Foreign earned income exclusion - FEIE

The Foreign Earned Income Exclusion (FEIE) is one of the most valuable tax benefits available to US citizens and resident aliens who live and work abroad. By excluding foreign-earned income from US taxation, the FEIE can help expats significantly reduce their US tax liability.

To qualify for the foreign earned income tax exclusion, individuals must meet either the bona fide residence test or the physical presence test, and have a tax home in a foreign country. It’s important to note that the FEIE doesn’t apply to passive income like interest or dividends, and certain restrictions apply to government employees.

In order to claim the FEIE, expats must file Form 2555 with their US tax return. This form is used to calculate the exclusion amount and provide details about foreign residence and income sources.

This guide provides an in-depth look at how the foreign earned income exclusion works and who can claim it by filing IRS Form 2555. The FEIE allows qualifying individuals to exclude up to $126,500 of foreign-earned income for the 2024 tax year ($130,000 for 2025).

Who qualifies for the foreign earned income exclusions and deductions?

To qualify for the FEIE, you must meet all three of these requirements:

1. Your tax home must be in a foreign country.
2. You must have foreign-earned income.
3. You must pass either the Bona Fide Residence Test or the Physical Presence Test.
    

Types of income that qualify for the foreign earned income exclusion

The foreign-earned income exclusion applies specifically to income earned through active work performed in a foreign country. Qualifying income includes: 

• wages
• salaries
• commissions
• bonuses
• professional fees
• self-employment income

However, the FEIE does not apply to passive or unearned income sources. This includes investment income like: 

• dividends
• interest
• capital gains
• rental income
• pensions
• annuities
• Social Security benefits 
• alimony

It’s important to note that only income earned while physically present in a foreign country qualifies. Income earned during visits to the US or in international waters cannot be excluded under the foreign-earned income exclusion.

How much income can be excluded?

For the 2024 tax year, you can exclude up to $126,500 of your foreign-earned income. If both you and your spouse work overseas and meet either the Bona Fide Residence or Physical Presence Tests, you can each exclude up to $120,000.

The FEIE is adjusted annually for inflation. The exclusion limits for recent years are:

• 2025: projected at $130,000
• 2024: $126,500 (see IRS for details)
• 2023: $120,000
• 2022: $112,000
• 2021: $108,700

Bona Fide Residence Test

The Bona Fide Residence Test applies to US citizens and resident aliens who are bona fide residents of a foreign country for an uninterrupted period that includes an entire tax year (January 1 – December 31). We have a whole separate article on bona fide resident qualifications too.

Bona fide residence is determined based on facts and circumstances. Some key factors are:

• your intention to remain in the foreign country
• purpose of your trip
• nature and length of your stay abroad

If you go abroad for an indefinite work assignment, you may be a bona fide resident even if you intend to eventually return to the US. But if you go abroad for a defined temporary period, generally one year or less, you ordinarily will not be considered a bona fide resident.
 

Example 1: Sarah is a US citizen who moved to London on January 15, 2024, to work for her company's U.K. office. She intends to live and work in London indefinitely until her employer transfers her elsewhere.

Sarah spent a total of 30 days back in the US in 2024 for vacation and work meetings. Because Sarah's bona fide foreign residence lasted the entire 2023 tax year other than those brief US visits, she qualifies for the FEIE under the Bona Fide Residence Test for 2024.

Example 2: Robert is a US citizen who accepted a 2-year work assignment in Japan beginning March 1, 2024. He moved to Tokyo on that date, established a residence, and lived there for the rest of 2024. On January 10, 2025, Robert's employer unexpectedly cut his assignment short and permanently transferred him back to the US, where he returned on January 25, 2025.

Although Robert was a bona fide resident of Japan for over 10 months, he does not qualify for the foreign income exclusion under the Bona Fide Residence Test for either the 2024 or 2025 tax years, since his bona fide foreign residence did not encompass a full tax year in either case. If eligible, he may still be able to claim a prorated FEIE under the Physical Presence Test for the portion of each year he was physically present in Japan.

Physical Presence Test

The Physical Presence Test has no residence requirement – it applies based solely on how long you are physically present in a foreign country during a 12-month period. You qualify if you are in a foreign country for 330 days in any consecutive 12 months. The 330 days do not have to be a full calendar year or consecutive.

When counting the 330 days:

• a full day is a 24-hour period beginning at midnight
• any portion of a day spent in the US counts as a full day in the US
• travel days through international waters don't count toward the 330 days
   

Example 1: From July 1, 2023 to June 30, 2024, Karen is physically present in France for 345 days. During that time, she also took two 10-day trips back to the US. Karen passed the Physical Presence Test for 2023–2024 as she was in a foreign country for 330 days during a 12-month period.
 

Example 2: From January 1, 2024 to December 31, 2024, Harry worked in the United Kingdom, but made separate 20-day trips to the US in February, May, August, and November (80 days total). Harry failed the Physical Presence Test for 2024 because he was in the US for more than 35 days.

