Form 2555 instructions: how to claim the foreign earned income exclusion
Living and working abroad brings incredible opportunities – and complex tax responsibilities. Fortunately, Americans overseas may qualify to exclude a significant portion of their foreign income from US taxation using IRS Form 2555.
Key takeaways
- Form 2555 lets you exclude up to $130,000 of foreign earned income from your 2025 US tax return (filed in 2026) – but only if you meet strict residency requirements and have income from active work abroad. For 2026 (filed in 2027), the exclusion increases to $132,900.
- You must pass either the Physical Presence Test (330 full days in a foreign country during any 12-month period) or the Bona Fide Residence Test (full calendar year of uninterrupted foreign residency).
- The FEIE doesn't eliminate your filing obligation – US citizens and resident aliens must still file a return even if all income is excluded, and you may also qualify for the Foreign Housing Exclusion to offset living costs.
What you'll learn
This guide walks you through who qualifies for Form 2555, how the two residency tests work, what income counts (and what doesn't), and where your exclusion numbers actually go on Form 1040. You'll also see common filing mistakes and get a checklist of documents you need.
What is Form 2555?
Form 2555 is the IRS form US citizens and resident aliens use to claim the Foreign Earned Income Exclusion (FEIE) – allowing you to exclude foreign earned income from your US tax return. For 2026, the maximum exclusion is $132,900, up from $130,000 in 2025.
Here's what you need to know:
- What counts as earned income: Wages, salaries, bonuses, commissions, and self-employment income from services performed abroad. Passive income like dividends, interest, rental income, pensions, or capital gains, does not qualify.
- Who usually benefits: Expats working in low-tax or no-tax countries (like the UAE, Qatar, or Monaco) save the most. If you're in a high-tax country (Germany, France, UK), the Foreign Tax Credit (Form 1116) might be better.
- Filing is still required: The FEIE doesn't remove your US filing obligation – even if all your income is excluded, you must still file Form 1040 and attach Form 2555. The exclusion simply reduces your taxable income.
As of 2026, the IRS inflation adjustment raised the FEIE limit to $132,900. You can claim this exclusion annually, but you must meet strict residency requirements and file the form correctly to avoid losing the benefit.
Who is eligible to file Form 2555 (Foreign Earned Income Exclusion)?
Not everyone working abroad qualifies. Use this checklist to see if you meet the requirements:
-
You have foreign earned income
Only income from active work – wages, salaries, bonuses, or self-employment earnings – performed in a foreign country qualifies. Passive income (dividends, interest, capital gains) does not. -
Your tax home is in a foreign country
A tax home is where your main place of business or employment is located. If your primary work remains in the US, you're not eligible. Many people confuse "tax home" with "abode" (where you live) – they're different. Your tax home is tied to your job location, not your residence. -
You pass the Physical Presence Test or the Bona Fide Residence Test
You must meet one of these: either be physically present abroad for at least 330 full days in any 12-month period, or live as a bona fide resident of a foreign country for an entire tax year (January 1–December 31). -
You're not a US government employee abroad
Income paid by the US government to its employees overseas doesn't qualify. However, if you work for a private contractor serving the US government, you may still be eligible based on the other criteria.
For full details, see IRS Form 2555 instructions and expat tax obligations.
The Physical Presence Test
The Physical Presence Test requires you to be physically present in one or more foreign countries for at least 330 full days during any 12-month consecutive period. Each qualifying day must be a full 24-hour period starting at midnight.
What is a "full day"?
A full day begins at midnight and ends at midnight (local time where you are). If you depart a foreign country at 11 PM, that day does not count. If you arrive at 1 AM, that day does not count either.
Example: You leave France on June 15 at 10 PM. June 15 does not count as a full day abroad.
Travel day pitfalls
- Days in transit don't count: If you fly from London to New York, the day you're in the air over international waters doesn't count as a day in a foreign country.
