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From my side of the desk, the call I get most about Form 673 sounds the same every January. A client just landed a posting in Dubai or Singapore, their first paycheck still has full U.S. federal tax withheld, and they want to know why the “tax-free overseas” money looks exactly like their old domestic check. The answer is almost always that nobody handed payroll a Form 673.
That one signed page is what lets your employer reduce withholding on wages you reasonably expect to exclude, so your cash flow matches your real tax instead of waiting on a refund. Below I walk through who can use it, the two tests you certify, how to estimate the housing piece in Part II, and how the whole thing reconciles on Form 2555.
Key Takeaways
- Give Form 673 to your U.S. employer to reduce federal withholding on wages you earn abroad when you expect to qualify for the Foreign Earned Income Exclusion and possibly the housing exclusion.
- Form 673 is used by U.S. citizens. Resident aliens cannot use the form, and the IRS cautions on withholding exemptions for resident aliens. You can still claim the exclusion on your return with Form 2555 if you qualify.
- You confirm you expect to meet either the Bona Fide Residence test or the Physical Presence test and that your tax home is abroad. Final eligibility is proved later on Form 2555.
- For 2025, the Foreign Earned Income Exclusion maximum is $130,000. The base housing amount equals 16% of the FEIE, prorated for qualifying days.
- If your facts change and you will not qualify, notify payroll right away to restart regular withholding and reduce penalties and interest risk.
What Is Form 673
Form 673 is a short, signed statement you give to your U.S. employer so they have “good reason to believe” you will qualify for the Foreign Earned Income Exclusion, and if applicable the foreign housing exclusion. With that in hand, your employer may reduce or stop U.S. federal income tax withholding on your foreign wages, up to the amounts you reasonably expect to exclude. Form 673 permits this relief but does not compel it: if your employer has any reason to believe you will not qualify for the exclusion, they must disregard the form and keep withholding at the normal rate. You do not mail it to the IRS. You give it to payroll.
Two important boundaries keep you out of trouble:
- First, Form 673 is for U.S. citizens. The IRS notes that resident aliens may not use Form 673 to exempt wages from withholding, even though they might later claim the exclusion on their return if they qualify. A resident alien who qualifies furnishes the employer a self-prepared statement carrying the same certifications, rather than Form 673 itself. When in doubt, follow Publication 54 and your employer’s policies.
- Second, Form 673 only affects withholding on wages. You will still file Form 2555 with your Form 1040 to claim the exclusion and reconcile your true tax.
Form 673 vs. Form 2555
These two forms work together, but they do different jobs:
- Form 673, given to your employer, is a payroll instruction that can reduce current federal withholding on wages you earn abroad if you expect to qualify.
- Form 2555, filed with the IRS at tax time, is where you actually compute and claim the exclusion and any housing benefits.
Here is the simple rule of thumb I give clients:
Use Form 673 to improve paycheck cash flow today, then use Form 2555 on your return to lock in the actual exclusion.
Purpose and Timing
- Submit Form 673 once you reasonably expect to meet either the Physical Presence test or the Bona Fide Residence test and you have a foreign tax home. Payroll can then adjust withholding prospectively.
- File Form 2555 with Form 1040 after the year ends to claim the exclusion. If you have not met a test by the normal deadline, you can request the special Form 2350 extension or file and amend later once you qualify.
Who Receives Each
- Form 673 goes to your employer’s payroll department, and they keep it on file.
- Form 2555 goes to the IRS attached to your tax return.
When To Use Each
- Use Form 673 to reduce or stop federal withholding on qualifying foreign wages once you have reasonable certainty about your qualifying period and eligibility.
- Use Form 2555 with your return, even if you used Form 673 during the year, to finalize the exclusion and any housing amount.
How Form 673 Changes Your Withholding
When payroll accepts a properly completed Form 673, they may reduce federal income tax withholding on your foreign-source wages by the portion you expect to exclude under the FEIE and, if eligible, the housing exclusion. This is not a new tax break, it is a timing adjustment so your paychecks better match what you will actually owe. The final numbers are determined on your Form 2555. Accepting Form 673 is not an IRS determination that your wages are excludable under section 911(a); the exclusion is still subject to IRS review when you file your return.
For 2025, the FEIE cap is $130,000. Your base housing amount is 16% of that annual cap, prorated to your qualifying days. Your employer may look at your estimate in Part II of Form 673 and limit withholding relief to reasonable housing amounts above that base, and subject to the IRS location limits. For most locations in 2025 the housing cap is $39,000, also prorated if you qualify for part of the year.
Eligibility Tests You Must Expect To Meet
To sign Form 673 in good faith, you need a foreign tax home and a reasonable expectation you will meet one of the two tests. You will later prove it on Form 2555.
- Physical Presence test, at least 330 full days in one or more foreign countries during any 12-month period.
- Bona Fide Residence test, an uninterrupted period that includes a full tax year, with facts showing real residence.
