Form 2555 & Form 2555-EZ

Form 2555 can be used to claim the foreign earned income exclusion. It must be used to claim the foreign housing exclusion or deduction. In some circumstances you can use Form 2555-EZ to claim the foreign earned income exclusion.

You must attach Form 2555 to your Form 1040 or 1040X if you claim the foreign housing exclusion or the foreign housing deduction. If you cannot use Form 2555-EZ, you must attach Form 2555 if you claim the foreign earned income exclusion. Form 2555 shows how you qualify for 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. See the instructions for the forms if you are not sure about the information requested.

Form 2555-EZ

Form 2555-EZ is a form that has fewer lines than Form 2555. You can use this form if all seven of the following apply.

1. You are a U.S. citizen or a resident alien.
2. Your total foreign earned income for the year is $76,000 or less.
3. All of your foreign earned income for the year is reported on Form 1040, line 7.
4. You are filing a calendar year return that covers a 12-month period.
5. You did not have any self-employment income for the year.
6. You did not have any business or moving expenses for the year.
7. You are not claiming the foreign housing exclusion or deduction.

Form 2555

If you claim exclusion under the bona fide residence test, you should fill out Parts II, IV, and V of Form 2555 as well as Part I. 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 III, IV, and V of Form 2555 as well as Part I. 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.

In addition, you must fill out Part VI if you are claiming an exclusion or deduction of foreign housing amounts. Also 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 each qualify under the bona fide residence test or the physical presence test to claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, you must each file a separate Form 2555 to claim these benefits. See the discussion earlier under Married Couples Living Apart.

Illustrated Example

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 2000. They both can exclude their foreign earned income up to the limit.

Jim is a petroleum engineer. He works primarily in the Persian Gulf region. For 2000, his salary, which was entirely from foreign sources, amounted to $71,000. 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 Country X for the period he was not working at remote drilling sites.

At various times during the year, Jim worked at remote oil drilling sites in nearby countries. 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 Paris, France, while Jim worked in the Middle East. Judy had a job as an executive secretary with a U.S. company in Paris. Her earnings from this job were $44,000. These earnings were subject to French income tax.

The Adams family rented an apartment in Paris during 2000 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 Paris apartment as those for a qualified second foreign household, because conditions at Jim's tax home in Country X are considered to be adverse. They include the $12,000 Paris housing expenses with Jim's $18,000 Country X housing expenses and this results in a larger total housing exclusion.

Jim and Judy had taxable U.S. interest and dividend 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, 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, amount to $133,000. They enter this on line 7 and their interest and dividend income of $7,500 on lines 8a and 9.

At this point, Jim will complete Form 2555 and Judy will complete Form 2555-EZ to figure their foreign earned income and housing exclusions.

Jim's Form 2555. 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 that he maintains for his wife and children, $12,000, and enters total housing expenses of $30,000 on line 28. He puts a base amount of $10,171 on line 30 and subtracts that amount to arrive at a total foreign housing amount of $19,829 on line 31. He figures an exclusion of $19,829 for amounts provided by his employer on line 34.

Although Judy could claim a separate housing exclusion for the expenses of the Paris apartment rather than combining those expenses with Jim's housing expenses, she does not do so because she would have to reduce her expenses by a separate base housing amount. Also, her foreign earned income is less than the $76,000 maximum foreign earned income exclusion, so claiming a separate housing exclusion would not result in any tax benefit.

Jim figures his foreign earned income exclusion in Part VII of Form 2555. Because his foreign earned income minus his housing exclusion is less than the maximum exclusion of $76,000, Jim is only entitled to exclude $69,171 for 2000 ($89,000 - $19,829).

When Jim combines the exclusion of $69,171 with his housing exclusion of $19,829 he comes up with a total exclusion of $89,000 in Part VIII.

None of his unreimbursed employee business expenses are allowable 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.

Judy's Form 2555-EZ. Judy completes a Form 2555-EZ to figure her foreign earned income exclusion. Her foreign earned income is less than the maximum excludable amount ($76,000). On Judy's Form 2555-EZ, Part IV, she lists her salary on line 17. She figures an exclusion of $44,000 on line 18.

The Adamses enter their combined exclusions of $133,000 on line 21, Form 1040. They identify this item to the left of the entry space. Their adjusted gross income on line 33 is $7,500, their investment income, which does not qualify for exclusion.

Form 1040, page 1 for James and Judith Adams

Form 2555, page 1 for James Adams

Form 2555, page 2 for James Adams

Form 2555, page 3 for James Adams

Form 2555-EZ, pages 1 and 2 for Judith Adams

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