To cut a long story short, based on the info above, I believe that yes, you an amend you return

Your initial choice of the exclusion(s) on Form 2555, Foreign Earned Income, generally must be made with:

• a timely filed return (including any extensions),
• a return amending a timely filed return, or
• a late-filed return filed within 1 year from the original due date of the return (determined without regard to any extensions).

There other things in the mix, but I don't think they are relevant

So in short so long as you file a timely 1040-X for 2021 and 2022 then you should be ok.

here is an IRS summary

Choosing the foreign earned income exclusion | Internal Revenue Service

The foreign earned income exclusion is voluntary.

www.irs.gov

If you want to dig into the weeds here are the regulations that page is based on.

26 CFR § 1.911-7 - Procedural rules.

www.law.cornell.edu

For what its worth, its not income levels that determine which is better but rather the effective tax rate on that income. If effective tax rates on wages are lower than those in the US, then the FEIE is better because the FEIE offsets tax on that income completely.. So for example if you lived in a country that had no income tax then even if you earned a large salary you would be better of using the FEIE because you would have no foreign taxes to offset the US tax liability. Similar can apply in High income taxing countries if they also have a high tax free threshold and you have a low income and thus have not paid enough income tax to offset it via FTCs.

 

To cut a long story short, based on the info above, I believe that yes, you an amend you return

Your initial choice of the exclusion(s) on Form 2555, Foreign Earned Income, generally must be made with:

• a timely filed return (including any extensions),
• a return amending a timely filed return, or
• a late-filed return filed within 1 year from the original due date of the return (determined without regard to any extensions).

There other things in the mix, but I don't think they are relevant

So in short so long as you file a timely 1040-X for 2021 and 2022 then you should be ok.

here is an IRS summary

Choosing the foreign earned income exclusion | Internal Revenue Service

The foreign earned income exclusion is voluntary.

www.irs.gov

If you want to dig into the weeds here are the regulations that page is based on.

26 CFR § 1.911-7 - Procedural rules.

www.law.cornell.edu

For what its worth, its not income levels that determine which is better but rather the effective tax rate on that income. If effective tax rates on wages are lower than those in the US, then the FEIE is better because the FEIE offsets tax on that income completely.. So for example if you lived in a country that had no income tax then even if you earned a large salary you would be better of using the FEIE because you would have no foreign taxes to offset the US tax liability. Similar can apply in High income taxing countries if they also have a high tax free threshold and you have a low income and thus have not paid enough income tax to offset it via FTCs.

Thank you so much for this detailed answer. Before I go through that huge hassle, it would be important to know the answer to the first question. If I have never taken the FEIE (only the FTC in 2021 and 2022), does the five year rule against switching to the FEIE apply to me?

 

If I have never taken the FEIE (only the FTC in 2021 and 2022), does the five year rule against switching to the FEIE apply to me?

TLDR: No.


The longer answer:

It would not apply. If you have never used the FEIE then you have never made an election to exclude income. If you have never made the choice then you cannot revoke that choice.

The relevant regulations (26 CFR § 1.911-7) make it pretty clear that to revoke an election you will have actually had to have made that election, and that can only be done via an income tax return.

So if you haven't lodged an income tax return where you elect to exclude income (using form 2555) then you have not made an election under s.911,

Indeed there are situations where you could have foreign earned income and not qualify for the exclusion (for example not being outside the US for long enough, nor not having a tax home outside the US) in which case you would have no other option but to use the FTC but could later qualify and use the FEIE.

Now, if you DO file the FEIE, then you WILL be deemed to have revoked that choice in any future year that you file a return that is inconsistent with that choice - at that point you could not use the FEIE again for 6 years without a private ruling. But if you have never used the FEIE then this is moot.

 

its not income levels that determine which is better but rather the effective tax rate on that income. If effective tax rates on wages are lower than those in the US, then the FEIE is better because the FEIE offsets tax on that income completely

Yes, and emphasis on effective tax rate. Honestly you won't find it in any of tens if not hundreds of articles on FTC vs FEIE out there. They all repeat the same mantra - but this is the key point and the right way to look at it. The US has different brackets and different rates. What you earn might fall in a different bracket in the US than in the country you reside in.

then the FEIE is better because the FEIE offsets tax on that income completely

Not completely, up to a limit, ~120k as of 2024. So one should take that into account as well, while considering you can still apply FTC on what's left after deduction but also considering you loose foreign credits on income you've excluded.

For example (overly simplified to illustrate the concept)

with

foreign earned income: $150k
foreign taxes paid: $45k
max exclusion $120k
foreign effective tax rate 30%
us effective tax rate 25% (rate applies as if no exclusion was made - another key point often not mentioned)

then with (feie and ftc)

150 - 120 = 30k -> taxable income after exclusion
FTC available (120/150 * 45k) = 9k
us tax liability $7.5k
0 us tax, 1.5k to carry over or carry back

with ftc only
us tax liability 37.5k
0 us tax, 7.5k to carry over or carry back + child credit (if applicable)

Similar can apply in High income taxing countries if they also have a high tax free threshold and you have a low income and thus have not paid enough income tax to offset it via FTCs

Yes, but again - given this example, if you have low income, you will also be in a low bracket in the US - and your us tax liability should be low as well. So here also worth running the numbers.

Only clear cut case for FEIE are countries with very low effective rates and you earned a lot.