Foreign Income Exclusion Form 2555

As a US citizen or a resident alien you are taxed on your global income earned wherever in the world. However, if you are living outside the country and also residing there, you can earn a Foreign Income Exclusion on the income earned abroad. This reduces your total taxable income in the US. Is the concept of Foreign Income Exclusion this simple?

No, it’s not. There are various terms and conditions which must be fulfilled before you become eligible to avail the benefits of Foreign Income Exclusion. Let us understand what these conditions are –

Who is eligible for Foreign Income Exclusion?

US citizens and resident aliens would be deemed eligible for claiming a Foreign Income Exclusion if they satisfy all the following three criteria:

1. US citizens or resident aliens should have a foreign earned income
2. Their tax home must be in a foreign country, i.e. not in the United States of America
3. They should meet any one of the following requirements:
   • The individual has passed the bona fide residence test. This bona fide residence test is meant for US citizens who have been a bona fide resident of one or more foreign countries for a continuous period which includes one full US tax year.
   • The individual is a resident alien who has passed the bona fide residence test of being a bona fide resident of one or more foreign countries for a continuous period which includes one full US tax year. Resident aliens of US are allowed a bona fide presence test only if the individual is a citizen or national of a country with which the US has affected an income tax treaty.
   • The US citizen or resident alien has passed the physical presence test. This test means that the taxpayer has been physically present in one or more foreign countries for a minimum of 330 days during any period of 12 consecutive months.

What is the amount of exclusion?

The maximum amount of exclusion is a dynamic figure which is adjusted for inflation every year. Currently, for the year 2016, the maximum allowable exclusion limit is $101, 300.

How to avail the exclusion?

The Foreign Income Exclusion can be earned if the individual files IRS Form 2555. Form 2555

This Form needs to be duly filled and filed with the IRS within the stipulated time along with Form 1040. For 2016, the latest date of filing is 17th April, 2017. Claiming tax deduction on foreign earned income lowers down the income taxable in US and is beneficial for US citizens and resident aliens. So, know the details of Form 2555 which lets you avail such exclusions and save your taxes.