Foreign Earned Income Exclusion (FEIE)
Contents
- 1 Form 2555 (Foreign Earned Income Exclusion)
- 2 What is Foreign Earned Income Exclusion?
- 3 Who Qualifies for FEIE?
- 4 Can Both Spouses Claim the Exclusion?
- 5 Foreign Housing Exclusion
- 6 Form 2555 Extension on Form 2350
- 7 5-Year Revocation Rule
- 8 Late-Filing Disclosure Options
- 9 Streamlined Filing Compliance Procedures (SFCP, Non-Willful)
- 10 Streamlined Domestic Offshore Procedures (SDOP, Non-Willful)
- 11 Streamlined Foreign Offshore Procedures (SFOP, Non-Willful)
- 12 Delinquent FBAR Submission Procedures (DFSP, Non-Willful/Reasonable Cause)
- 13 Delinquent International Information Returns Submission Procedures (DIIRSP, Reasonable Cause)
- 14 IRS Voluntary Disclosure Procedures (VDP, Willful)
- 15 Quiet Disclosure
- 16 Late Filing Penalties May be Reduced or Avoided
- 17 Current Year vs. Prior Year Non-Compliance
- 18 Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)
- 19 Need Help Finding an Experienced Offshore Tax Attorney?
- 20 Golding & Golding: About Our International Tax Law Firm
Form 2555 (Foreign Earned Income Exclusion)
U.S. Taxpayers living and working outside the United States may qualify to have a certain portion of their income excluded for U.S. tax purposes on IRS Form 2555. The foreign earned income exclusion is a method that taxpayers can use to exclude a certain portion of their income for tax purposes. Still, there are some important caveats that taxpayers must be aware of, including the fact that excluding income does not mean it is excluded from including it on a tax return. Rather, the taxpayer reports the foreign income on the return — and then excludes it using Form 2555. In addition, not all taxpayers will qualify for the foreign earned income exclusion even if they live and work outside of the United States. Finally, taxpayers have to be cautious about whether they claim the exclusion in subsequent years and what limitations may occur if they use the foreign tax credits instead of the foreign earned income exclusion (distinct from using foreign tax credits to reduce other types of foreign income).What is Foreign Earned Income Exclusion?
The foreign earned income exclusion allows certain taxpayers who have to file a U.S. tax return on Form 1040 to exclude a certain portion of their foreign income when they live and work outside of the United States. As mentioned above, if taxpayers qualify for the exclusion they must still file a U.S. tax return but then they claim the foreign earned income exclusion on Form 2555. Also, if the taxpayer works for the US government abroad, they typically will not qualify for the foreign earned income exclusion. As provided by the IRS:-
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“Income from working abroad as an employee of the U.S. Government does not qualify for either of the exclusions or the housing deduction. Don’t file Form 2555.”
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Who Qualifies for FEIE?
Taxpayers who are U.S. persons and work overseas may qualify for the foreign earned income exclusion. Even if a taxpayer is self-employed, they may still qualify for the exclusion. Noting, that the exclusion is for earned income and not passive income such as dividends or interest.Can Both Spouses Claim the Exclusion?
One benefit of the foreign earned income exclusion is that even when Taxpayers file joint returns, each can claim the same exclusion for the income they earn on their joint tax return. In other words, if two spouses are filing jointly and each of them earns ~$120,000 in foreign income that qualifies for the exclusion — they can each file a Form 2555 to exclude their income from their U.S. tax return.Foreign Housing Exclusion
In addition to the foreign earned income exclusion, there is an additional housing exclusion that some taxpayers may qualify for a foreign housing exclusion. Taxpayers should be careful not to double dip these expenses anywhere else on their tax return and now not the full housing amount can be excluded, instead, there is a calculation to determine how much of the foreign housing, if any may be excluded.Form 2555 Extension on Form 2350
If a taxpayer files a Form 4868 or other extension form, then Form 2555 goes on extension as well. In addition, taxpayers may file a separate extension form (Form 2350) when they intend to qualify for the Form 2555 exclusion but need additional time to meet the requirements. As provided by the IRS:-
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U.S. citizens and resident aliens abroad file this form 2350 to ask for an extension of time to file their tax return only if they expect to file Form 2555 or 2555-EZ and need the time to meet either the bona fide residence test or the physical presence test to qualify for the foreign earned income exclusion and/or the foreign housing exclusion or deduction.
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5-Year Revocation Rule
One final important fact about Form 2555 that taxpayers should take note of, is that if they file Form 2555 and one year and then do not file it in the next year (because they plan on claiming the foreign tax credit) then they have to wait five years before they can file the Form 2555 again unless the taxpayer can obtain approval from the IRS. Information about obtaining approval can be found in IRS publication 54. As provided by the IRS: “Choosing the Exclusion(s)-
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To choose either of the exclusions, complete the appropriate parts of Form 2555 and file it with your Form 1040, 1040-SR, or 1040-X. Your initial choice to claim the exclusion must usually be made on a timely filed return (including extensions) or on a return amending a timely filed return.
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However, there are exceptions. See Pub. 54 for details.
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Once you choose to claim the exclusion(s), that choice remains in effect for that year and all future years unless it is revoked. To revoke your choice, you must attach a statement to your return for the first year you don’t wish to claim the exclusion(s). If you revoke your choice, you can’t claim the exclusion(s) for your next 5 tax years without the approval of the IRS. See Pub. 54 for more information. Note. It is not necessary to affirmatively revoke your choice if you don’t have any foreign earned income.”
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