Where to report foreign income on Form 1040 – and how to exclude it legally

US citizens and green card holders must report their worldwide income – no matter where they live or earn it. The IRS enforces strict rules on disclosing foreign income – yet offers powerful exclusions that can ease the tax burden for expats. Knowing how to report foreign income on 1040 is essential not just for compliance, but for maximizing these legal benefits.

In this guide, you’ll discover exactly where to report your foreign income on Form 1040 – and how to legally reduce your US tax bill using the Foreign Earned Income Exclusion (FEIE).

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Step-by-step – where and how to report foreign income on Form 1040

Americans living abroad often wonder how to correctly report foreign earned income – and 1040 is the starting point for ensuring full IRS compliance. Below, we’ll walk through the key steps to help you file accurately and avoid costly mistakes.

1. Report your total worldwide income on the main Form 1040

Start with Line 1 of Form 1040 to report wages, and salaries – and if you’re self-employed, attach Schedule C to provide details on your business income and expenses. You must report foreign income – just like – US income, even if it’s already taxed abroad or eligible for an exclusion later. All income reported must be converted to US dollars using IRS-approved currency conversion rates – typically the yearly average unless a specific transaction date applies.

2. Use Form 2555 to claim the Foreign Earned Income Exclusion

If you’re living and working abroad, this step is your ticket to reducing double taxation – but only if you meet the IRS’s foreign residency rules.

Who qualifies for the Foreign Earned Income Exclusion:

• Your tax home is in a foreign country – This means your regular place of business or employment is outside the US, not just a temporary travel location.
• You meet the bona fide residence test – You’ve established genuine ties in another country and lived there for at least one full tax year.
• You meet the physical presence test – You’ve been physically present in one or more foreign countries for at least 330 full days during any 12-month period.

To exclude up to $130,000 of your foreign earned income (2025 limit), you’ll need to file Form 2555 along with your 1040. Be sure to fill out both forms carefully – the IRS requires exact dates, income amounts, and a declaration that you qualify under one of the two tests mentioned above.

3. Apply the exclusion to reduce taxable income

Once you've determined your eligibility for the FEIE and completed Form 2555, the next step is to apply the exclusion on your tax return. The excluded amount goes on Schedule 1 → Line 8d (or the equivalent for tax year 2025) – this line reports other income adjustments that reduce your total taxable income.

Adjusted gross income (AGI) is then recalculated automatically on Form 1040 based on your total income minus the foreign earned income exclusion and other allowable deductions. Here’s how that might look using a simplified breakdown:

In the example above, John’s $100,000 in foreign earned income is fully excluded under the FEIE – and since the 2025 threshold allows up to $130,000 per qualifying individual, his adjusted gross income drops to $6,500, significantly reducing his US tax liability.

4. Continue completing your 1040 as usual

After applying the Foreign Earned Income Exclusion, you’ll move on to the remaining sections of Form 1040 to finalize your return. This includes reporting any eligible credits that further reduce your tax liability.

Here are some common credits expats may claim:

1. Child Tax Credit (if eligible based on residency and SSN requirements)
2. Foreign Tax Credit (if you paid foreign income taxes and are not using the FEIE for the same income)
3. Credit for other dependents
4. Education credits (e.g., American Opportunity or Lifetime Learning Credit, if you qualify)
5. Saver’s Credit (for retirement contributions made while abroad)

Let’s go back to John – after excluding $100,000 in foreign earned income, his AGI is $6,500. If he has one child as a dependent, he qualifies for the Child Tax Credit, reducing his final tax owed even further – and based on standard rates and thresholds, he likely owes little to no US tax. At this point, 1040 will also calculate whether John is due a refund or must make a payment, based on withholding or estimated taxes paid.

How to fill out Form 2555 correctly

Form 2555 is your gateway to excluding foreign earned income from US taxation. Once you've determined you're eligible based on your residency status, it's time to complete the form step-by-step and attach it to your 1040. Here's how to do it right.

Part I – your foreign address and employer information

Enter your full foreign address as it appears in your local country of residence. Provide your employer’s name, address, and the type of work you perform abroad.

Part II – residency test: bona fide or physical presence

Bona fide: Fill in the start and (if applicable) end date of your bona fide residence abroad. If you're still a bona fide resident as of the end of the tax year, write continues.

Or

Physical: Record the dates you were physically present in a foreign country. Use Line 16 to list each period abroad, ensuring the total equals at least 330 days within a 12-month window.

Part III – entering your foreign earned income and housing costs

Convert all income to USD and enter it on Line 24. If applicable, include housing costs like rent or utilities, which may qualify for additional exclusions under the housing exclusion or deduction rules.

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Legal ways to reduce taxes with the foreign income exclusion

Living and working abroad doesn’t mean you’ll be taxed twice – the IRS provides several provisions to help reduce your tax bill when you report your foreign earned income on your US tax return.

If you qualify, you can legally reduce or even eliminate your US tax liability by using one or more of the following strategies:

→ Foreign Earned Income Exclusion allows you to exclude up to $120,000+ per person from taxable income for the 2023–2025 tax years.

→ Foreign housing exclusion offers additional relief if your housing costs exceed a certain threshold while living abroad.

→ When to use the Foreign tax credit instead – or in addition:

• if your foreign income tax rate is higher than the US rate
• if your income exceeds the FEIE limit
• if you receive unearned income like dividends, interest, or capital gains that aren’t covered under the FEIE.

Foreign income filing mistakes to avoid

Even seasoned expats trip up when reporting foreign income. Here’s how to stay in the clear with the IRS:

Need help reporting foreign income? Talk to a tax expert who gets it

Not sure if you’ve met the IRS’s foreign income reporting rules – or overwhelmed by Form 2555, FBAR, or housing exclusions?

You don’t have to figure it out alone. At Taxes for Expats, our specialists work exclusively with Americans living abroad. We’ll make sure your return is accurate, compliant, and optimized – so you don’t miss exclusions, deductions, or critical filing deadlines.

Let’s take the stress out of expat taxes – together.