If you are working and/or living abroad and meet certain requirements, you may be eligible to use the Foreign Earned Income Exclusion. If you meet the requirements, you can complete Form 2555 to exclude your foreign wages or salary from income earned in the foreign country. You may also qualify to exclude compensation for certain foreign housing costs or your personal services.
Am I Eligible?
To be eligible for this exclusion, a citizen of the United States or a resident alien must have a tax home in a foreign country and they must receive income for working in the foreign country. This is commonly referred to as foreign earned compensation (FEC). The taxpayer must also meet one of two tests.
Bona Fide Residence Test
The Bona Fide Residence Test: You must reside an entire tax year, January 1 through December 31, to be eligible for the bona fide residence, in a foreign country for an uninterrupted period. You may leave the country for temporary or brief trips to the United States or elsewhere, during the period of bona fide residence in a foreign country.
You must have a clear objective to return from these trips, without unreasonable delay, to retain your status as a bona fide resident of a foreign country. You can return to your foreign residence or to a new bona fide residence in another foreign country.
Physical Presence Test
The Physical Presence Test: Generally, you must be physically present for at least 330 full days during the 12-month period, in a foreign country or countries, to meet the physical presence test. You can count days spent abroad for any reason.
If family problems, illness, a vacation, or by employer’s order, cause you to be abroad for less than 330 days in a 12-month period, you do not meet the Physical Presence Test.
What if I do not meet the criteria of either test?
If your being present in a foreign country is in violation of United States law, you are not treated as being physically present or as a bona fide resident in the foreign country while in violation of the U.S. law. Income earned within such a country during the period of violation would not qualify as foreign earned income.
If you must leave a foreign country due to civil unrest, war or similar condition, the two tests may be waived. You must provide evidence that you are expected to meet, if not for the situation, the minimum time requirements. In order to implement the waiver, you must have had a tax home in the foreign country and were physically present in or a bona fide resident of, the foreign country on or before the start date of the waiver.
Reporting the Foreign Income
You must first report this income on your tax return in order for it to then be excluded from the total income. If the income was reported to you on a US tax form, it will be entered into your account in the appropriate section.
If it is foreign compensation, you can enter this into your account by going to:
- Federal Section
- Less Common Income
- Other Compensation
- Foreign Earned Compensation
How do I exclude my foreign earned income?
To enter the Foreign Earned Income Exclusion (Form 2555), go to:
- Federal Section
- Less Common Income
- Foreign Earned Income Exclusion Form 2555
2020 COVID-19 Waiver (for tax year 2020 only)
Due to the global health emergency caused by the COVID-19 pandemic the IRS is providing a waiver of the time requirements that allow a qualified individual to exclude foreign earned income and the housing cost amount from income. If your tax home was in a foreign country, and you reasonably expected to meet either the bona fide residence test or physical presence test during 2019 or 2020, but failed to do so, you may be entitled to the waiver.
If due to the COVID-19 emergency, you left:
- The People's Republic of China, excluding the Special Administrative Regions of Hong Kong and Macau (China), on or after December 1, 2019, but on or before July 15, 2020; or
- Any other foreign country on or after February 1, 2020, but on or before July 15, 2020; you will be treated as having met the physical presence or bona fide residence test if you could establish a reasonable expectation that you would have met either test if it had not been for the COVID-19 emergency.
Note: To request this waiver for 2020, write "Revenue Procedure 2020-27" across the top margin of your Form 2555.