How Form 2555 Helps You Exclude Foreign Income From U.S. Taxes

For Americans abroad, some tax forms feel like chores. But Form 2555 is different—it’s the one that can actually make your U.S. tax bill smaller.

Form 2555 is how you claim the Foreign Earned Income Exclusion (FEIE), a benefit that lets you exclude a significant portion of your foreign salary or self-employment income from U.S. taxation.

It’s not the easiest form to fill out, but for many expats it’s one of the most valuable. Done right, it can mean the difference between paying U.S. tax on every dollar you earn and keeping more of what you make overseas.

What is Form 2555 and why does it matter for expat taxes?

At its core, Form 2555 is the IRS form that lets qualifying U.S. expats exclude a portion of their foreign earned income from U.S. taxation. For the 2025 tax year, the exclusion amount is $130,000, and it’s adjusted annually for inflation.

Here’s why it matters:

• Exclusion amount: A substantial slice of your foreign wages or self-employment income can be removed from your U.S. return.
• Foreign Housing Exclusion: Expats with high housing expenses abroad can exclude even more with the Foreign Housing Exclusion, especially in costly cities like London, Tokyo, or Hong Kong.
• Form 2555-EZ no longer exists: The simplified version was discontinued, so now all taxpayers must use the full form.
• Interaction with Form 1116: While Form 2555 reduces taxable income, the Foreign Tax Credit (FTC) reduces U.S. tax liability dollar-for-dollar for foreign taxes paid. Many expats compare or even combine both to prevent double taxation across an entire tax year.

Eligibility: Who can use Form 2555?

Not every American abroad qualifies for the Foreign Earned Income Exclusion. The IRS has clear rules about who can claim this benefit using Form 2555:

• Who qualifies: Who qualifies: U.S. citizens and resident aliens with a tax home in a foreign country who meet the bona fide residence or physical presence test.
• Physical Presence Test: You must spend at least 330 full days in a foreign country during any 12-month period.
• Bona Fide Residence Test: Alternatively, you can qualify by being a bona fide resident of another country for a full tax year or longer.
• Type of income: Only earned income counts. This includes wages, salaries, and self-employment income. Investment income, pensions, Social Security, and capital gains are excluded.
• Other requirements: Other requirements: You must have a valid taxpayer identification number (SSN or ITIN) to claim the exclusion.

Step-by-step: How to complete Form 2555

Completing Form 2555 isn’t quick, but following the steps in order makes it manageable. Here’s the process:

• Gather documentation: Proof of foreign residency, travel dates, and records of your foreign earned income.
• Part I: Enter your foreign address and basic taxpayer details.
• Part II: Complete the Bona Fide Residence Test if you qualify as a resident of another country for an entire tax year.
• Part III: Complete the Physical Presence Test if you qualify by spending at least 330 days abroad in a 12-month period.
• Part IV: Report your foreign earned income and convert it into U.S. dollars using IRS-approved exchange rates.
• Part VI: Claim the Foreign Housing Exclusion or Deduction, if eligible, to exclude additional housing expenses.
• Attach to return: File Form 2555 with your Form 1040 and Schedule 1 as part of your U.S. tax return.
• Filing options: Expats can e-file or mail the form. If you need more time, submit Form 4868 to extend your filing deadline.

Foreign Housing Deduction and Exclusion

Form 2555 doesn’t just help you exclude foreign earned income—it also provides extra relief for expats facing high living costs abroad. Depending on your situation, you can claim either a housing exclusion (if you’re an employee) or a housing deduction (if you’re self-employed).

Here’s what you need to know:

• Eligible expenses: Rent, utilities, and related housing costs (but not luxury extras like cable or maid service).
• Limits: The maximum amount you can exclude or deduct depends on your country of residence, and in some cases, the specific city where you live.
• Calculation: Use the Form 2555 instructions and IRS worksheet to figure out the deductible or excludable portion, based on your number of days abroad.

Form 2555 vs. Form 1116

Both Form 2555 and Form 1116 are designed to keep U.S. expats from paying tax twice—but they work in very different ways.

• Form 2555 (Foreign Earned Income Exclusion): Reduces your gross income by excluding a set amount of foreign wages or self-employment earnings.
• Form 1116 (Foreign Tax Credit): Provides a dollar-for-dollar credit against your U.S. tax bill for foreign income taxes paid.
• Combining strategies: Some taxpayers mix approaches—for example, using the FEIE to exclude wages while also claiming the Child Tax Credit and the FTC on investment income.
• Which is better? The choice depends on your income level, your country’s tax laws, and whether you live in a low-tax or high-tax country.

Common filing mistakes to avoid

Form 2555 is a valuable tool for reducing your U.S. tax bill, but it comes with plenty of fine print. Here are the errors that trip up expats most often:

• Missing the deadline: Forgetting to file Form 2555 on time means losing access to the exclusion unless you qualify for late-filing relief.
• Carryover confusion: Miscalculating prior-year carryovers when switching between the FEIE and the Foreign Tax Credit can cost you credits you might otherwise use.
• Ineligible income: Only earned wages and self-employment income qualify. Pensions, dividends, and capital gains don’t belong on Form 2555.
• Mixing rules: Not reporting foreign accounts separately on the FBAR (FinCEN Form 114), which is required under the Bank Secrecy Act, is a common oversight.
• Over-reliance on software: Tax software can’t always juggle the nuances of foreign tax laws and U.S. taxation. Complex cases often need professional review.

Cutting your U.S. bill with Form 2555

Form 2555 is one of the simplest ways for expats to reduce their federal income tax bill, but only if you meet the residency tests and file it correctly. Knowing how much you can exclude—and when the housing deduction applies—makes all the difference.

For most expats, the peace of mind comes from working with a tax pro who handles this every day.

At Bright!Tax, we help Americans abroad navigate Form 2555 and all the other IRS twists that come with expat life. Ready to cut through the complexity and keep more of your income? Get in touch today and let’s make it happen.

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