- Partial days in the US break the count: Even a few hours on US soil (including layovers) means that day doesn't count toward your 330.
Sample 12-month window
Your 12-month period does not have to match the calendar year. You can choose any consecutive 12 months that give you the most qualifying days.
Example: You arrive in Singapore on March 1, 2025, and stay until February 28, 2026, taking only two short trips to the US (3 days each). You'd have 330+ full days in Singapore during the 12-month period from March 1, 2025, to February 28, 2026 – so you qualify.
The Bona Fide Residence Test
The Bona Fide Residence Test requires you to be a resident of a foreign country for an entire calendar year (January 1 – December 31) with no defined end date to your stay. You must demonstrate substantial ties to that country – not just physical presence.
Proof the IRS looks for:
- Valid work visa or residency permit
- Long-term lease or property ownership
- Local tax residency (filed foreign tax returns, registered as a resident)
- Family living with you abroad
- Bank accounts, driver's license, local memberships
Common IRS red flags:
- Frequent trips back to the US (especially if staying for months at a time)
- A short-term employment contract that shows you plan to return to the US soon
- Maintaining a permanent home in the US while claiming foreign residency
If you maintain strong ties to the US or your foreign stay is clearly temporary, the IRS may deny your claim even if you were abroad the full year.
The Foreign Housing Exclusion
If you live abroad, you may also reduce your US tax liability through the Foreign Housing Exclusion – a provision that offsets the high cost of housing in foreign countries.
How it works:
The exclusion applies to qualified housing expenses (rent, utilities, insurance) that exceed a base housing amount. For 2025, the base is $20,800 annually (16% of the FEIE limit of $130,000), or roughly $56.99 per day. For 2026, with the FEIE at $132,900, the base will adjust accordingly.
General cap:
You can exclude up to $39,000 in housing expenses for tax year 2025 (30% of the $130,000 FEIE limit). For tax year 2026, this increases to $39,870 (30% of the $132,900 FEIE limit). However, certain high-cost cities have higher caps – see IRS Notice 2025-16 for the full list.
Exclusion vs deduction:
-
Employees claim the housing exclusion (reduces taxable income directly)
- Self-employed individuals claim the housing deduction (taken as an adjustment to income)
You report housing costs in Parts VI, VIII, and IX of Form 2555. For more details, refer to the IRS guidance on the housing exclusion or deduction.
Also read. Foreign Housing Exclusion guide
Form 2555 vs. Form 1116: which should you file?
Many expats wonder whether to use the Foreign Earned Income Exclusion (Form 2555) or the Foreign Tax Credit (Form 1116). The right choice depends on your income type and the tax rate in your host country.
Quick decision guide:
- Low-tax or no-tax countries (UAE, Saudi Arabia, Monaco) → use Form 2555 to exclude income
- High-tax countries (Germany, France, UK) → often better to claim Foreign Tax Credit on Form 1116
- Mixed income (wages + dividends) → you may use Form 2555 for earned income and Form 1116 for passive income, but you cannot claim FTC on income you've already excluded
| Form 2555 – FEIE | Form 1116 – FTC | |
|---|---|---|
| Purpose | Excludes earned income from US taxation | Offsets US tax by crediting foreign taxes paid |
| Best for | Expats in low-tax or no-tax countries | Expats in high-tax countries |
| Type of income | Earned income only (wages, salary, self-employment) | Both passive and earned income |
| Tax savings limit | 2026 limit is $132,900 | No fixed cap – limited by foreign tax paid and FTC limitation rules |
| Form location | Attached to Form 1040 | Attached to Form 1040 |
| Impact on credits | May reduce eligibility for certain credits (like the Additional Child Tax Credit); IRA deduction limits may apply if using FEIE | May retain eligibility for some credits |
| Penalty risk if filed late | May lose exclusion if not filed timely | Late filing can reduce credit carryovers |
| Revoke and re-elect | 5-year restriction on revocation without IRS consent | No revocation restriction |
| Example scenario | Self-employed in Dubai with no local tax | Salaried in Germany paying 40%+ foreign taxes |
Important: If you use the FEIE to exclude income, you cannot claim the Foreign Tax Credit on that same income. You can, however, use Form 1116 to claim credit on non-excluded foreign income (like dividends or wages above the FEIE cap).
