Form 2555: Foreign earned income exclusion with TWO qualifying periods separated by a gap in the middle of the year

[fjordlander]

I am eligible for the Foreign Earned Income Exclusion (FEIE) based on the physical presence test. You meet the physical presence test if you are physically present in a foreign country or countries for 330 full days during a period of 12 consecutive months.

My situation is this: I was outside the US for all of 2021. I visited the US for 4 months from May 2022 to Sept 2022. From Sept 2022, I will be outside the US again for more than a year. 

I know that I can claim the FEIE based on the physical presence test using the 12-month period May 2021-May 2022. I also know that once September rolls around, I can also qualify using the 12-month period Sept 2022-Sept 2023. 

My question is: how do I fill out Form 2555 for 2022 so as to exclude all my foreign income from both qualifying periods, up to May 2022 and post September 2022?

IRS Publication 54 (https://www.irs.gov/publications/p54) mentions that 12-month periods can overlap, but doesn't address my situation directly. Form 2555 only has space for entering one 12-month period, and then you figure out how many days in that period fall within the tax year.

I've found a couple different answers in my research. One accounting firm says you submit a separate Form 2555 for each qualifying physical presence period, and you have to paper file:

https://alliscpa.com/uscitizens_physical_presence.php:

Can I use multiple presence periods in the same year? Can I count the same days each year?

You can use 2 different physical presence periods in the same year. These periods can even overlap within the same year. Each period is claimed on a separate Form 2555. As of this writing, such returns do not qualify for electronic filing so a paper return must be submitted to the IRS.

I spent 12 months overseas, took a break for a few months in the states, then went back overseas to start another assignment. How do I complete my tax return?

Each physical presence period is claimed on a separate Form 2555 as discussed above. You need to wait to file until you have qualified for both periods as discussed below.

Another tax advisor suggests to submit just one Form 2555 and attach a statement to the Form setting forth the second qualifying period and my method for calculating the exclusion threshold for the year: https://www.justanswer.com/tax/4ynne-question-regarding-foreign-earned-income-tax.html

As we already agreed - you can use two qualifying periods for the same year to claim the foreign earned income exclusion. There is no IRS resource which explicitly sets forth this position, but there is no IRS resource which prohibits it either.

Because the exclusion threshold is figured by counting qualifying days as the number of days in the taxable year within the qualified period during - this definition does not exclude the use of more than one 12 month period covering parts of a taxable year.

As Form 2555 contains space only for one qualifying period - instead of filing two forms - it is preferable to attach a statement to the Form setting forth the second qualifying period and your method for calculating the exclusion threshold for the year. Also calculating combined prorated exclusion amount from two periods might be confusing especially if these periods are overlapping (not the issue in your case).

This way - you still may file the tax return electronically.

I'm just looking to see if anyone can say more definitively how to do this in 2022 and back it up with any evidence.

[Anonymous_]

@pk ?

[pk · Accepted solution]

@fjordlander , I applaud your  diligence in reading through all the material associated with the subject -- eligibility for "Foreign Earned Income Exclusion".  And you are correct in that  the tax rules  do not explicitly  either limit  the number of  "Test Periods" and therefore begs the question what happens  when one ends a foreign tax home in the earlier part of the year  and starts a new one  during the latter part of the year.  This is your particular case.

Code section 911 provides the basis of the pub 54 and all the write-ups by the IRS on this subject  --- consistently  referring  to your freedom to choose the  test period  that covers  the most of your earnings for exclusion.  I think the reasoning here is that  in case of service breaks as in your case , you can choose  a combination of Tax credit and income exclusion to cover all of your foreign earnings.  My personal  view of this is that this does a dis-service to the those few tax-payers that are in your type of situation ( large break period  between foreign assignments/ stays ) and have US income in between --- because in such a case the un-excluded  and foreign taxed  portion does not match the benefit if the whole foreign amount could be excluded.  However I have not found any case-law in this either -- probably has not been litigated.

Does this make sense ?

pk

[fjordlander]

@pk Thank you very much for your reply. It makes sense that this (possibly rare) situation just hasn't been litigated.

I had the option checked to email me when someone replies, but didn't see a notification. Apologies for the delayed response.

[eballey90]

@fjordlander How did you end up filing your 2022 tax return?  I am potentially going to be in the same situation next year

[fjordlander]

I filed one Form 2555 and rather than fill out the dates on Part III of the form, I attached an explanation of my two periods of physical presence abroad that listed all the dates in each country for these periods, and used both periods for calculating my number of qualifying days abroad. My CPA agreed to take this approach, with the caveat that the IRS may or may not accept this position.

So far the IRS has accepted my return and issued my refund. I think they have 3 years to audit me so I won't really know I'm in the clear until then.