Common pitfalls to avoid with the FEIE

Some common pitfalls when claiming the foreign earned income exclusion, and how to avoid them:

1. Assuming automatic qualification:
   Many expats mistakenly believe that simply working abroad qualifies them for the foreign income exclusion. But remember, you must meet either the Bona Fide Residence Test or the Physical Presence Test.
   
   The Bona Fide Residence Test requires living in a foreign country for an uninterrupted period that includes an entire tax year, while the Physical Presence Test requires being physically present in a foreign country for at least 330 full days during a 12-month period.
2. Misunderstanding eligible income:
   Only foreign-earned income qualifies for the FEIE. Unearned income like interest, dividends, and capital gains cannot be excluded. Additionally, income earned as a US government employee or military personnel is not eligible.
3. Failing to file Form 2555:
   Many expats assume the foreign-earned income exclusion is applied automatically. However, you must file Form 2555 with your tax return to claim the exclusion. Failing to do so can result in losing the benefit for that year.
4. Revoking the FEIE without understanding the consequences:
   If you revoke the FEIE, you cannot claim it again for five years without IRS approval. This can have significant long-term tax implications, so if you’re unsure - speak to a professional before deciding.
5. Overlooking other tax benefits:
   Relying solely on the FEIE might mean missing out on other benefits like the Foreign Tax Credit or tax-deductible IRA contributions. It’s essential to consider your entire tax situation when deciding between the FEIE and other options.
6. Incorrect currency conversion:
   When calculating the FEIE, ensure you convert foreign currency to US dollars using IRS-approved exchange rates. Using incorrect rates can lead to inaccurate calculations and potential issues with the IRS.

The filing process for claiming the FEIE

IRS Forms to use

To claim the FEIE, you must file IRS Form 2555 with your annual US federal income tax return (Form 1040). Form 2555 has many detailed questions about your foreign-earned income, housing, and travel, so plan to spend some time gathering this information.

✔️ Pro tip: If your only foreign income was wages reported on a W-2, and the FEIE is your only exception or deduction, you can use the shorter Form 2555-EZ instead.

Step-by-step guide to Form 2555

1. Provide your personal information and answer background questions about your foreign employment and residence
2. Calculate your foreign earned income, converting amounts to US dollars
3. List any employer-provided housing amounts
4. Complete either the Bona Fide Residence or Physical Presence Test sections
5. Calculate your standard FEIE amount, subtracting any employer housing
6. Transfer the FEIE amount to Form 1040 to exclude it from federal taxable income

Need help navigating the complexities of the foreign earned income exclusion and expatriate tax filing? The tax experts at Taxes for Expats are here to help. Did you know you could get a free consultation on minimizing your global tax liability?

Deadlines and Extensions for Filing Abroad

US citizens abroad are automatically granted a 2-month extension until June 15 to file their taxes. However, any tax due must still be paid by April 15 to avoid interest and penalties.

If you need more time, you can request an additional extension until October 15 by filing IRS Form 4868. 

Note: The Form 4868 extension extends your filing deadline, not your payment deadline.

Other tax benefits for expats

The FEIE is just one of several tools to reduce your US expat taxes. Here are some others to consider:

Foreign housing exclusion or deduction

You may be able to exclude or deduct amounts paid for foreign housing in addition to the FEIE. The housing exclusion applies to amounts paid by an employer, while the housing deduction applies to amounts paid from self-employment income.

Foreign Tax Credit (FTC)

The Foreign Tax Credit lets you claim a dollar-for-dollar credit on your US taxes for income taxes you paid to a foreign country. You can claim the foreign tax credit on foreign income that is not excluded under the foreign income tax exclusion.

By combining the FEIE, foreign housing exclusion or deduction, and foreign tax credit, many expats can reduce their US tax liability substantially or even eliminate it entirely. A tax advisor who specializes in expat taxes can help you determine the optimal strategy for your situation.

Child Tax Credit

Child Tax Credit American expats living abroad may qualify for the Child Tax Credit. For the 2024 tax year, you can generally claim a credit worth up to $2,000 per qualifying child.

Foreign Bank Account Reporting (FBAR)

While not a tax benefit, it’s crucial for expats to be aware of FBAR requirements. If you have foreign financial accounts with an aggregate value exceeding $10,000 at any time during the calendar year, you must report them to the Financial Crimes Enforcement Network (FinCEN).

Tax Treaties

The United States has tax treaties with over 70 countries, which can help prevent double taxation on certain types of income. These treaties can provide additional benefits or exemptions for expats, depending on the specific agreement between the US and the country of residence.

State Tax Considerations

Some states may still require you to file a tax return even if you’re living abroad. However, many states have provisions that allow you to break tax residency when you move overseas. It’s important to research your specific state’s rules regarding expatriate tax obligations.