IRS Form 2555 – If you’re a U.S. citizen or resident alien living and working abroad, navigating U.S. tax obligations can feel overwhelming. One key tool to reduce your tax burden is IRS Form 2555, which allows you to exclude a portion of your foreign earned income from U.S. taxation. This guide breaks down everything you need to know about Form 2555, including eligibility, how to file, and the latest exclusion limits for tax year 2025. Whether you’re an expat in Europe, Asia, or beyond, understanding this form can help you maximize your tax savings while staying compliant.
What Is IRS Form 2555 and Its Purpose?
IRS Form 2555, titled “Foreign Earned Income,” is used by qualifying U.S. taxpayers to claim the Foreign Earned Income Exclusion (FEIE). This exclusion lets you subtract up to a certain amount of your foreign-earned wages, salaries, or self-employment income from your gross income, effectively shielding it from U.S. federal income tax. The form also helps calculate the foreign housing exclusion or deduction, which can further reduce your taxable income by accounting for housing costs abroad.
The primary goal of Form 2555 is to prevent double taxation for Americans earning income overseas, as many countries tax income earned within their borders. By excluding foreign earned income, the IRS provides relief, but you must still report all worldwide income on your U.S. tax return (Form 1040 or 1040-SR). Note that excluded income may still be subject to self-employment taxes, and it impacts eligibility for certain credits like the Earned Income Credit or Additional Child Tax Credit.
Who Qualifies for the Foreign Earned Income Exclusion?
Not everyone living abroad can use Form 2555. To qualify, you must meet specific criteria set by the IRS:
- U.S. Citizenship or Residency: You must be a U.S. citizen or a U.S. resident alien.
- Foreign Earned Income: Your income must be earned for personal services performed in a foreign country (e.g., wages, salaries, or business profits). Passive income like dividends, interest, or pensions doesn’t qualify.
- Tax Home in a Foreign Country: Your main place of business or employment must be abroad. This is determined by factors like your principal workplace and family ties.
- Pass One of Two Tests: You need to satisfy either the Bona Fide Residence Test or the Physical Presence Test (detailed below).
U.S. government employees, such as military personnel or diplomats, generally cannot exclude their income, as it’s considered U.S.-sourced. Additionally, income earned in restricted areas like Cuba (if in violation of U.S. travel rules) doesn’t qualify.
Eligibility Tests: Bona Fide Residence vs. Physical Presence
To claim the exclusion, you must pass the tax home test plus one of these residency tests:
Bona Fide Residence Test
This test requires you to be a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year (typically January 1 to December 31). It’s based on your intent to make the foreign country your home indefinitely or for an extended period. Factors include:
- Type of living quarters (e.g., rented home vs. hotel).
- Family presence abroad.
- Participation in local community activities.
- Statements to foreign authorities about your residency status.
This test is available to U.S. citizens and resident aliens from countries with U.S. income tax treaties. Temporary U.S. visits don’t disqualify you if your intent remains abroad.
Physical Presence Test
Under this test, you must be physically present in a foreign country for at least 330 full days during any 12-month consecutive period. The days don’t have to be consecutive, and brief trips to the U.S. or international waters count against the 330-day requirement. This test focuses on presence rather than intent, making it easier for digital nomads or short-term expats to qualify.
Waiver for Adverse Conditions: If war, civil unrest, or similar events force you to leave a foreign country, the IRS may waive the time requirements. Check the latest IRS bulletins for eligible countries.
How to Fill Out IRS Form 2555: Step-by-Step?
Filing Form 2555 requires attaching it to your Form 1040. Here’s a breakdown of the key parts:
- Part I: General Information – Provide your foreign address, occupation, and tax home details.
- Part II or III: Qualification Tests – Complete Part II for the Bona Fide Residence Test (include family details and any nonresidency statements) or Part III for the Physical Presence Test (specify your 12-month period).
- Part IV: Foreign Earned Income – Report your total foreign earned income, including employer-provided allowances (minus excludable meals/lodging).
- Part V: Housing Expenses – If claiming the housing exclusion/deduction, list qualifying expenses like rent, utilities, and insurance (exclude phone, TV, or furniture purchases).
- Parts VI-IX: Calculations – Figure your exclusions and deductions. Prorate for partial years using worksheets.
For married couples, each spouse files a separate Form 2555 if both qualify, potentially doubling the exclusion. Use the Foreign Earned Income Tax Worksheet in Form 1040 instructions to calculate your tax on non-excluded income.
Download the latest Form 2555 and instructions from the IRS website for the most accurate guidance.
Maximum Foreign Earned Income Exclusion Amounts for 2025
For tax year 2025 (filed in 2026), the maximum FEIE is $130,000 per qualifying person. If both spouses qualify, they can exclude up to $260,000 combined. This amount is adjusted annually for inflation and is prorated for partial qualifying periods.
| Tax Year | Maximum Exclusion Per Person |
|---|---|
| 2023 | $120,000 |
| 2024 | $126,500 |
| 2025 | $130,000 |
The exclusion can’t exceed your actual foreign earned income minus any housing exclusion.
Foreign Housing Exclusion or Deduction
In addition to the FEIE, you can exclude or deduct certain housing costs if they exceed a base amount (16% of the FEIE limit, or about $20,800 for 2025). The maximum housing exclusion is generally 30% of the FEIE ($39,000 for 2025), but higher limits apply in high-cost cities (see IRS Notice 2025-16).
- Exclusion: For employer-provided housing amounts.
- Deduction: For self-paid expenses, with carryover to the next year if unused.
Married couples can claim jointly or separately, depending on their living situation.
Common Mistakes to Avoid When Filing Form 2555
Expats often trip up on these issues:
- Misclassifying U.S. abode as a foreign tax home.
- Including non-qualifying income (e.g., pensions or U.S. government pay).
- Failing to prorate exclusions for partial years.
- Duplicating housing claims for married couples in the same household.
- Not adjusting deductions or credits related to excluded income.
Always consult IRS Publication 54 for examples and consult a tax professional if unsure.
Final Thoughts: Maximizing Your Expat Tax Benefits
IRS Form 2555 is a powerful tool for reducing U.S. tax liability on foreign earnings, but it requires careful documentation and adherence to IRS rules. For tax year 2025, with the exclusion at $130,000, many expats can significantly lower their taxes. Remember to file on time—extensions are available if you’re abroad on the due date—and consider amending prior returns if you qualify retroactively.
For the most up-to-date information, visit the IRS website or review Publication 54. If your situation involves complex self-employment or multiple countries, professional advice is recommended to ensure compliance and optimize savings.