What Is the Foreign Earned Income Exclusion (FEIE)?
The foreign earned income exclusion (FEIE) is an Internal Revenue Service (IRS) provision that lets qualifying U.S. citizens and resident aliens exclude a portion of their foreign earned income from U.S. federal income tax. It’s intended to reduce or eliminate double taxation for Americans who live and work overseas. To claim the exclusion you must file IRS Form 2555 and meet specific qualification tests.
Key takeaways
– For tax year 2024 the maximum FEIE is $126,500 per qualifying individual; for 2025 it increases to $130,000.
– The FEIE applies only to “earned income” (wages, salaries, income from self‑employment), not to passive income (interest, dividends, pensions, Social Security, most capital gains).
– You must meet either the bona fide residence test or the physical presence test to qualify.
– There is a separate foreign housing amount (exclusion for employees; deduction for the self‑employed) that can further reduce U.S. taxable income, subject to base amounts and ceilings.
– To claim FEIE you must file Form 2555 with your U.S. return; even if all foreign income is excluded you still must file.
Understanding how FEIE works
– Worldwide taxation principle: U.S. citizens and resident aliens generally pay U.S. tax on income from all sources worldwide. FEIE reduces U.S. taxable income by allowing a dollar amount of foreign earned income to be excluded.
– Interaction with foreign tax credit: If your foreign taxes exceed what would be owed after FEIE, you may be able to use the foreign tax credit (Form 1116) to reduce U.S. tax on income that isn’t excluded. Many taxpayers use a combination of FEIE and the foreign tax credit.
– Employee vs self‑employed: The housing benefit (see below) is taken as an exclusion for employees and as a deduction for self‑employed taxpayers. Excluded income under Section 911 (FEIE) does not exclude earnings from self‑employment tax—self‑employment tax is still due even on amounts excluded for income tax purposes.
Who qualifies — the two tests
You must meet one of these tests during a tax year (or a defined period):
1) Bona fide residence test
– 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–December 31 for most taxpayers). This is a facts-and-circumstances test—ties to the U.S., intent, employment, and the nature and length of your stay matter.
2) Physical presence test
– You must be physically present in one or more foreign countries for at least 330 full days during any consecutive 12‑month period. Days of arrival and departure rules apply (a “full day” means a 24‑hour period).
What counts as foreign earned income
– Included: wages, salaries, professional fees, and other amounts received for personal services performed in a foreign country; net earnings from self‑employment attributable to services performed abroad.
– Excluded: passive income (interest, dividends, rental income not tied to services performed abroad), pensions, unemployment compensation, social security benefits, and amounts earned while a U.S. employer pays you but you perform services in the U.S.
The foreign housing amount (housing exclusion/deduction)
– The foreign housing amount equals reasonable housing expenses paid with foreign earned income, in excess of a base housing amount. The base housing amount is 16% of the FEIE maximum prorated daily for your qualifying period.
– For many taxpayers, excludable housing expenses are capped at roughly 30% of the FEIE maximum for the year, but high‑cost localities may have higher limits (see IRS guidance for exceptions).
– The housing amount is an exclusion for employees and a deduction for the self‑employed. If your employer provides housing and excludes its value under a qualified plan, you must follow specific rules—check Form 2555 instructions.
FEIE amounts for 2024 and 2025
– 2024 maximum FEIE: $126,500 (per individual).
– 2025 maximum FEIE: $130,000 (per individual).
– If you qualify for only part of the year, the FEIE and base housing amount are prorated based on the number of qualifying days.
Practical steps to claim the FEIE
1) Determine if you qualify
– Decide whether you meet the bona fide residence test or the physical presence test for the relevant tax year or a 12‑month period that straddles tax years. Use IRS guidance to confirm (Form 2555 instructions, and IRS topics on these tests).
2) Identify and document foreign earned income
– Gather pay stubs, employer statements, contracts, and receipts showing where and when income was earned and where taxes were paid. Distinguish earned income from passive income and employer reimbursements.
3) Calculate the FEIE
– Apply the annual maximum (e.g., $126,500 for 2024) or prorate the maximum based on qualifying days if you don’t qualify for the full tax year. Subtract the excluded amount from gross income when completing your U.S. tax return.
4) Calculate foreign housing amount (if applicable)
– Compute base housing amount: 16% of the FEIE maximum, prorated daily over your qualifying days.
