note that using Form 2555 doesn’t cover social security and Medicare taxes, just federal income tax with holding.

What about Form 2555 the timing?

Be sure to file federal and state tax extensions if you need too. The physical presence requirement on tax Form 2555 dictates the filing date for Form 1040. That means you can only claim the foreign earned income exclusion at the end of 360 days after you started the foreign assignment. This is a first time Form 2555 issue, and once that time period includes an entire calendar year the tax filing deadlines are straight forward. That proves you qualify for the physical presence test. If you started a foreign assignment on July 1st, 2015, you’d file a tax extension for 2015 by April 15th, 2015, and then file the 2016 Form 2555 after June 30th, 2015.

What about expat tax extensions?

The IRS has an automatic two month extension for expats, changing the filing deadline from April 15, 2015 to June 14th, 2016. That protects you from under payment and late filing penalties. But most Form 2555 CPAs cover Expats with a “regular” extension as well. So the filing deadline  is October 15th, 2016. Note that doesn’t cover underpayment penalties. See Form 4648 and read the Form 4648 instructions. We e-file our expat tax extensions negating the vagaries of international postal issues.

What’s Form 1116 about?

You may able to deduct, under certain conditions, foreign taxes you paid. Form 116 calculates the tax deduction.

The IRS probably screens Form 2555 carefully

  • 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.
  • In my opinion the IRS could red flag many more tax returns than it does. But they are too short-handed to do something about it. Not all tax returns are treated equally, the IRS admits it goes after bigger fish.

Other non Form 2555 expat issues

  • File FinCen 1114, formally FBAR if you have non US banks accounts.
    • Note this goes to the criminal division of the IRS.
    • The IRS FATCA program, to discover American’s foreign bank accounts, is in full force. Many countries now report your foreign bank account information to the IRS. They could cross correlate Form 2555 with FATCA information.

“The most common error I see as a Form 2555 CPA? Not claiming the foreign housing exclusion. I know the Form 2555 instructions are counter intuitive, but the foreign housing exclusion could be $30,240 of deductions for 2015, maybe saving you $9,979 in taxes.”

Should you have an expat CPA tax accountant prepare Form 2555?

It depends.

  • Like anything else, Form 2555 preparation gets easier with experience. I think it’s like riding a bike. Anyone can do it but you probably fall a few times first.
  • 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.
    • Up to $45,864 in 2015, depending on your particular expat issues.
  • Tax software will allow errors. There’s usually a manually workaround for Form 2555. But that requires knowing what the outcome should be and making the tax return reflect it properly. Form 2555 is not handled as automatically s say a W-2 is.
  • The IRS Form 2555 instructions can be daunting.
  • Our virtual office makes the paperwork easy and the fees aren’t too bad.
  • CPAs specialize. But ExPat CPA specialists are hard to find. Experience counts. If you can’t find a local CPA well versed in all aspects of Expat taxation try calling us.

When I was a brick and mortar CPA I never saw a Form 2555 case. This blog sent me enough expats, Vets at first, to specialize. 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, even when back in the US, so our service is responsive.

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