Also read. Form 1116 complete guide
IRS form 2555 instructions: step-by-step filing guide
Step 1: Gather your documents
Collect detailed records of all foreign earned income for the tax year – wages, salaries, bonuses, commissions, and self-employment income earned outside the US.
Step 2: Determine which residency test you pass
Confirm you qualify under either the Physical Presence Test (330 full days abroad in a 12-month period) or the Bona Fide Residence Test (full calendar year abroad). You'll complete Part III for Physical Presence or Part II for Bona Fide Residence.
Step 3: Confirm your tax home location
Your tax home must be in a foreign country during the qualifying period. Complete Part I of Form 2555.
Step 4: Calculate your Foreign Earned Income Exclusion
Use Part VII to calculate the exclusion. The maximum for 2026 is $132,900. If you qualify for only part of the year, the exclusion is prorated based on the number of qualifying days.
Step 5: Claim the Foreign Housing Exclusion or Deduction (if applicable)
If you have qualified housing expenses, complete Parts VI and VIII (for employees) or Part IX (for self-employed). Use IRS location-specific limits and the daily base threshold of $56.99 (for 2025).
Step 6: Attach Form 2555 to your Form 1040
Submit Form 2555 with your Form 1040 or 1040-SR. If living abroad, you automatically receive a two-month extension, moving the filing deadline to June 15, 2026, for 2025 tax returns (filed in 2026). You can request additional time with Form 4868 to extend until October 15, 2026.
Where numbers go: Form 2555 to Form 1040 mini map
Form 2555 calculates your Foreign Earned Income Exclusion (and any housing exclusion/deduction) and produces the amounts to report on Form 1040.
- FEIE amount → Form 1040, Schedule 1 (Additional Income and Adjustments): entered as the FEIE line item, then flows to Form 1040 line 8 (via Schedule 1).
- Foreign housing exclusion (employees) → also reflected through Schedule 1 (as part of the exclusion reporting flow).
- Foreign housing deduction (self-employed) → appears on Schedule 1, line 24j, reducing your AGI (the income exclusion appears on Schedule 1, line 8d, and flows to Form 1040, line 8).
- Excluded income still matters for computing your tax rate (the IRS "stacking rule"): it's excluded from taxable income but used in the rate calculation worksheet tied to Form 2555 instructions.
- If you claim Foreign Tax Credit (FTC), that is separate: Form 1116 → Schedule 3 → Form 1040 line 20.
- If you use FEIE, you generally can't claim FTC on the same excluded income, so the amounts you put on Form 1116 must be for non-excluded foreign-source income.
Note: Exact Schedule/line labels can shift slightly by tax year; the flow above matches the IRS instructions framework for Form 2555 + 1116.
Documents you need
- Foreign income proof: Pay stubs, employment contract, year-end wage statement (foreign equivalent of W-2), or self-employment records/invoices.
- US income forms (if any): W-2, 1099s (to reconcile total income on the return).
- Travel log for the Physical Presence Test: Entry/exit dates, boarding passes, passport stamps, itinerary records. Many expats use a spreadsheet or app to track their daily activities abroad.
- Residency support for Bona Fide Residence: Residency permit/visa, lease, utility bills, local registration, and foreign tax returns showing you as a resident.
- Housing expense records (if claiming housing): Rent receipts, utilities (eligible ones), insurance (if eligible), plus proof of location (city/country) for higher-limit localities.
- Foreign taxes paid documentation (if also claiming FTC on non-excluded income): Foreign tax return, withholding statements, payment receipts.
- Prior-year return/Form 2555: (if continuing FEIE) to keep elections consistent and avoid re-election issues.
