Even if you’ve moved abroad for a brighter future or are considering working online abroad, you might still have obligations toward the IRS. The Foreign Earned Income Exclusion (FEIE) allows U.S. expats to exclude a portion of their foreign earned income from U.S. taxation, helping reduce or eliminate tax liability on earnings made outside the United States.
This guide explains what the FEIE is, who qualifies, and how to claim the exclusion using Form 2555. You’ll also learn about the Foreign Housing Exclusion and Deduction, which can further reduce your taxable income by covering housing expenses in a foreign country.
What Is the Foreign Earned Income Exclusion?
The FEIE allows qualifying U.S. citizens and Green Card holders living abroad to exclude a portion of their foreign-earned income from U.S. taxation. This reduces or eliminates U.S. tax liability on income earned outside the U.S.
2024 Foreign Earned Income Exclusion Limit
- The maximum exclusion for 2024: $126,500
- The maximum exclusion for 2025: $130,000
- Married Filing Jointly: Each spouse can claim FEIE individually, allowing a total exclusion of $260,000 in 2025 if both qualify.
- You must file Form 2555 to claim the FEIE with your U.S. tax return.
Who Qualifies for the Foreign Earned Income Exclusion?
To qualify for the Foreign Earned Income Exclusion, you must meet three key requirements:
- Foreign Earned Income – You must have earned income (wages, salaries, professional fees, or self-employment income) from a foreign country. Passive income (rental income, dividends, pensions) does not qualify.
- Foreign Tax Home – Your tax home must be in a foreign country, meaning your primary place of work is outside the U.S.
- Meet Either the Physical Presence Test or Bona Fide Residence Test
Do You Qualify for the Foreign Earned Income Exclusion Based on Residency or Physical Presence?
To claim the FEIE, a U.S. citizen or resident alien must meet either the Physical Presence Test or the Bona Fide Residence Test while maintaining a foreign tax home. These tests determine whether income earned in a foreign country or countries qualifies for the earned income exclusion, helping expats avoid double taxation on their worldwide income.
Physical Presence Test
The Physical Presence Test applies if you are physically present in a foreign country for at least 330 full days within a 12-month period. This period can start and end at any point but must be an uninterrupted period that includes an entire tax year if claiming the maximum exclusion amount, which is adjusted annually for inflation.
Days spent in international waters or in transit through the United States do not count. However, brief stops in the U.S. for less than 24 hours while traveling between two foreign countries do not affect qualification.
The Physical Presence Test is often used by self-employed expats, remote workers, and those without a permanent residence abroad. However, failing to track travel days accurately can lead to disqualification when filing taxes with the Internal Revenue Service.
Bona Fide Residence Test
The Bona Fide Residence Test applies if you are a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year. Unlike the Physical Presence Test, there is no strict day-counting requirement, but you must prove that you have established a foreign tax home and intend to reside in the foreign country indefinitely.
The IRS considers various factors, such as whether you pay taxes in your resident country, maintain a home, have a visa, or participate in the local economy. Simply living abroad for a year does not automatically qualify you as a bona fide resident, especially if you have declared non-residency in your host country.
This test is beneficial for long-term expats, as it allows more flexibility for travel to the U.S. compared to the Physical Presence Test. However, the IRS has the authority to deny claims if they determine your residency status does not meet the legal criteria.
What Counts as Foreign Earned Income?
Foreign earned income covers wages, salaries, and self-employment income received for work performed in a foreign country. Passive sources like dividends, rental income, pensions, or Social Security benefits are not included. The IRS also excludes pay from the U.S. government or military, and income earned on international waters.
Self-employed individuals can exclude foreign earned income from U.S. income tax but still owe self-employment tax unless covered by a totalization agreement. The foreign housing exclusion may further reduce taxable foreign income by allowing certain housing expenses to be deducted.
Claiming Foreign Housing Exclusion and Deduction
The Foreign Housing Exclusion and Deduction help U.S. expats further reduce their taxable income beyond the FEIE amount. Suppose you are self-employed or an employee working in a foreign country. In that case, you may qualify to exclude foreign earned income related to housing costs, including rent, and utilities. The Foreign Housing Exclusion applies to employees, while the Foreign Housing Deduction benefits the self-employed expats.
What Is the Difference Between the Foreign Tax Credit and the Foreign Earned Income Exclusion?
The FEIE and the Foreign Tax Credit (FTC) are two ways U.S. expats can reduce their U.S. federal income tax on foreign income.
The FEIE allows you to exclude foreign earned income from taxable income. It applies only to earned income, such as wages and self-employment income, and requires meeting either the Physical Presence Test or the Bona Fide Residence Test. However, it does not apply to passive income or eliminate self-employment tax.
The FTC, on the other hand, provides a tax credit for foreign taxes paid to offset U.S. income tax liability. It can be used on all types of foreign income, including passive income, and is especially useful for expats living in countries with higher tax rates than the U.S.
Both tax benefits help avoid double taxation, but they work differently. To determine which one is best for your situation, check out our detailed comparison here:
FEIE vs. Foreign Tax Credit – Which One to Choose?
How to Claim the Foreign Earned Income Exclusion?
To claim the FEIE, you must file Form 2555 with your U.S. federal income tax return (Form 1040).
If you haven’t lived outside the U.S. long enough by the regular tax filing deadline, you can request a filing extension to qualify for the FEIE. The IRS allows you to apply for Form 4868 (automatic extension until October 15) providing you with additional time to meet the physical presence requirement.
Once you claim the FEIE, you must continue using it every year unless you revoke it. If you revoke the income exclusion, you must wait five years before reapplying, unless you get special IRS approval.
Can I claim both the Foreign Earned Income Exclusion and the Foreign Tax Credit?
Yes, you can claim both the FEIE and the Foreign Tax Credit, but not on the same income. You can exclude foreign earned income with the FEIE and use the FTC to offset U.S. tax liability on non-excluded income, such as passive income or earnings above the FEIE limit. However, once you exclude foreign earned income, you cannot use the FTC on the same amount.
Common Mistakes U.S. Expats Make When Claiming the Foreign Earned Income Exclusion
Many U.S. expats misunderstand how the Foreign Earned Income Exclusion works, leading to costly mistakes when filing taxes. One of the biggest errors is assuming that if their foreign earned income is below the FEIE limit, they don’t need to file a U.S. tax return. This is incorrect—U.S. citizens and resident aliens must report their worldwide income, even if they qualify to exclude foreign earned income. To claim the income exclusion, they must file Form 2555 along with their tax return.
Another major mistake is revoking the FEIE without realizing that once revoked, it cannot be claimed again for five years unless the IRS grants special approval.
Expats also overlook the fact that claiming the foreign earned income exclusion can impact eligibility for other tax benefits. For example, those who claim the FEIE may lose access to refundable credits like the Additional Child Tax Credit, which could otherwise reduce their income tax or provide a refund. Additionally, since the IRS does not count excluded foreign earned income as taxable compensation, expats who claim the FEIE may not be able to contribute to an IRA, limiting their retirement savings options.
At 1040 Abroad, we specialize in U.S. expat taxes, helping Americans navigate the Foreign Earned Income Exclusion, Foreign Tax Credit, and other tax benefits. We offer free tax consultations to ensure you maximize your tax breaks and stay IRS-compliant. Contact us today for free tax advice and stress-free expat tax filing!
