How does Form 2555 fit into your global mobility program?

There is a really good reason that global mobility programs usually have a direct relationship with an expatriate tax provider. Actually, there are lots of good reasons!  Your company has a mobile workforce spread out over multiple locations, and you need help with the tax complexities that come with having employees working outside their usual work location. Having a close working relationship with your tax partner helps to ensure that you structure mobility in the most cost effective way while maintaining compliance in all your departure (home) and destination (host) locations.

There are so many nuances to structuring an assignment. The combination of locations, the duration and the types of benefits being delivered and accounted for all play into the tax cost calculation. And when someone from the U.S. heads off on an assignment, one of those nuances is "Form 2555, the Foreign Earned Income Exclusion Form" which not only helps them calculate the income that may be excluded from taxes but also allows them to exclude basic living expenses from their tax liability, such as their expat housing allowance. 

Per the IRS, "If you qualify, you can use Form 2555 to figure your foreign earned income exclusion and your housing exclusion or deduction. You cannot exclude or deduct more than your foreign earned income for the year."

There are a few requirements to qualify for foreign income exclusion benefits. You must:

• Meet the tax home test: Your tax home is the location where you indefinitely work. For this qualification, your tax home must be outside the U.S. and you cannot have an home in the U.S.
• Meet either the bona fide residence test or the physical presence test:
  • Bona fide residence test:
    1. You are a U.S. citizen who is a bona fide resident of one or more foreign countries for an uninterrupted period that includes an entire tax year...OR...
    2. You are a U.S. resident alien who is a citizen or national of a country with which the U.S. has an income tax treaty and are a bona fide resident of one or more foreign countries for an uninterrupted period that includes an entire tax year.
  • Physical presence test: You are a U.S. citizen or resident alien who is physically present in one or more foreign countries for at least 330 full days during any period of 12 months in a row.
    

For most expats, the Foreign Housing Allowance makes it possible to exclude up to 30% of the amount they claim for their Foreign Earned Income Exclusion for housing-related expenses, such as rent, leasing fees, furniture rental, repairs, utilities (except telephone bills), parking, and property insurance, but does not include things like mortgage payments, tv subscriptions, domestic help, purchased furniture.

Also, if you live in a city with a higher cost of living, you may be eligible to exclude more of your Foreign Housing Expenses. These cities include London and Hong Kong, among others. 

For a great video on the topic of the Foreign Housing Allowance and Exclusion, check out this from Greenback Expat Tax Services.