How Form 2555-T is different from IRS Form 2555
You might see "Form 2555-T" mentioned in tax software – but it's important to know this is not an IRS-issued form.
What is it?
Form 2555-T is typically a software-generated worksheet that summarizes your foreign-earned income, travel dates, and eligibility inputs. Tax programs (like TurboTax or H&R Block) use it to collect the information they need to generate the actual IRS Form 2555 (Foreign Earned Income).
Why does it exist?
It shows up when the software needs your Physical Presence or Bona Fide Residence dates to calculate your exclusion correctly. Once you fill it out, the software auto-populates the official Form 2555 that gets attached to your return.
Bottom line: Form 2555-T is just a helper tool. The actual filing form is IRS Form 2555, which supports the FEIE and housing exclusion/deduction.
Form 2555 preview
Common mistakes to avoid
Failing the residency tests
Missing the 330-day rule or full calendar year requirement disqualifies your claim. If you filed incorrectly, amend with Form 1040-X and corrected dates. Track your days carefully – even one day short of 330 can cost you the entire exclusion.
Miscalculating exclusions
Using outdated figures causes errors. For 2026, the maximum FEIE is $132,900 and the base housing amount is $56.99 per day (for 2025; check IRS updates for 2026). Double-check the IRS inflation adjustments each year.
Filing late
If you miss the April deadline without an extension, you risk penalties and losing the exclusion entirely. Expats abroad get an automatic extension to June 15, 2026 (for 2025 returns), and can request more time with Form 4868 (extending to October 15, 2026). Remember: an extension to file is not an extension to pay – you still owe estimated taxes by the original deadline.
Wrong tax home or abode
The IRS can deny your exclusion if they determine your "tax home" is still in the US – or that your "abode" (family, permanent home, ties) never shifted abroad. Document your foreign residency clearly.
Including non-earned income
Passive income (dividends, interest, rental income, capital gains, pensions) does not qualify for the FEIE. Only include wages, salaries, bonuses, and self-employment income from services performed abroad.
State residency assumption
Moving abroad doesn't automatically end your state tax obligations. Some states (California, Virginia, South Carolina, New Mexico) have strict domicile rules and may continue to tax you even if you're living overseas. Check your state's rules and formally change your domicile if necessary.
Not amending mistakes promptly
If you discover an error after filing, amend immediately with Form 1040-X. The IRS is more lenient if you self-correct before they catch the mistake.
Need help? Speak with a seasoned tax advisor
Navigating Form 2555 can be complex – between qualifying residency tests, housing exclusions, and strict filing deadlines, there's a tendency of error.
Let Taxes for Expats handle it for you – our licensed tax professionals specialize in US expat returns and will ensure your Form 2555 is filed accurately and on time.
We can clear your doubts.
FAQ
No. The Foreign Earned Income Exclusion only reduces your income tax. You still owe self-employment tax (Social Security and Medicare) on your net self-employment earnings, even if that income is excluded from income tax via Form 2555.
No. You cannot claim the Foreign Tax Credit (Form 1116) on income you've already excluded with Form 2555. However, you can use Form 2555 for earned income and Form 1116 for passive income (like dividends) on the same return.
You can still qualify using the Physical Presence Test just make sure you have 330 full days abroad within any 12-month period, even if it spans two tax years. Your exclusion will be prorated based on the number of qualifying days.
Yes. US citizens and resident aliens must file a return regardless of whether they owe tax. The FEIE reduces your taxable income, but it doesn't eliminate the filing requirement.
It depends. Some states (like California, Virginia, and South Carolina) have strict domicile rules and may still consider you a resident even if you're abroad. You may need to file a state return and formally establish residency elsewhere.
Wages, salaries, bonuses, professional fees, and self-employment income from services you performed in a foreign country. Passive income (dividends, interest, rental income, pensions, capital gains) does not qualify.
Stay IRS-compliant with your business abroad – we’re ready to help