Physical Presence Test, In Plain English
Here is how I explain it to traveling teams. Pick any 12-month window that includes days in the tax year. Count every day that is a full 24 hours in a foreign country. Do not count hours over international waters or partial U.S. days. Hit 330 full days, and you meet the test for that window. This is flexible enough to cover midyear moves and rolling travel, and the official instructions underline the 24-hour midnight-to-midnight definition. Keep passport stamps and travel records.
The test requires 330 full days in a foreign country, counted within any 12 consecutive months that include part of the tax year, and the 330 days themselves do not have to be consecutive; only the 12-month window must be. The IRS defines a full day as the 24-hour period that starts at midnight.
Bona Fide Residence, The “Settle In” Standard
This test focuses on where you truly live and intend to stay for an uninterrupted period that includes a full tax year (simply living abroad for twelve months does not by itself make you a bona fide resident). You need a foreign tax home and credible ties like a lease, utilities, local registration, or family living with you. Short trips to the U.S. usually do not break the period if your ties continue. It is fact specific, so document your situation and be conservative with your expectations on Form 673.
Partial-Year Proration
If you qualify for only part of the year, you will prorate the FEIE and any housing exclusion to the days you qualified in the tax year. This can happen with a summer move, a short assignment, or a return to the U.S. midyear. Form 2555 walks you through the math, and payroll should reflect your best estimate on Form 673 so withholding stays realistic.
Quick Proration Example
- Assume you qualify under the Physical Presence test from July 1, 2025 through June 30, 2026, and your 2025 qualifying days are 184.
- Your 2025 FEIE maximum is $130,000, prorated by 184 over 365. Your 2025 cap would be about $65,534 for the year, subject to Form 2555 limits and your actual foreign earned income.
Estimating the Housing Exclusion On Form 673
In Part II, you estimate qualified housing expenses. Include items like rent, utilities other than telephone, property insurance, nonrefundable lease fees, occupancy taxes, and necessary repairs. Exclude refundable deposits, phone charges, furniture purchases, mortgage principal, and domestic help. The base housing amount is 16% of the FEIE, prorated to your qualifying days, and your eligible housing amount is your qualified expenses minus that base. Keep receipts because Form 2555 will validate this later.
For 2025, the typical housing cap for most locations is $39,000 for a full year, with higher limits in specific cities that the IRS publishes annually. If your qualifying period is shorter than a full year, you will use the per-day amount. Check the current 2555 instructions and the year’s housing notice for exact location caps.
Step-by-Step, Completing Form 673
Part I, Qualification Information
- Enter your name, SSN, and the calendar year or the 12‑month period you are using.
- Check the test you expect to meet.
- Bona Fide Residence, list your foreign country, tax home, and start date.
- Physical Presence, confirm you will reach 330 full days in your 12‑month period, and list your tax home country.
- Be consistent with the dates you will later report on Form 2555.
Part II, Estimated Housing Cost Amount
- List estimated qualified housing costs by category, total them, compute the base housing amount at 16% of the FEIE, prorate if needed, then subtract the base to get your estimated housing cost amount.
- Remember location caps and per‑day proration rules. Keep records.
Part III, Signature
Sign and date under penalties of perjury. This is your statement that you reasonably expect to qualify. If anything changes, notify your employer immediately so they can resume regular withholding.
Practical Timing, Extensions, And Your Return
If you live and work abroad on the due date, the IRS gives you an automatic two‑month extension to file and pay. For 2025 calendar‑year returns, that moves the due date from April 15, 2026 to June 15, 2026, although interest still accrues from April 15 on any balance. If you need more time to actually meet a test, you can request a special extension using Form 2350 or file and amend later.
Filing tip, if you will qualify but your 12‑month window finishes after April, consider Form 2350 so you file once with everything complete.
Comparison Table, Form 673 vs. Form 2555
| Item | Form 673 | Form 2555 |
| Purpose | Reduce current federal withholding on foreign wages you reasonably expect to exclude | Claim the Foreign Earned Income Exclusion and any housing exclusion or deduction |
| Who gets it | Your employer’s payroll department | The IRS, attached to your Form 1040 |
| When used | As soon as you reasonably expect to qualify | At tax time, after year end |
| Who may use | U.S. citizens for the withholding statement | Qualifying U.S. citizens and resident aliens for the actual exclusion |
| What it does not do | It does not claim any exclusion | It does not instruct payroll withholding |
Sources, see IRS pages for Form 673 and Form 2555.
Common Mistakes And How To Avoid Them
Most Form 673 problems are not math errors, they are scope errors, where the form is asked to do something it was never built to do. These are the ones I correct most often.
Mini Checklists You Can Reuse
These are copy-paste ready for a firm SOP or your own records. Tick each box as you go; the page remembers your progress on this device.
Before you sign Form 673
- Confirm the employee is a U.S. citizen, since resident aliens cannot use Form 673.
- Confirm a foreign tax home exists at the principal place of work.
- Pick exactly one test: Physical Presence or Bona Fide Residence.
- For Physical Presence, map the 12-month window and confirm a realistic path to 330 full days.
- For Bona Fide Residence, confirm an uninterrupted period that includes a full tax year.
- Match the dates, country, and tax home to what will appear on Form 2555.
