How US Expats Save Tax With The Foreign Earned Income Exclusion (FEIE) – 2025

For Americans living abroad, the Foreign Earned Income Exclusion (FEIE) can provide major tax savings. The FEIE allows to exclude up to $120,000 (2023) from US federal income taxes. It is available to Americans and Green Card holders living outside the US.

However, you must meet certain requirements to qualify for the FEIE and claim it on IRS Form 2555.

US expats should also know that claiming the Foreign Earned Income Exclusion is not always the best approach for tax optimization. In some cases, using a Foreign Tax Credit can be the better strategy.

In this guide, we cover how the FEIE works, how to qualify for it, when you should or shouldn’t use it, common mistakes, and much more.

If you are new to filing US taxes when living overseas, you might also want to check out our Expat Tax Guide for a general overview of tax considerations for expats.

Table of Contents

• What Is The Foreign Earned Income Exclusion?
• How To Qualify For The Foreign Earned Income Exclusion
• Tax Home In A Foreign Country
• Physical Presence Test
• Bona Fide Residence Test
• What Is Foreign Earned Income?
• Earnings Not Eligible For FEIE
  • Passive Income
  • Income Earned While Not In A Foreign Country
  • Pay From The Military, Government, And Its Agencies
• Form 2555 And FEIE
• How Much Foreign Income Is Tax-Free In The US?
• How To Calculate The FEIE
• FEIE Does Not Reduce Self-Employment Tax
• Foreign Housing Exclusion Or Deduction
• Foreign Earned Income Exclusion Vs Foreign Tax Credit
• Claiming Both The FEIE And FTC
• Common Mistakes Expats Make With The Foreign Earned Income Exclusion
• How To Claim The Foreign Earned Income Exclusion

What Is The Foreign Earned Income Exclusion?

The Foreign Earned Income Exclusion, or FEIE, allows Americans living abroad to exclude up to $120,000 (2023) of foreign earned income from federal income tax in 2023. The exclusion amount is adjusted annually for inflation.  

The FEIE does not apply to all types of income. For example, you cannot use it to exclude passive income from taxation. We explain what income can be excluded this later in this guide.

Expats must claim the FEIE on IRS Form 2555 (more about this form in a moment), filed together with their US tax return. If you don’t claim the exclusion with Form 2555, you cannot use it.

We often read in expat forums and groups that people think they don’t have to file US taxes if they earn below the FEIE exclusion limit. This is not correct! You must file a US tax return if your income exceeds the general tax filing thresholds. Filing thresholds can be as low as $5 gross income for married filing separately or $400 for self-employed.

As always with tax benefits, you must meet certain requirements to be able to claim the exclusion.

How To Qualify For The Foreign Earned Income Exclusion

Living abroad or spending a lot of time outside the US traveling is not enough to qualify for the FEIE. The IRS requires that:

• Your tax home is in a foreign country, and
• You meet either the Physical Presence Test or the Bona Fide Residency Test.

Let’s break that down.

Tax Home In A Foreign Country

The IRS defines “tax home” as your regular or principal place of business, employment, or post of duty, regardless of where you maintain your family residence. You may have more than one tax home per year.

Be aware that the IRS does not treat US possessions like Guam and Puerto Rico as foreign countries. Therefore, you won’t be able to claim the FEIE when living there.

Physical Presence Test

To meet the Physical Presence Test, you must be physically present in a foreign country or countries for at least 330 full days during any period of consecutive 12 months.

The 12-month period does not have to be the same as the tax year; rather it can be any 12 month-period that allows you to qualify for 330 full days. This means that it can actually straddle tax years, as long as it starts or ends in the tax year you are claiming the FEIE and ends before you file your tax return.

While counting days seems very straightforward, the IRS has specific rules on what constitutes a full day in a foreign country. For example, international waters don’t count as foreign countries.

We explain in detail how to correctly count days and find the best 12 month-period to maximize the exclusion in this Guide to the Physical Presence Test.

Bona Fide Residence Test

The criteria of the bona fide residency test are far more subjective than those of the physical presence test, as there is no set limit on the number of days you can spend in the US.

Generally, you are a bona fide resident if you can call another country “home” for an entire calendar year. This means you have likely rented or purchased property and you are in your host country legally with some type of non-tourist visa.

You may also have established bank accounts, maybe a business, and have foreign bills to pay. If you have a family, they may have moved with you to the foreign country (although this is not required).

If you are a bona fide resident, you may keep your house or other interests in the US. However, if you are audited you must be able to show the IRS that you have moved your life to your new country.

Note that if you declare yourself a non-resident in your host country to avoid taxes there, you cannot claim to be a bona fide resident of that country. Our Guide to the Bona Fide Residence Test explains all the details and nuances.

What Is Foreign Earned Income?

As mentioned earlier, not all types of income can be excluded from US income tax using the Foreign Earned Income Exclusion. Only “foreign earned” income qualifies.

