If you are claiming the foreign earned income exclusion only, you can use Form 2555. In some circumstances, you can use Form 2555-EZ to claim the foreign earned income exclusion. You must file one of these forms each year you are claiming the exclusion.
If you are claiming either the foreign housing exclusion or the foreign housing deduction, you must use Form 2555. You cannot use Form 2555-EZ. Form 2555 shows how you meet the bona fide residence test or physical presence test, how much of your earned income is excluded, and how to figure the amount of your allowable housing exclusion or deduction.
Do not submit Form 2555 or Form 2555-EZ by itself.taxmap/pubs/p54-013.htm#en_us_publink100047547
Form 2555-EZ has fewer lines than Form 2555. You can use this form if all seven of the following apply.
- You are a U.S. citizen or a resident alien.
- Your total foreign earned income for the year is $87,600 or less.
- You have earned wages/salaries in a foreign country.
- You are filing a calendar year return that covers a 12-month period.
- You did not have any self-employment income for the year.
- You did not have any business or moving expenses for the year.
- You are not claiming the foreign housing exclusion or deduction.
If you claim exclusion under the bona fide residence test, you should fill out Parts I, II, IV, and V of Form 2555. In filling out Part II, be sure to give your visa type and the period of your bona fide residence. Frequently, these items are overlooked.
If you claim exclusion under the physical presence test, you should fill out Parts I, III, IV, and V of Form 2555. When filling out Part III, be sure to insert the beginning and ending dates of your 12-month period and the dates of your arrivals and departures, as requested in the travel schedule.
You must fill out Part VI if you are claiming a foreign housing exclusion or deduction.
Fill out Part IX if you are claiming the foreign housing deduction.
If you are claiming the foreign earned income exclusion, fill out Part VII.
Finally, if you are claiming the foreign earned income exclusion, the foreign housing exclusion, or both, fill out Part VIII.
If you and your spouse both qualify to claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, you and your spouse must file separate Forms 2555 to claim these benefits. See the discussion earlier under Separate Households. taxmap/pubs/p54-013.htm#en_us_publink100047549
Jim and Judy Adams are married and have two dependent children. They are both U.S. citizens and they file a joint U.S. income tax return. Each one has a tax home in a foreign country and each meets the physical presence test for all of 2008. They both can exclude their foreign earned income up to the limit. Their qualified housing expenses are limited to 30% of the maximum foreign earned income exclusion.
Jim is a petroleum engineer. For 2008, his salary, which was entirely from foreign sources was $74,000. In addition, his employer provided him an annual housing allowance of $18,000, which he used to maintain a rented apartment at his tax home in City A, Country X (which is not a high-cost locality), for the period he was not working at remote drilling sites.
At various times during the year, Jim worked at remote oil drilling sites. While he worked at these remote sites, his employer provided him lodging and meals at nearby camps. Satisfactory housing was not available on the open market near these drilling sites, and the lodging was provided in common areas that normally accommodated 10 or more employees and were not available to the general public. The fair market value of the lodging he was provided in these camps was $2,000, and the value of the meals was $1,000.
After he made an adequate accounting, Jim was reimbursed by his employer for part of his travel expenses and other employee business expenses. Jim had $2,500 of unreimbursed employee business expenses for travel, meals, and lodging that were allocable to his foreign earned income.
Because of adverse conditions in Country X, Judy and the children lived in City Y, Country Y (which is not a high-cost locality), where she worked as an executive secretary with a U.S. company. Her earnings from this job were $47,000. These earnings were subject to foreign income tax.
The Adams family rented an apartment in Country Y for Judy and the children. They paid $1,000 a month rent, including utilities, or $12,000 for the year. The Adamses choose to treat the expenses for the apartment as those for a qualified second foreign household. They include the $12,000 Country Y housing expenses with Jim's $18,000 Country X housing expenses. This results in a larger total housing exclusion.
Jim and Judy had taxable U.S. interest income of $7,500 for the year. The Adamses had no other income for the year and do not itemize deductions.
The Adamses report their income and figure their foreign earned income exclusions and foreign housing exclusion, as shown on the accompanying filled-in forms.
First, they list their income on the front of Form 1040. Their combined salaries, including Jim's $18,000 housing allowance, total $139,000. They enter this on line 7. They enter their interest income of $7,500 on line 8a.
At this point, Jim will complete Form 2555 and Judy will complete Form 2555-EZ to figure their foreign earned income and housing exclusions.taxmap/pubs/p54-013.htm#en_us_publink100047550
On Jim's Form 2555, Part IV, he lists his salary on line 19, his housing allowance on line 22e, and the fair market value of meals and lodging provided in camps by his employer on lines 21a and 21b. The entries on lines 21a and 21b are not shown as income on Form 1040. Jim enters the total of these two entries on line 25 of Form 2555.
Jim combines his housing expenses, $18,000, with the qualified expenses for the second household, $12,000, and enters total housing expenses of $30,000 on line 28. His limit on housing expenses is $26,280 (30% of $87,600) because his qualifying period includes all of 2008 and the expenses were not incurred in high-cost localities. Jim enters $26,280 on lines 29b and 30. This is the limit on his housing expenses. He puts a base housing amount of $14,016 on line 32 and subtracts that amount to arrive at a total foreign housing amount of $12,264 on line 33. He figures a housing exclusion of $12,264 on line 36.
Jim figures his foreign earned income exclusion in Part VII of Form 2555. Because his foreign earned income ($92,000) is more than the maximum exclusion of $87,600, he must reduce the income by the housing exclusion. The foreign earned income exclusion on line 42 is $79,736 ($92,000 – $12,264).
When Jim combines this exclusion of $79,736 with his housing exclusion of $12,264 he comes up with a total exclusion of $92,000 in Part VIII.
The Adamses cannot deduct any of Jim's unreimbursed employee business expenses because they are all allocable to excluded income. However, the Adamses are still entitled to the full standard deduction for a married couple filing jointly.taxmap/pubs/p54-013.htm#en_us_publink100047551
Judy completes a Form 2555-EZ to figure her foreign earned income exclusion. Her foreign earned income is less than the maximum excludable amount. On Judy's Form 2555-EZ, Part IV, she lists her salary on line 17. She figures an exclusion of $47,000 on line 18.
The Adamses enter their combined exclusions of $139,000 on line 21, Form 1040. They identify this item to the left of the entry space. Their adjusted gross income on line 37 is $7,500 (their investment income), which does not qualify for exclusion.