- Remember the form is signed under penalties of perjury.
Part II housing estimate
- List rent, utilities other than telephone, property insurance, and necessary repairs.
- Add nonrefundable lease fees and occupancy tax not deductible under Section 164.
- Exclude telephone, refundable deposits, mortgage principal, furniture, and domestic help.
- Total qualified expenses, then subtract the 16% base housing amount, $20,800 for a full-year 2025 qualifier (Revenue Procedure 2024-40).
- Prorate the base by qualifying days over 365 if you qualify for only part of 2025.
- Apply the standard $39,000 location cap, or the higher figure if your city is on the IRS high-cost list in the Form 2555 instructions.
- Keep receipts, because Form 2555 will validate these figures later.
When status changes midyear
- Notify payroll in writing the moment you expect to miss your test.
- Ask payroll to resume regular federal withholding going forward.
- Recompute your prorated FEIE and housing caps for the days you did qualify.
- Consider Form 2350 if you need more time to meet a test before filing.
- File Form 2555 with Form 1040 to reconcile your estimates against actual results.
Example Scenario, From Start To Finish
You accept a London role beginning March 1, 2025. HR confirms your tax home shifts abroad in March. You expect to meet the Physical Presence test by late February 2026, and you will have 307 qualifying days in 2025. You hand payroll a signed Form 673 with your 12‑month window and an estimate of rent and utilities. Payroll reduces federal withholding on a portion of your wages. In 2026, you file your 2025 Form 1040 with Form 2555, prorating the $130,000 cap to your 307 qualifying days and applying the housing math and London’s location cap from the year’s IRS notice. Any difference between your paycheck estimates and the final Form 2555 is reconciled on your return.
Final Notes And A Simple Next Step
If you are already abroad, confirm your qualifying test and dates, complete Form 673, and give it to payroll. Track your days carefully and keep housing receipts. At tax time, file Form 2555 with your Form 1040 and double check the year’s exclusion amount, base housing percentage, and location caps. As of January 3, 2026, the 2025 FEIE cap is $130,000 and the base housing amount remains 16% of that cap, both prorated for qualifying days.
Keep 673 Season From Stalling
Form 673 does not arrive on a tidy annual deadline. It shows up whenever an employee accepts an overseas posting, whenever a 12-month qualifying window rolls forward, and whenever a housing estimate needs refreshing against current-year figures. For 2025 those figures carry weight: the Foreign Earned Income Exclusion cap is $130,000 and the base housing amount is 16% of that, or $20,800 for a full-year qualifier (Revenue Procedure 2024-40). A wrong estimate today becomes underwithholding the employee discovers on Form 2555 months later.
The fix is not more spreadsheets, it is a repeatable intake that treats every statement the same way. When the test determination, the Part II housing math, and the year-end reconciliation are documented once, a withholding statement that lands in March is handled with the same rigor as one that lands in September.
- A standard intake that captures citizenship, foreign tax home, the chosen Section 911 test, and the exact 12-month window before anyone signs.
- A Part II worksheet that excludes telephone and refundable deposits and applies the current-year 16% base and the $39,000 location cap.
- A reconciliation step that maps every Form 673 estimate to the eventual Form 2555 so prorated days and caps line up.
- A tickler that flags status changes so payroll restarts withholding the moment an employee will not meet a test.
When that structure lives in a documented process rather than one reviewer's memory, foreign-wage withholding stops being a fire drill. That is the kind of repeatable execution our tax outsourcing teams build into the workflow, with multi-layer review so the estimates hold up when the return is filed.
FAQs
Who can use Form 673?
U.S. citizens who expect to qualify under the Physical Presence or Bona Fide Residence test can give Form 673 to their employer to reduce federal withholding on foreign wages. The IRS states that resident aliens may not use Form 673 to exempt wages from withholding. Eligibility for the exclusion itself is finalized on Form 2555.
What is the 2025 FEIE amount?
For the 2025 tax year, the FEIE cap is $130,000. You will compute the actual exclusion on Form 2555 using your qualifying period and foreign earned income.
Does Form 673 change state withholding?
It depends on your resident state’s rules and your employer’s payroll system. Form 673 is a federal concept. Confirm your state residency status and whether your employer withholds state tax for you while abroad.
How do I coordinate Form W‑4 with Form 673?
Form 673 covers the portion of wages you expect to exclude. Use Form W‑4 for the remainder of your wages and any U.S.‑source income that is still taxable. Some employers request a fresh W‑4 when you submit Form 673 to keep records aligned. The IRS Internal Revenue Manual also discusses how a statement for section 911 interacts with withholding rules.
What counts as qualified housing expenses?
Typical qualified costs include rent, utilities other than telephone, property insurance, occupancy taxes, and necessary repairs. Exclude phone charges, refundable deposits, mortgage principal, and furniture purchases. Subtract the 16% base housing amount, prorated to your qualifying days, and apply location caps.
What if I will not meet a test after all?
Tell payroll immediately and resume regular withholding. You will still file Form 1040 and Form 2555, and any underwithholding becomes tax due with possible interest and penalties. Fast communication limits the damage.