Foreign earned income is income from employment, including self-employment, while working in a foreign country. This includes:

• Salaries
• Wages
• Professional fees for providing services
• Commissions
• Bonuses
• Tips

Earned income also includes payments for sick leave or vacation leave. Even severance pay can in certain situations be partially excluded. Speak to an experienced expat tax accountant.

The income can be paid by US based businesses, including your own US company, as long as you are in a foreign country while doing the work.

It doesn’t matter if you get paid into a US or foreign bank account. Furthermore, it doesn’t matter if your employer is foreign or US based. What is important is that you performed the work while in a foreign country.

Still, not all income you might receive while abroad is eligible for the FEIE.

Earnings Not Eligible For FEIE

The Foreign Earned Income Exclusion allows you to exclude income that you earn when working in a foreign country. Other income does not qualify for the FEIE because it is not considered “earned” or “foreign earned”. The following income types are not eligible for the FEIE:

• Passive income
• Income earned while not in a foreign country
• Pay from the military, government, and its agencies

Let’s explain these a bit more.

Passive Income

Passive income, as opposed to earned income, does not qualify for the FEIE. This includes:

• Pension payments
• Investment income: capital gains, dividends, interest
• IRA distributions
• Rental income
• Social security benefits
• Annuities
• Alimony and child support
• Trust fund payments

Income Earned While Not In A Foreign Country

You can only exclude income that earned while you were in a foreign country. The IRS definition of a foreign country excludes international waters and US possessions like Puerto Rico.

This means that if you are working on a cruise ship or other vessel in international waters, you may not be able to use the FEIE to lower your income tax. However, if you have established bona fide residency in another country, you may still be able to claim a portion of the FEIE.

And of course, when you work during a visit back to the US, you cannot exclude the income earned during that visit. But there is an upside to this. You need “unexcluded” income for IRA contributions. Be aware of the pitfalls of making IRA contributions when using the FEIE.

Pay From The Military, Government, And Its Agencies

Military and civilian employees of the US government or its agencies also generally cannot exclude their pay under the FEIE. However, international organizations such as NATO may have special agreements with the IRS. We have experience with these special situations.

Form 2555 And FEIE

You might think that you don’t have to file a US tax return if you don’t owe any tax. However, don’t fall for this misconception—it could really get you into trouble.

The FEIE is an exclusion that you must claim on your tax return. Without claiming it, the IRS does not give it automatically. In fact, if you don’t file your tax returns and claim the FEIE, you may lose the right to use it. To claim the exclusion, you file Form 2555, Foreign Earned Income together with your tax return.

If you didn’t file US taxes as expat because you didn’t know you had to, don’t panic. You can still file tax returns late under the Streamlined Program and claim the FEIE.

Speak to an experienced expat accountant to avoid any costly mistakes.

You can schedule a consultation with one of our expat tax experts.

Don’t wait until the IRS notifies you about missing tax returns. It might be too late then to claim the FEIE.

How Much Foreign Income Is Tax-Free In The US?

As mentioned earlier, the IRS adjusts the maximum exclusion amount every year for inflation. The FEIE limit per qualifying taxpayer is $120,000 for the 2023 tax year (filed in 2024), and £126,500 for the 2024 tax year.

For the 2024 tax year, the exclusion limit goes up to $126,500.

The limits are per person, and each person must qualify separately. For a married couple filing jointly, the total limit is up to $240,000 (2023) when both spouses meet the requirements. Each spouse will file their own Form 2555 and be entitled to $120K each.

How To Calculate The FEIE

Americans working abroad can exclude foreign earned income up to those limits if they qualify for the exclusion. However, the actual exclusion amount is prorated, based on the number of days you actually spent in foreign countries during the tax year.

For example, let’s say you moved abroad in March 2023. You could qualify under the Physical Presence Yest if you spent over 330 full days in the foreign country during the period starting in March 2023 to March 2024. However, your 2023 exclusion would be prorated for the time spent in the foreign country from March to December of 2023. Hence you would be entitled to a maximum of $100,560 ($120,000 x 0.838)

Once you claim the FEIE, it applies to the entire eligible foreign earned income of that tax year. You cannot choose which income to exclude and which not. If you need unexcluded income, for example to make an IRA contribution and you worked in the US during the tax year, you can use this US-earned income.

FEIE Does Not Reduce Self-Employment Tax

Self-employed expats can use the Foreign Earned Income Exclusion to exclude eligible gross income from federal income tax. However, the FEIE does not reduce self-employment tax on net income.

When self-employed, you pay the combined employee and employer amount of social security and Medicare tax.  Self-employment tax consists of 12.4% social security tax on the first $160,200 of your net income, plus 2.9% Medicare tax on your entire net earnings. If the earned income exceeds $200,000 ($250,000 for married couples filing jointly), you must pay an additional 0.9% in Medicare taxes.

Unless you pay social security taxes in a country that has a totalization agreement with the United States, you must pay into the US system.

Learn more here about self-employment tax for expats. If you have significant income from self-employment, incorporating a business may be more beneficial for US taxes.

