Living and working abroad as a US taxpayer comes with exciting opportunities and unique challenges, including navigating US tax obligations. One valuable benefit available to eligible US taxpayers living abroad is the Foreign Earned Income Exclusion (FEIE).
By reducing taxable income, the FEIE can significantly lower or eliminate US tax liability for many expatriates. This guide explains what the FEIE is, who qualifies, and how to claim it.
What is the Foreign Earned Income Exclusion (FEIE)?
The Foreign Earned Income Exclusion (FEIE) is a tax-filing provision that allows eligible US taxpayers to exclude a certain amount of foreign-earned income from their taxable income.
For tax year 2024, (the taxes you’ll file in 2025 / by April 15, 2025), the maximum exclusion amount is $126,500 per individual. For the 2025 tax year, (the taxes you’ll file in 2026 / by April 15, 2026), the maximum exclusion is $130,000 per individual. If a US couple abroad is married and both spouses work and meet the requirements, they can each claim the exclusion, doubling the benefit.
The FEIE applies only to earned income, such as wages, salaries, and self-employment income. Interest, dividends, or capital gains are considered unearned or passive income. Additionally, the exclusion cannot exceed the amount of foreign-earned income actually reported during the tax year.
For example, if you spend one month working from the US, then this would be considered US-sourced income. Therefore, you may not reduce this by the FEIE.
Who Qualifies for the FEIE?
To claim the FEIE, taxpayers must meet the following criteria:
1. Tax Home Must Be in a Foreign Country
Your tax home (i.e., domicile) is generally the location of your main place of business or employment. To qualify for the FEIE, your tax home must be in a foreign country for a significant portion of the year.
2. Meet One of Two Residency Tests
Taxpayers must meet either the Bona Fide Residence Test or the Physical Presence Test to demonstrate their foreign residency:
- Bona Fide Residence Test: You must be a resident of a foreign country for an uninterrupted period that includes a full calendar year. Temporary trips to the US do not disqualify you as long as your intention to maintain foreign residency is clear.
- Physical Presence Test: You must be physically present in a foreign country for at least 330 full days within a consecutive 12-month period. The 330 days do not need to be consecutive but must fall within the specified period.
Tip: If you plan your move abroad strategically, it may be possible to time your move so that you pay $0 in taxes for one year. Note that this is unlikely to be an option for many popular European countries, however, it’s worth mentioning here as a possibility on a case-by-case basis.
How Does the FEIE Work?
The FEIE is commonly confused with the IRS’ minimum filing threshold, which is significantly lower than the FEIE threshold. To clarify, the minimum filing threshold is what determines whether or not you need to file a US tax return. That minimum filing threshold depends on your filing status, which you will be asked to confirm when filing IRS Form 1040.
The FEIE is a tax provision used to prevent double taxation and does not have anything to do with whether or not you have to file US taxes. However, it can help you exclude a significant portion of your income from US taxes if you meet certain criteria, as we addressed earlier in this article.
Exclusion of Foreign Earned Income
The FEIE allows taxpayers to exclude up to $126,500 (2024) of foreign-earned income from their US taxable income. If a taxpayer’s foreign-earned income exceeds the exclusion limit, the excess is subject to US taxation at the marginal tax rates.
Housing Exclusion or Deduction
In addition to the FEIE, eligible taxpayers may claim a Foreign Housing Exclusion or Deduction for certain housing expenses incurred while living abroad. (1) This benefit is calculated based on reasonable housing costs in your location and can further reduce taxable income.
Limitations and Adjustments
- The FEIE applies only to income that is subject to foreign taxes. If foreign income is not taxed by the host country (e.g., in tax-free zones), it may still be subject to US taxes.
- Self-employed taxpayers can exclude foreign-earned income but must still pay US self-employment taxes.
How to Claim the FEIE
To claim the Foreign Earned Income Exclusion, taxpayers must file IRS Form 2555 along with their annual tax return. Here are the steps:
- Determine Eligibility: Ensure that your tax home is in a foreign country and that you meet either the Bona Fide Residence Test or the Physical Presence Test.
- Complete Form 2555:
- Provide personal details and specify the period of foreign residency.
- Calculate the amount of foreign-earned income eligible for exclusion.
- Include information about foreign housing expenses if claiming the housing exclusion or deduction.
- Attach Form 2555 to Your Tax Return: Include the completed form with your Form 1040 and submit by the filing deadline.
- Maintain Accurate Records: Keep documentation of foreign income, travel dates, and housing expenses to support your claim in case of an audit.
Advantages of the FEIE
The FEIE offers significant benefits to US taxpayers living abroad:
- Reduces Taxable Income: By excluding foreign-earned income, the FEIE can substantially lower your US tax liability.
- Simplifies Compliance: For many taxpayers, the FEIE eliminates the need to pay US taxes on foreign-earned income altogether.
- Flexibility for Dual Earners: Married couples can each claim the FEIE, effectively doubling the exclusion amount.
If you still owe student loan debt and took out federal loans for school, living abroad may actually help you save up money to pay them off faster, since interest is typically calculated off of earned income and reducing that figure to $0 means your rate is calculated off of zero.
Common Challenges with the FEIE
While the FEIE provides valuable tax relief, there are some challenges and limitations to be aware of:
- Strict Residency Requirements: Meeting the residency tests requires careful planning, especially for taxpayers with frequent travel between the US and other countries.
- Self-Employment Taxes: Unless they can prove that they’re paying into a foreign social security system that qualifies for exemption from US contributions, self-employed individuals must still pay US Social Security and Medicare taxes, even if their income is excluded under the FEIE.
- Limited Exclusion Amount: If your foreign-earned income exceeds the exclusion limit, the excess is subject to US taxation. If this is you, consider connecting with an experienced CPA to navigate the next steps – investing in a consultation will likely save you money!
- State Tax Obligations: Certain states, such as California and New York, may not recognize the FEIE, resulting in state tax liability even if you qualify for the federal exclusion.
- Blocked from contributing to certain US retirement accounts: If you claim the FEIE and reduce your declared income to $0, you are ineligible to contribute to post-tax retirement accounts such as Roth IRAs because they require that the money you put in be post-tax (on the US side).
- Blocked from taking the Child Tax Credit: If you claim the FEIE, you are automatically ineligible to claim the Child Tax Credit.
- No Double Dipping with Foreign Tax Credit: If you claim the FEIE to exclude a portion of your earned income, on which you paid foreign taxes, you will not be allowed to take a credit for those foreign taxes. (Learn more about the Foreign Tax Credit in our guide.)
Filing Deadlines and Extensions
The standard tax filing deadline for US taxpayers is April 15th, but those living abroad receive an automatic extension to June 15th, or the first standard workday if the 15th falls on a holiday or weekend.
Additional extensions to October 15th and December 15th can be requested if needed. It’s important to note that any taxes owed must still be paid by April 15th to avoid interest charges.
Wrapping Up
The Foreign Earned Income Exclusion is a powerful tool for US taxpayers living abroad, helping to reduce the financial burden of double taxation.
By understanding its eligibility requirements and filing process, taxpayers can make the most of this exclusion and optimize their tax situation. However, seeking guidance from a tax professional with expertise in expat taxation is highly recommended.
References
The FEIE is an excellent tool for US taxpayers, but there may be some strategy to applying it in complex cases.
