Items you will need
- W-2s or host country equivalent
- Other income information
- Housing payment or subsidy information
- Housing interest amounts
American expatriates can use IRS Form 2555 (or 2555EZ) to report income earned in foreign countries provided they meet residency requirements established by the Internal Revenue Service. You must be a U.S. citizen or U.S. resident alien living in a foreign country and meet the “bona fide” or “physical presence” tests. Form 2555 allows you to exclude part or all of your income, as well as providing for a housing allowance deduction. Because the income exclusion is fairly high ($91,500 for tax year 2010), filing Form 2555 often is a formality — although a long, complicated one — that results in no U.S. taxes being due.
Read IRS instructions pertaining to foreign residency requirements for filing Form 2555. Part II pertains to the Bona Fide Residency Test and Part III is the Physical Presence Test. U.S. citizens or U.S. resident aliens basically must reside in a foreign country for a an uninterrupted tax year to be considered a bona fide resident, while the physical presence test requires 330 days of residency out of a continuous 12-month period.
Download and read the abbreviated version of IRS instructions for Form 2555. This is a concise and more palatable rendition of the official IRS instructions for Form 2555, which run 11 pages. Pay particular attention to the income exclusions -- $91,500 for each individual, meaning married couples who each earn money both must file a Form 2555 and their total exclusion would be $183,000 -- and the housing allowance deductions. The housing deductions are on top of any income exclusions and can exceed your income exclusions depending on where in the world you live. For example, if you live in a country where housing expenses are high, such as Hong Kong, your housing deduction could exceed $100,000 to a $107,000 maximum. The U.S. government provides a list of countries, broken down by city, on the instructions to Form 2555. There also are residency waivers and exclusions as well as information about filing deadlines, extensions and amendments.
Complete Form 2555 -- complete Form 2555EZ if you don’t have income that exceeds the $91,500 maximum and you have no housing deductions. You can download the IRS form online. Form 2555 is a three-page document that resembles Form 1040. You’ll have to include personal information, such as home address, country, employer and citizenship status. You’ll then choose to complete Part II or Part III, depending on your “bona fide residence” or “permanent residence” status, then report income information in parts IV and V. Part VI is your housing deduction section, Part VII is the foreign income exclusion, and parts VIII and IX are the tallying sections for income and housing deductions. A little homework and preparation goes a long way in demystifying Form 2555. Once you know your residency status, income exclusion amount and your housing deduction allowance, it’s a matter of simply inputting and adding a series of numbers.
Sign the form and mail it to the IRS. Individuals should send their forms to:
Department of the Treasury Internal Revenue Service Austin, TX 73301-0215 USA
There are different addresses for tax preparers and for citizens of Guam and the Virgin Islands.
If you earned more than the $91,500 in income exclusions and/or the $107,000 maximum housing allowance, and you paid taxes to your host country, you can additionally file Form 1116. Form 1116 provides a dollar-for-dollar tax deduction for taxes paid to foreign governments.
Employees of the U.S. government who earned all their income exclusively from the government cannot file Form 2555.
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