Form 2555
Foreign Earned Income Exclusion
Who Must File
US citizens and resident aliens who live and work abroad and want to exclude foreign earned income (up to the annual limit) and/or claim the foreign housing exclusion or deduction.
Deadline
Filed with Form 1040 by April 15 (auto-extended to June 15 for taxpayers abroad)
Penalty
No separate penalty, but failing to file forfeits the exclusion and may increase US tax liability significantly
Step-by-Step Filing Instructions
Determine eligibility: you must meet either the Bona Fide Residence Test or the Physical Presence Test.
Calculate the number of qualifying days in Canada (or other foreign country) during the tax year.
Identify your foreign earned income: wages, salaries, self-employment income earned while residing in Canada.
Complete Part I with your tax home and foreign address information.
Complete Part IV (Bona Fide Residence Test) or Part V (Physical Presence Test) with supporting details.
Calculate the maximum excludable amount and any housing exclusion on Parts VI through IX.
Attach Form 2555 to your Form 1040 and reduce your reported income by the excluded amount.
Tips & Best Practices
The Foreign Earned Income Exclusion and the Foreign Tax Credit (Form 1116) cannot be applied to the same income; plan which provides the greater benefit.
Canadians who moved to the US mid-year may qualify for a partial-year exclusion on income earned in Canada before the move.
The Physical Presence Test requires 330 full days in a foreign country during any consecutive 12-month period.
Self-employment tax still applies even if you exclude the income from US income tax.
You must file a timely return (including extensions) to elect the FEIE; a late filing can forfeit the exclusion.
Frequently Asked Questions
Can I claim both the Foreign Earned Income Exclusion and the Foreign Tax Credit?
You can claim both, but not on the same income. The FTC (Form 1116) applies only to income that is not excluded under Form 2555. Many cross-border filers find the FTC more beneficial overall.
Does the exclusion apply to Canadian investment income?
No. The FEIE applies only to foreign earned income (wages, salary, self-employment). Passive income such as dividends, interest, rental income, and capital gains is not eligible for exclusion.
What happens if I revoke the FEIE election?
If you revoke the FEIE election, you cannot re-elect it for 5 tax years without IRS approval. Consider the long-term implications carefully before revoking.
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