Foreign Housing Exclusion Or Deduction

The Foreign Housing Exclusion or Deduction is an often-overlooked tax benefit for US expats, that goes hand in hand with the Foreign Earned Income Exclusion. It is also claimed on Form 2555.

This housing benefit allows US expats to exclude or deduct certain foreign housing expenses from their US taxes. It helps expats to reduce the costs associated with living and working abroad.  Especially for expats in expensive locations such as Hong Kong, Singapore or Tokyo, this exclusion or deduction can be substantial.

How much exactly US taxpayers can save with the exclusion or deduction depends on where in the world they live. High-cost locations have higher upper limits. Like the FEIE, the housing amount is also updated annually for inflation.

Qualifying housing expenses include:

• Rent
• Fees for securing a lease
• Property insurance
• Parking spaces
• Rentals for furniture or appliances
• Certain utilities such as water and gas
• Home repairs

Expenses most be reasonable; they cannot be lavish.

Foreign Earned Income Exclusion Vs Foreign Tax Credit

While the FEIE is a great way to minimize US taxes, it is not the only option. If you pay tax in a foreign country, you can also use the Foreign Tax Credit (FTC) to offset your US taxes.

Which option is more beneficial depends on the specific circumstances.

Generally, expat living in high tax jurisdictions like Northern Europe benefit more from the FTC, while US citizens living in low or no tax countries are usually better off with the Foreign Income Exclusion.

However, additional considerations play a role, for example Child Tax Credit or IRA contributions. You cannot make IRA contributions from income excluded using the FEIE.

If you use the FEIE but do not exclude your entire income, you can claim the Child Tax Credit but cannot receive the refundable portion of the credit. 

An experienced expat tax accountant can run both FEIE and Foreign Tax Credit scenarios for you and advise on the best approach.

It’s important to note that you cannot switch back and forth between claiming and not claiming the FEIE. You elect to use the Foreign Earned Income Exclusion by filing Form 2555. When you don’t claim the FEIE on the next tax return, you are revoking the election to claim it and lose the right to claim it for the next 5 years.

Basically, you can switch it off, but you can’t quickly switch it on again. You may request permission from the IRS to use the FEIE election again before the 5-year wait time if you have an acceptable reason. Reasons include a change in marital status or change of country.

You could also revoke it by mistake. When you decide FTC is more beneficial but qualified for the FEIE, hence didn’t file. This would count as revocation.

You see, this complexity is especially taxing on expat.

But an experienced expat tax accountant can help with this.

Claiming Both The FEIE And FTC

If you earn more than the FEIE limit and pay taxes in another country, you can use a foreign tax credit on the income that’s not covered by the FEIE.

But be careful. You cannot apply both FEIE and Foreign Tax Credit to the same income.

As an example, a taxpayer earned $150,000 and paid $15,000 income tax in a foreign country in 2023. He spent the entire year in a foreign country and therefore qualifies for the entire FEIE amount of $120,000, which leaves $30,000 of unexcluded income.

He can then only use foreign taxes paid on those $30,000 as a dollar-for-dollar tax credit against US federal income tax. Foreign tax paid on the excluded $120,000 cannot be used for a tax credit. No double-dipping!

In the example above, 80% ($120,000/$150,000) of the $15,000 foreign tax paid would be disallowed. The taxpayer can only take a maximum credit of $3,000 against his US liability.

Common Mistakes Expats Make With The Foreign Earned Income Exclusion

The US tax code is complicated and even skilled US tax accountants may not know about expat tax rules like the foreign earned income exclusion.

That’s why we review the last three years of tax returns for each new client to spot any carryovers and unique tax situations.

It hits hard when our new clients find out they missed on legally saving thousands of dollars in recent years.

Luckily, there’s a solution for that: The IRS allows you to correct old returns.

In some cases, we managed to get big tax refunds by amending old returns.

Typical mistakes we see include:

• Not pro-rating the exclusion properly.
• Overlooking FEIE related exclusions and deductions, such as the Foreign Housing Exclusion/Deduction.
• Claiming the Foreign Earned Income Exclusion when the Foreign Tax Credit would have been more beneficial.
• Excluding all earned income with the FEIE and then making an unallowed excess IRA contribution.
• Accidentally revoking the right to claim the FEIE for 5 years by taking an inconsistent approach in their tax filings year over year.
• Reporting net salary instead of gross, i.e. taking deductions/benefits disallowed in the US.

How To Claim The Foreign Earned Income Exclusion

The concept of the Foreign Earned Income Exclusion seems simple, which is why it’s popular among expats. But many forget to determine if it is even beneficial for their specific situation.

As Morgan Stanley said: “You must pay taxes. But there’s no law that says you gotta leave a tip”.

He was spot on—there’s no need to overpay on taxes.

This article aims to help you understand the FEIE benefits, but it can’t replace personalized professional advice.

It’s always better to get help from an expat tax pro for your US expat returns.