If you live overseas, you will likely find yourself in a special tax situation and may need to file Form 2555, Foreign Earned Income. You may be eligible for an exclusion that allows you to exclude a certain amount of income from taxation ($107,600 in 2020 and $108,700 in 2021).
Who qualifies for the foreign earned income exclusion? You qualify to exclude foreign earned income from gross income if you pass both of the following conditions:
You can also enter on the form the total reasonable expenses paid or incurred during the tax year by you, or on your behalf, for your foreign housing and the housing of your spouse and dependents if they lived with you.
There are also strict definitions of what it means to work overseas. For example, income from working abroad as an employee of the U.S. government does not qualify for the exclusion. If this is your status, do not file Form 2555.
Special pandemic rules
If your residency plans were thwarted by the pandemic, you may be entitled to relief. If your tax home was in a foreign country and you reasonably expected to meet either the bona fide residence test or the physical presence test during 2019 or 2020 but failed to do so, you may be entitled to the waiver. To request this waiver for 2020, write "Revenue Procedure 2020-27" across the top margin of your Form 2555. There are other rules surrounding this relief; see the form instructions for details.
This is just a summary of a complicated series of rules — there are additional provisions and exceptions. If you live overseas or are planning to move, keep detailed records and consult with a tax professional.
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