How to Report the Foreign Earned Income Exclusion on a Tax Return

The Foreign Earned Income Exclusion (FEIE) allows U.S. citizens and resident aliens working abroad to reduce their U.S. tax liability. This provision helps prevent double taxation, where income might otherwise be taxed by both the foreign country where it was earned and by the United States. The exclusion applies specifically to earned income, such as wages, salaries, and professional fees, received for services performed in a foreign country. It does not extend to passive income sources, including dividends, interest, rental income, or Social Security benefits.

Understanding Eligibility Requirements

Qualifying for the Foreign Earned Income Exclusion depends on meeting specific criteria established by the Internal Revenue Service (IRS). A fundamental requirement is that an individual’s “tax home” must be in a foreign country throughout their period of residence or presence. This means the individual’s main place of business, employment, or post of duty must be located outside the United States.

Beyond the tax home requirement, individuals must satisfy one of two tests: the Bona Fide Residence Test or the Physical Presence Test. Both tests determine if an individual has established sufficient ties to a foreign country to qualify for the exclusion. The choice between these tests often depends on the nature and duration of an individual’s stay abroad.

Bona Fide Residence Test

The Bona Fide Residence Test assesses whether an individual has established a genuine residence in a foreign country for an extended period. To meet this test, a U.S. citizen or resident alien must be a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. For most taxpayers, an entire tax year spans from January 1 through December 31.

This test is qualitative, meaning the IRS considers the individual’s intentions and the permanence of their stay. Simply living abroad for a year does not automatically grant bona fide resident status; the individual must demonstrate an intention to reside there indefinitely, rather than for a temporary work assignment with a defined end date. Documentation supporting this intent may include a long-term visa, local tax filings, local health insurance, or a long-term lease for a home. Meeting this test offers greater flexibility for brief visits back to the United States without jeopardizing eligibility.

Physical Presence Test

The Physical Presence Test provides a more objective, quantitative method for qualifying for the FEIE. This test requires an individual to be physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months. A “full day” is defined as a 24-hour period.

The 12-month period for this test is flexible; it can begin on any day of any month and does not need to align with the calendar year. The 330 qualifying days do not need to be consecutive, allowing for occasional travel outside the foreign country during the 12-month period. Unlike the Bona Fide Residence Test, this test does not consider the individual’s intentions about returning to the United States or the kind of residence established. In limited circumstances, the minimum time requirement may be waived if an individual is forced to leave a foreign country due to war, civil unrest, or similar adverse conditions.

Completing Form 2555

Form 2555, “Foreign Earned Income,” is the specific IRS form used to claim the Foreign Earned Income Exclusion and the Foreign Housing Exclusion or Deduction. This form must be completed and attached to an individual’s main tax return, typically Form 1040 or Form 1040-SR, to properly claim these benefits.

Part I, General Information, collects basic taxpayer details, including name, Social Security number, foreign address, occupation, and employer information. It also asks about the individual’s tax home and whether Form 2555 has been filed in previous years.

Depending on which eligibility test is met, individuals will complete either Part II or Part III. If qualifying under the Bona Fide Residence Test, Part II requires details such as the dates of foreign residence and confirmation that the residency included an entire tax year. For those meeting the Physical Presence Test, Part III involves listing the dates of presence in foreign countries and any travel to the United States during the 12-month qualifying period.

Part IV, Foreign Earned Income, is where all foreign earned income received during the tax year must be reported. This includes wages, salaries, professional fees, and certain allowances or reimbursements, all converted to U.S. dollars.

Part VI is dedicated to calculating the Foreign Housing Exclusion or Deduction. This section requires individuals to itemize their qualified housing expenses paid or incurred in the foreign country. Qualified housing expenses may include rent, utilities (excluding telephone costs), real estate taxes, and certain repairs. There is a base housing amount, which for 2024 is $20,240 and for 2025 is $20,800, that is considered a non-excludable portion of housing costs. The maximum housing exclusion is generally limited to 30% of the maximum foreign earned income exclusion, which for 2024 is $37,950. Higher limits may apply to individuals residing in officially designated high-cost foreign locations. The housing exclusion applies to employer-provided amounts, while the housing deduction is for amounts paid from self-employment earnings.

After determining the housing exclusion, Part VII is used to calculate the Foreign Earned Income Exclusion. The maximum exclusion amount is adjusted annually for inflation. For the 2024 tax year, the maximum foreign earned income exclusion is $126,500, increasing to $130,000 for the 2025 tax year. If the qualifying period covers less than a full tax year, the maximum exclusion amount must be prorated based on the number of qualifying days. If both spouses in a married couple qualify and work abroad, each spouse can claim the exclusion separately, provided they meet the eligibility requirements individually.

Part VIII summarizes the total exclusions claimed, combining the foreign earned income exclusion and any housing exclusion. For self-employed individuals, Part IX is used to compute any housing deduction that may apply.

Transferring the Exclusion to Your Main Tax Form

Once Form 2555 has been completed and the excludable amounts calculated, the next step involves transferring this information to your main U.S. income tax return, typically Form 1040 or Form 1040-SR. Form 2555 must be physically attached to your Form 1040 when filing your tax return.

Individuals must first report their total worldwide income on the appropriate lines of Form 1040. For instance, wages and salaries are generally reported on Line 1 of Form 1040. If an individual is self-employed, their business income and expenses are reported on Schedule C, which then flows to Form 1040.

The calculated foreign earned income exclusion amount from Form 2555 will then reduce this reported worldwide income. Specifically, the amount of the Foreign Earned Income Exclusion, derived from Part VIII of Form 2555, is entered as a negative figure on Schedule 1 (Form 1040), Line 9, titled “Other Income.” Schedule 1 aggregates various income adjustments, and the exclusion effectively reduces the adjusted gross income reported on the main Form 1040.

While the Foreign Earned Income Exclusion can significantly reduce an individual’s regular income tax liability, it does not reduce self-employment tax. Self-employed individuals residing abroad remain responsible for paying self-employment taxes, which cover Social Security and Medicare contributions, on their net earnings regardless of the FEIE.