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The Foreign Earned Income Exclusion (FEIE) is a provision in the U.S. tax code that allows U.S. citizens and resident aliens who live and work in a foreign country to exclude a certain amount of foreign-sourced earned income from their U.S. federal income taxes. The main goal of the FEIE is to prevent double taxation, that is, paying tax in both the United States and your host country on the same income.
The U.S. is one of the few countries that taxes its citizens on worldwide income, regardless of where they live or earn their money. For many Americans abroad, this means their income could potentially be taxed twice, once by the foreign country where they work, and again by the U.S. government. The FEIE, established under Internal Revenue Code Section 911, helps ease this burden.
Key fact: The FEIE is not a total exemption from filing a U.S. tax return. All U.S. citizens and green card holders must file annually if they meet the income filing threshold, regardless of where they live.
For more on why and how the FEIE exists, see the IRSâs guide on Foreign Earned Income Exclusion.
Qualifying for the FEIE is not automatic. The IRS sets out strict criteria that must be met. Hereâs a detailed breakdown:
The FEIE applies only to earned income, wages, salaries, professional fees, or other compensation for personal services performed in a foreign country. Unearned income (like dividends, pensions, interest, capital gains, Social Security, and rental income) is NOT eligible for the exclusion. Weâll cover the differences in more detail later.
A âtax homeâ is the general area of your main place of business, employment, or post of duty, regardless of where you maintain your family residence. If you regularly work in a foreign country and expect to do so indefinitely, your tax home is abroad.
To qualify under this rule, you must be a bona fide resident of a foreign country (or countries) for an uninterrupted period that includes an entire tax year (January 1 â December 31 for most taxpayers).
Key points for the Bona Fide Residence Test:
For examples and details: Bona Fide Residence Test â IRS
This test is more objective and is based solely on time spent abroad. You must be physically present in a foreign country (or countries) for at least 330 full days within any consecutive 12-month period.
Key points for the Physical Presence Test:
For more information, see: Physical Presence Test â IRS
Important: You can only use one test per taxpayer per year. Married couples living abroad may each pass different tests, depending on their circumstances.
The FEIE exclusion limit is adjusted each year for inflation. For the 2024 tax year, the maximum exclusion amount per qualifying individual was $126,500. Early projections for 2025 suggest it will rise to around $130,000 (the IRS will confirm this number before tax season).
How the adjustment works:
See: IRS: Annual Exclusion Limits for FEIE
âEarned incomeâ is pay from personal services performed abroad. This includes:
The IRS offers a helpful chart for distinguishing between earned and unearned income at IRS: What Income is Not Foreign Earned Income?
If your foreign housing costs (such as rent, utilities, and certain other expenses) exceed a set âbase amountâ ($19,800 for 2024, likely higher for 2025), you may claim an additional exclusion or deduction, further reducing your taxable income.
Example:
If youâre posted in Tokyo, and your rent and utilities for the year total $48,000, while the base housing amount is $20,000, you could exclude/deduct the difference of $28,000, on top of the FEIE.
For more details, see:
IRS: Foreign Housing Exclusion or Deduction
Claiming the Foreign Earned Income Exclusion (and any foreign housing exclusion/deduction) requires you to file IRS Form 2555 with your U.S. tax return (Form 1040).
Where to find Form 2555 and instructions:
IRS Form 2555 (PDF)
IRS Form 2555 Instructions
Note: Software and online platforms often misinterpret the rules or overlook the housing benefit, another reason to ask a tax professional to review your filing.
Even seasoned expats and business owners can fall into traps. Here are some of the most frequent issues we see:
The FEIE excludes foreign earned income from income tax only. If you are self-employed abroad, youâre still generally on the hook for U.S. self-employment tax (Social Security & Medicare), unless youâre in a country with a Totalization Agreement that allows you to pay social taxes only to your country of residence. (See the list of U.S. Totalization Agreements.)
Key tip:
Contractors, remote gig workers, or digital nomads are the most likely to miss this catch.
Meeting the Physical Presence Test requires careful record-keeping. If you miss the 330-day requirement even by a day, your exclusion may be denied. Short trips to U.S. territories or international waters may not count toward the 330 days, and âtravel daysâ arenât always considered full days.
Moving abroad (or back to the U.S.) mid-year can impact your eligibility window for the FEIE and reduce your allowed exclusion for that year. Usually, the exclusion is prorated based on the number of qualifying days, rather than the whole year.
Many taxpayers miss out on potential exclusions simply by not understanding or documenting their housing costs. High-rent locations can result in thousands of additional tax dollars saved, but only if you properly report allowable expenses.
Generally, you cannot apply the Foreign Tax Credit (FTC) on income you have already excluded under the FEIE. Sometimes, using the FTC is more beneficial, especially in high-tax countries, so itâs worth reviewing both options.
Some U.S. states, like California, do not recognize the FEIE and continue to tax residents on all global income, even after moving abroad. Severing all state ties before departure is crucial.
For more on these mistakes, see: Pitfalls and Consequences
While the FEIE is a powerful exclusion, there are situations where itâs not your best choice:
Strategic tip:
Evaluate both the FEIE and FTC every year. A professional tax consultant can help run the numbers and choose the most effective strategy for your scenario.
At Provide Clarity Consulting, Inc., our U.S. expat tax specialists have decades of experience guiding individuals and small businesses through the maze of international tax compliance. We help:
Our team stays current on every IRS update and helps you avoid the most common and costly expat tax mistakes. Whether you are a remote worker, contractor, military spouse, small business owner, or global retiree, our personalized approach ensures you keep more of your hard-earned money, wherever you call home.
If youâre living or working abroad, understanding the Foreign Earned Income Exclusion is crucial to avoid double taxation and maximize your benefits. But getting all the details right can be challenging. Contact our experienced team of U.S. international tax consultants today for a confidential assessment and personalized advice tailored to your situation. Donât pay more than you owe; ensure every tax dollar goes farther, no matter where life takes you.
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