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Form 2555, Foreign Earned Income Exclusion

Updated: 3/28/2013
Article ID: GEN85319

If you meet certain tests related to the length and nature of your stay in a foreign country, you may qualify to exclude some of your foreign earned income from your return, and you may also be able to exclude or deduct some of your reimbursed housing costs. You cannot exclude or deduct more than your foreign earned income for the year. For 2012, the maximum foreign earned income exclusion is $95,100.

You qualify for the tax benefits available to taxpayers who have foreign earned income if both of the following apply.

  • You meet the tax home test (see below).
  • You meet either the bona fide residence test or the physical presence test (see below).

Form 2555 and TurboTax

Form 2555 can be one of the most complex forms to complete when preparing your return, but don't worry! When you use TurboTax to prepare your taxes, we’ll ask you questions about your foreign earned income, figure out how much you can exclude, and fill in all the right forms for you.

If you've already gone through the step-by-step interview and want to jump directly to the entry screen for Form 2555, follow these directions:

  1. Select the Federal Taxes tab (the Personal tab in the Home & Business edition).
  2. Select the Wages & Income subtab, click on Explore on My Own.
  3. Scroll down the Wages & Income screen until you see the Less Common Income group.
  4. Click on the Start/Update button to the right of the Foreign Earned Income and Exclusions category.  
  5. Follow the prompts.

The Tax Home Test

Your tax home is your regular or principal place of business, employment, or post of duty, regardless of where you maintain your family residence. If you do not have a regular or principal place of business because of the nature of your trade or business, your tax home is your regular place of abode (the place where you regularly live).
 
To meet this test, your tax home must be in a foreign country, or countries, throughout your period of bona fide residence or physical presence, whichever applies (see below).
 
For this purpose, your period of physical presence is the 330 full days during which you were present in a foreign country, not the 12 consecutive months during which those days occurred.

The Bona Fide Residence Test

Generally, you meet this test if you are a U.S. citizen who is a bona fide resident of a foreign country, or countries, for an uninterrupted period that includes an entire tax year (January 1–December 31).

Whether you are a bona fide resident of a foreign country depends on your intention about the length and nature of your stay. Evidence of your intention may be your words and acts. If these conflict, your acts carry more weight than your words.

Generally, if you go to a foreign country for a definite, temporary purpose and return to the United States after you accomplish it, you are not a bona fide resident of the foreign country. If accomplishing the purpose requires an extended, indefinite stay, and you make your home in the foreign country, you may be a bona fide resident.

See IRS Pub 54 for more information and examples.

The Physical Presence Test

To meet this test, you must be a U.S. citizen or resident alien who is physically present in a foreign country, or countries, for at least 330 full days during any period of 12 months in a row. A full day means the 24-hour period that starts at midnight. 
 
To figure 330 full days, add all separate periods you were present in a foreign country during the 12-month period shown on line 16. The 330 full days can be interrupted by periods when you are traveling over international waters or are otherwise not in a foreign country.
 
See IRS Pub 54 for more information and examples.
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