This post was last updated March 6, 2023.
It’s frustrating for expats, but all US persons (both citizens and permanent residents) are required to file a federal tax return as long as they meet the income reporting threshold. Depending on their circumstances, expats may also owe taxes to the country in which they reside.
However, this doesn’t necessarily mean that you’ll pay taxes on the same income to multiple countries. In fact, if you take advantage of one of the tax breaks that the IRS offers Americans abroad, there’s a very good chance you won’t have a US tax bill at all.
One of these tax breaks is the Foreign Earned Income Exclusion, or FEIE, which you can claim by filling out Form 2555. (Prior to the 2019 tax year, there was a simplified version of the form, 2555-EZ. However, it is no longer possible to use it to claim the FEIE.)
What is the Foreign Earned Income Exclusion?
The FEIE is an IRS tax break geared toward Americans living abroad that allows them to exclude over $100,000 of their earned income from US taxation (the figure rises a little each year). For the 2022 tax year (i.e. the taxes you’ll be filing in 2023), that figure is $112,000. And due to inflation, it’s getting bumped up to $120,000 for the 2023 tax year (i.e. the taxes you’ll be filing next year, in 2024).
Foreign Earned Income Exclusion Amounts
|Tax Year||Filing Year||FEIE Amount|
As long as it’s outside the US, it doesn’t matter where in the world your income is sourced as long as it’s earned — aka money you received from actively working, like wages, commissions, bonuses, etc. What it doesn’t include is unearned income. Unearned income is also called passive income because the money arrives in your account whether you are or aren’t actively working at the time. Thus, unearned income is used to describe income from investments, rentals, trust funds, etc.
If you qualify for the FEIE, you also qualify for the Foreign Housing Exclusion (FHE) — or, if self-employed, the Foreign Housing Deduction (FHD) — which allows you to exclude income spent on qualifying housing expenses.
But before you can claim the FEIE, you’ll need to prove that you live abroad according to IRS standards.
The Physical Presence Test
The first way to prove you live abroad is by meeting the Physical Presence Test, which requires expats to prove that they spent at least 330 full days outside the US in either the tax year or, for people who moved at some point in the middle of the year, a 365-day period that overlaps with the tax year.
The Bona Fide Residence Test
The second way to prove that you live abroad is called the Bona Fide Residence Test, which requires you to provide concrete evidence that you reside in another country through documentation like a residency card, foreign tax records, rental contracts, utility bills, etc.
Which to choose: the Foreign Earned Income Exclusion or the Foreign Tax Credit?
The other main tax break for Americans abroad is called the Foreign Tax Credit (FTC), which gives you a credit for income taxes that you’ve paid to a foreign government that can then be applied toward any taxes you owe the US. You can’t apply both the FEIE and the FTC to the same income, though.
The FEIE vs the Foreign Tax Credit — which one is right for you?
The FEIE is best for expats who:
- Earn no more than the FEIE exclusion limit
- Have all or mostly earned income
- Meet either the Physical Presence Test or the Bona Fide Residence Test
- Earn their income in a low- or no-income tax country
The FTC, on the other hand, is best for expats who:
- Earn more than the FEIE exclusion limit
- Pay income taxes to a foreign government, especially at a higher rate than in the US
- Have a significant amount of passive income
If you’re unsure about which option is best for you, make sure to reach out to a tax specialist.
How to claim the FEIE
If you do decide to claim the FEIE, you’ll have to file IRS Form 2555 along with your federal tax return.
Form 2555 vs. Form 2555-EZ
As its name implies, Form 2555-EZ is a shorter, simpler version of Form 2555. Since tax year 2019, the form is no longer used to claim the FEIE. However, you may still qualify to use it if you are filing for tax years prior to 2019.
To qualify for this simplified form, you must:
- Not have self-employment income
- Earn no more than the FEIE exclusion limit
- Be claiming for a tax year (not a 365-day period coinciding with it
- Have no business or moving expenses
- Not claim the Foreign Housing Exclusion
Is there a Form 2555-EZ for 2022 tax returns?
In 2023, all US taxpayers seeking to claim the FEIE must complete form 2555. If you previously used Form 2555-EZ, there is a section on the 2022 Form 2555 to note that information, right at the beginning.
How to complete Form 2555
Form 2555 consists of nine parts:
- Part I: Fill out general information like your address, occupation, and employer details
- Part II: For those who meet the Bona Fide Residence Test only — fill out details on your stay abroad, like the type of home you live in, the type of visa you have, and the dates you were in and out of the US
- Part III: For those who meet the Physical Presence Test only — fill out details on your stay abroad, like which country you live in and the dates you were in and out of the US
- Part IV: Shares details on your foreign-earned income, like how much you earned and what your business expenses were
- Part V: Indicate whether or not you will also claim the FHE
- Part VI: For those claiming the FHE only — calculate your FHE allowance
- Part VII: Calculate your FEIE allowance
- Part VIII: Calculate your combined FEIE & FHE allowances
- Part IX: For those claiming the FHD only — calculate your FHD allowance
How to complete Form 2555-EZ (for the 2018 tax year and earlier)
Form 2555-EZ consists of just four parts:
- Part I: Share whether you qualify for the Physical Presence or Bona Fide Residence Test
- Part II: Fill out general information like your address, occupation, and employer details
- Part III: Share the dates you were in and out of the US
- Part IV: Calculate your FEIE allowance
Get help filing expat taxes
Filing taxes from abroad can be complex, but Bright!Tax is here to help. Claiming the FEIE using Form 2555 is standard practice for us, and we can also assist with filing your US tax return in general. What’s more, we specialize in helping expats catch up on back taxes penalty-free through the IRS’s amnesty program, the Streamlined Procedure.
Reach out today and one of our CPAs will get in touch with you as soon as possible!