– Housing amount = actual reasonable housing expenses (for the qualifying period) – base housing amount, limited by caps (30% of FEIE for many locations; special higher limits apply for specific high‑cost areas). Consult the Form 2555 instructions for locality limits.
5) Decide about the foreign tax credit (Form 1116)
– If foreign taxes were paid, calculate whether using FEIE, foreign tax credit, or a mix yields the best U.S. tax outcome. Foreign tax credit may be preferable for income not eligible for FEIE or when foreign taxes are higher than U.S. tax liability.
6) File the right forms and keep records
– File Form 2555 with your Form 1040 to claim the FEIE (and housing exclusion/deduction).
– If claiming foreign tax credits, file Form 1116.
– Keep documentation (travel records, visas, employer statements, rental/utility receipts, foreign tax returns and payment records) for at least the statute of limitations period.
7) Understand deadlines and extensions
– U.S. citizens/resident aliens living abroad get an automatic two‑month extension to file (June 15 instead of April 15), but tax owed is still due by the regular deadline—interest applies to late payments. You can file for an additional extension (Form 4868).
8) Check other reporting obligations
– FBAR (FinCEN Form 114) if aggregate foreign financial accounts exceeded $10,000 at any time during the year. FATCA reporting (Form 8938) may also apply. FEIE does not eliminate these separate reporting duties.
Practical example (illustrative)
– Facts: U.S. citizen works abroad, earns $225,000 in 2024, qualifies under the physical presence test for the full year, and paid $33,600 in foreign rent. Foreign income taxes paid may be used with the foreign tax credit if needed.
– Step 1: Exclude up to $126,500 (2024 FEIE) from U.S. taxable income. Remaining taxable earned income = $98,500.
– Step 2: Compute base housing amount = (16% × $126,500) prorated for qualifying days. (If qualifying all 365 days: base = 0.16 × $126,500 = $20,240.) Housing exclusion/deduction = reasonable housing expenses – base housing amount, subject to limits. Example illustrative only—see Form 2555 instructions for exact daily proration and locality caps.
– Step 3: If foreign income taxes are substantial, use Form 1116 to apply foreign tax credits against any remaining U.S. tax liability on non‑excluded income.
Common pitfalls and important notes
– Filing requirement remains: Even if all foreign earned income is excluded, you generally must file a U.S. return and attach Form 2555 to elect the FEIE.
– FEIE does not affect self‑employment tax (Social Security/Medicare) — excluded income may still be subject to self‑employment tax.
– You cannot exclude more than your earned income in the qualifying period (i.e., you can’t create or increase a net loss using FEIE).
– State taxes: Some U.S. states tax worldwide income and may not follow the FEIE. Check state rules and domicile considerations.
– Documentation: The IRS can require proof of qualifying days, residence, and housing expenses. Maintain travel logs, leases, receipts, and employer documentation.
Bottom line
The foreign earned income exclusion can significantly reduce U.S. income tax liability for Americans living and working abroad, but it has firm qualification requirements, dollar limits, and specific rules for housing and interaction with foreign tax credits. Properly determining qualification, calculating prorations, and filing Form 2555 (and Form 1116 if using foreign tax credits) are essential. Because international tax situations can be complex, many expats consult a tax professional familiar with Form 2555, foreign tax credit mechanics, and state residency issues.
Sources and further reading
– Investopedia — “Foreign Earned Income Exclusion” (summary/background). https://www.investopedia.com/terms/f/foreign-earned-income-exclusion.asp
– IRS — Foreign Earned Income Exclusion (Topic and general info). https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion
– IRS — Foreign Housing Exclusion or Deduction. https://www.irs.gov/individuals/international-taxpayers/foreign-housing-exclusion-or-deduction
– IRS — Form 2555, Foreign Earned Income. https://www.irs.gov/forms-pubs/about-form-2555
– IRS — Instructions for Form 2555. https://www.irs.gov/instructions/i2555
– IRS — Physical Presence Test. https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion-physical-presence-test
– IRS — Bona Fide Residence Test. https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion-bona-fide-residence-test
– IRS — Form 1116, Foreign Tax Credit. https://www.irs.gov/forms-pubs/about-form-1116
– IRS — IRS releases tax inflation adjustments for 2025 (for FEIE 2025 amount). https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-2025
If you’d like, I can:
– Walk through a personalized calculation using your specific dates, income, housing costs, and foreign taxes, or
– Provide a checklist and sample forms list to prepare your Form 2555 and Form 1116.