Form 2555
IRS, Foreign Earned Income Exclusion
The election to exclude a capped amount of foreign earnings from US tax, with a separate housing exclusion or deduction.
What is Form 2555?
Form 2555 lets a qualifying US citizen or resident abroad exclude up to $130,000 of foreign earnings from US taxable income. It is widely known and often chosen by default. In the UK, where tax on earnings is generally higher than in the US, it frequently gives a worse result than the foreign tax credit.
Why the exclusion is not the automatic choice
To use the exclusion the filer must have a tax home abroad and pass one of two tests.
The bona fide residence test looks at settled residence in a foreign country for an uninterrupted full tax year. The physical presence test requires 330 full days in a foreign country in any twelve-month period. Only earned income qualifies, meaning wages and self-employment profit. Dividends, interest, rent and pensions stay on the return in full.
The exclusion has side effects that are easy to miss. The remaining taxable income is taxed at the rates that would have applied had the excluded amount been included, so it does not lower the bracket. UK tax on the excluded earnings cannot also be credited. Contributions to a US individual retirement account may be restricted because excluded pay does not count as compensation. Self-employment tax is untouched, so a freelancer still needs the totalization agreement for that.
Choosing the exclusion also shapes future years. Credits for UK tax that go unused because income was excluded do not create carryovers. If the filer later revokes the election, a new election cannot be made for five years without IRS consent. For most UK employees on UK rates, the foreign tax credit wipes out the US tax on salary anyway and builds a carryover. The exclusion can suit lower earners or years of low UK tax.
At a glance
- Form 1040
- Attached to
- $130,000 of foreign earned income
- Maximum exclusion
- 330 full days in any twelve months
- Physical presence test
- Bars a new election for five years
- Revoking the election
Figures are for the tax year stated in the official instructions linked below.
How we handle it
- Individual Tax Returns
US federal returns for Americans living in the UK and British nationals with US income, prepared with the UK figures in view.
- Cross-Border Tax
US and UK returns prepared together from one set of workpapers, so credits, tax years and exchange rates line up across both.
- Tax Planning
Forward planning across the US and UK tax systems: timing income, choosing investments, arriving, leaving and organising family finances.
Where people go wrong
The Form 2555 errors we correct most often.
Who files it
- US citizens abroad whose UK tax is low relative to their US liability
- Lower earners in the UK who prefer a simpler return
- Americans in Britain paying high housing costs who may claim the housing exclusion
- Filers in a first or last year abroad who meet the physical presence test
01
Choosing the exclusion by habit when the foreign tax credit would leave a carryover
02
Expecting the exclusion to reduce US self-employment tax on freelance income
03
Counting partial travel days towards the physical presence test
04
Revoking the election without planning for the five-year bar on returning to it
Why US UK Tax Returns
Every form is prepared against the official instructions, and every position on it is one we can point to in the Code, the treaty or HMRC's guidance.
One File
US and UK returns prepared in the same engagement and reconciled line by line.
Primary Sources
Every position traced to the Code, the treaty, IRS instructions or HMRC guidance.
Scope First
Returns, forms, years and fee agreed in writing before work begins.
The Same People
The team that files this year carries the elections and credits into the next.
Questions we are asked
My friend in London uses the exclusion. Should I?
Not necessarily. The exclusion removes earnings from the return, but UK income tax on those earnings is usually higher than the US tax would be, so the foreign tax credit tends to cover it anyway. The credit also creates carryovers that can absorb US tax on other income or in later years. The comparison depends on salary, other income and plans to return to the US, so both should be run.
Can I exclude my UK pension or rental income?
No. The exclusion covers foreign earned income only, which means pay for personal services such as salary, bonuses and self-employment profit. Pension payments, rent, interest, dividends and capital gains are unearned and remain taxable on the US return. Relief for UK tax on those items comes through the foreign tax credit, or in some cases through the treaty.
I moved to the UK in September. Can I claim the exclusion for my first year?
Possibly, through the physical presence test, which counts 330 full days abroad in any twelve-month window rather than the calendar year. That window may not be complete by the usual filing date, and Form 2350 lets a filer delay the return until it is. The exclusion is then prorated for the qualifying days in the tax year. Whether it is the better choice still depends on the UK tax paid.
Primary sources
What this page says is drawn from the official material below. Read it yourself; we would rather be checked than trusted.
Last reviewed
Also in Relief From Double Tax
From the Blog
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