IRS Instruction 2555 – If you’re a U.S. citizen or resident alien living and working abroad, understanding IRS Form 2555 is essential for minimizing your U.S. tax liability. This form allows qualifying individuals to exclude a portion of their foreign earned income from U.S. taxation through the Foreign Earned Income Exclusion (FEIE) and potentially claim a housing exclusion or deduction. For the 2025 tax year, the maximum exclusion amount is $130,000, making it a valuable tool for expats. In this SEO-optimized guide, we’ll break down the instructions for Form 2555, eligibility requirements, step-by-step filing tips, and key calculations to help you navigate the process confidently.
What’s New in the 2025 Instructions for Form 2555?
The IRS updates Form 2555 annually to reflect inflation adjustments and legislative changes. For 2025:
- Exclusion Amount Increase: The maximum foreign earned income exclusion has risen to $130,000, up from $126,500 in 2024.
- Windfall Elimination Provision (WEP) Repeal: Effective for Social Security payments after December 2023, the WEP has been repealed under the Social Security Fairness Act of 2023. This may impact expats with foreign pensions or dual-country work histories.
These updates ensure the form aligns with current tax laws, but always check for any mid-year changes via IRS.gov.
Who Qualifies for the Foreign Earned Income Exclusion?
To use Form 2555, you must meet specific IRS criteria. Qualification hinges on having a tax home in a foreign country and passing one of two residency tests. Foreign earned income generally includes wages, salaries, bonuses, and self-employment income earned for services performed abroad during your qualifying period. Excluded items include pensions, dividends, interest, and U.S. government pay.
Key Eligibility Requirements
- U.S. Citizen or Resident Alien: You must be a U.S. citizen or a resident alien who is a citizen or national of a country with which the U.S. has an income tax treaty.
- Tax Home Test: Your principal place of business or employment must be in a foreign country throughout your bona fide residence or physical presence period. If your abode (family and economic ties) remains in the U.S., you generally don’t qualify—unless serving in a combat zone in support of U.S. Armed Forces.
- No U.S. Government Employees: Income from U.S. federal employment doesn’t qualify.
- Cuba Travel Restrictions: Time spent in Cuba violating U.S. travel rules doesn’t count, and related income or housing costs aren’t excludable.
Residency Tests
You must pass either the Bona Fide Residence Test or the Physical Presence Test—not both.
- Bona Fide Residence Test: You must be a bona fide resident of one or more foreign countries for an uninterrupted full tax year (January 1 to December 31 for calendar-year filers). This is intent-based, considering factors like your actions, family, and economic ties. Temporary visits to the U.S. are allowed, but filing a nonresidency statement with foreign authorities may disqualify you.
- Physical Presence Test: You need to be physically present in a foreign country (or countries) for at least 330 full days during any 12-month period that overlaps with your 2025 tax year. Full days are 24-hour periods starting at midnight, and brief U.S. visits don’t interrupt this.
Waiver of Time Requirements
If war, civil unrest, or similar adverse conditions force you to leave a foreign country, you may qualify for a waiver if you can show you would have met the time requirements otherwise. The IRS lists qualifying countries annually in the Internal Revenue Bulletin. Attach a statement to your form explaining the waiver claim.
For more details on qualification, refer to IRS Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad.
Step-by-Step Guide: How to Fill Out Form 2555
Form 2555 has nine parts, but you only complete the relevant sections based on what you’re claiming. Attach it to your Form 1040 or 1040-SR. If both spouses qualify, each files a separate Form 2555. Note: The simplified Form 2555-EZ was discontinued after 2018, so everyone uses the full form.
Part I: General Information
- Enter your personal details, foreign address, employer info, and tax home(s) with dates.
- Indicate if you’ve previously filed Form 2555 or revoked the exclusion.
Part II: Bona Fide Residence Test (If Applicable)
- Provide residence start/end dates, living arrangements with family, and details on any nonresidency statements or tax treaties.
Part III: Physical Presence Test (If Applicable)
- List foreign countries visited, dates, and the 12-month qualifying period (must include at least 330 full days).
Part IV: Foreign Earned Income
- Report total foreign earned income received during the tax year, including wages (line 18), allowances (line 22), and business profits (line 20). Subtract excludable meals and lodging (line 25) to get your total on line 26.
Part V: Housing Expenses (If Claiming Housing Exclusion/Deduction)
- Skip if not claiming housing benefits.
Part VI: Housing Exclusion/Deduction
- Enter qualified housing expenses (rent, utilities, insurance—excluding phone, TV, or lavish costs) on line 28.
- Calculate limits using the Limit on Housing Expenses Worksheet (line 29b): For unlisted locations, use $106.85 per day or $39,000 for a full year. Location-specific limits are in IRS Notice 2025-16.
- Prorate for partial qualifying periods (line 31: days in 2025 qualifying period).
Part VII: Foreign Earned Income Exclusion
- Calculate your maximum exclusion ($130,000 prorated for partial years) on line 42.
Part VIII: Housing and Income Exclusions Combined
- Allocate and subtract exclusions; enter the total on line 45 for Schedule 1 (Form 1040).
Part IX: Housing Deduction
- Use if expenses exceed exclusions; calculate carryover from prior years via the Housing Deduction Carryover Worksheet. Carryovers are limited to one year.
Key Calculations for Form 2555
- Foreign Earned Income Exclusion: Lesser of your foreign earned income or $130,000 (prorated: $130,000 × qualifying days in 2025 / 365).
- Housing Exclusion: Qualified expenses minus base amount (16% of max exclusion, or $20,800 for 2025), up to location-specific limits.
- Housing Deduction: For self-employed individuals, deduct excess housing costs after applying exclusions.
- Tax on Non-Excluded Income: Use the Foreign Earned Income Tax Worksheet in Form 1040 instructions to apply progressive rates as if no exclusion was claimed.
| Calculation Type | Formula/Example for 2025 |
|---|---|
| Max FEIE | Lesser of foreign income or $130,000 |
| Prorated FEIE | $130,000 × (Qualifying days / 365) e.g., 200 days = $71,233 |
| Housing Limit (Unlisted) | $106.85 × Qualifying days e.g., 365 days = $39,000 |
| Base Housing Amount | 16% of $130,000 = $20,800 |
Common Mistakes and Tips for Filing Form 2555
- Overclaiming Expenses: Only include reasonable housing costs; exclude improvements or purchases.
- Missing Proration: Always adjust for partial qualifying periods.
- Married Couples: File separately if both qualify; coordinate for joint households.
- When to Amend: If you qualify after filing, use Form 1040-X within limits.
- Impact on Credits: Claiming exclusions disqualifies you from the Earned Income Credit or Additional Child Tax Credit.
- Professional Help: Consult a tax expert for complex situations, like self-employment or multiple countries.
File by April 15, 2026, or June 15 with automatic extension for expats. Mail to special IRS addresses for international filers.
FAQs About IRS Form 2555 and Foreign Earned Income
What is the maximum foreign earned income exclusion for 2025?
Up to $130,000 per qualifying person.
Can married couples both claim Form 2555?
Yes, if both qualify separately, each can exclude up to $130,000.
What if I don’t meet the time requirements due to emergencies?
You may qualify for a waiver; attach an explanation.
Does self-employment income qualify?
Yes, but allocate reasonably (up to 30% of net profits if capital is involved).
Where can I download Form 2555?
From IRS.gov/forms, or view the PDF at https://www.irs.gov/pub/irs-pdf/f2555.pdf.
For the most accurate advice, visit IRS.gov or consult a tax professional. This guide is based on 2025 instructions and trusted sources to help expats optimize their taxes.