Form 2555: Foreign Earned Income Exclusion

Overview

Form 2555 is one of the most important tax forms for US citizens and resident aliens living and working abroad. This form allows qualifying taxpayers to exclude a significant portion of their foreign earned income from US taxation, with the exclusion amount adjusted annually for inflation. For tax year 2025, the maximum exclusion is approximately $130,000 per qualifying individual. The form also provides a housing exclusion or deduction for certain housing expenses incurred while living overseas. To qualify, you must meet either the bona fide residence test, which requires establishing genuine residency in a foreign country for an uninterrupted period that includes an entire tax year, or the physical presence test, which requires being physically present in a foreign country for at least 330 full days during a 12-month period. US expats living in Canada frequently use this form when their Canadian employment income would otherwise be subject to double taxation. It is critical to understand that self-employment taxes are not excluded even when income is excluded using Form 2555. Additionally, choosing the foreign earned income exclusion affects your ability to claim the foreign tax credit on the same income, so careful planning is essential.