What is the Foreign Earned Income Exclusion (FEIE)?

The Foreign Earned Income Exclusion (FEIE), claimed on Form 2555, allows qualifying US citizens and resident aliens living abroad to exclude a significant portion of their foreign earned income from US federal income tax.

For tax year 2024, the exclusion amount is $126,500. For 2025, it increases to approximately $130,000.

Who Qualifies?

To claim the FEIE, you must meet three tests:

1. Tax Home Test

Your tax home must be in a foreign country. Generally, this means your regular place of business or employment is outside the US.

2. Either the Bona Fide Residence Test OR the Physical Presence Test

Bona Fide Residence Test: You've been a bona fide resident of a foreign country for an uninterrupted period including an entire tax year.

Physical Presence Test: You've been physically present in a foreign country (or countries) for at least 330 full days during any consecutive 12-month period.

What Income Qualifies?

Only earned income from foreign sources qualifies — wages, salaries, professional fees, and self-employment income. Passive income (dividends, interest, capital gains, pensions) does NOT qualify for the exclusion.

The Foreign Housing Exclusion/Deduction

In addition to the FEIE, you may be able to exclude or deduct housing costs paid with foreign earned income that exceed a base amount. This can provide additional tax savings.

Important Considerations

• The FEIE does NOT eliminate self-employment tax on self-employment income
• The FEIE can interact unfavorably with US tax credits in some cases
• State taxes may not follow federal FEIE treatment
• The FEIE must be elected on your return; it's not automatic

Should You Elect the FEIE?

Surprisingly, not always. For some expats — particularly those in low-tax countries — claiming the Foreign Tax Credit instead of the FEIE provides a better tax outcome. This requires careful analysis of your specific situation.