The Foreign Earned Income Exclusion (FEIE): An Expat’s Guide 

A move abroad doesn’t relieve Americans of their United States tax obligations, but it does frequently qualify them for major tax breaks. In fact, leveraging the right tax exclusions, credits, and deductions often allows expats to reduce — or even completely erase — their US tax bill. Among these key expat tax breaks is the Foreign Earned Income Exchange, or FEIE.

The FEIE can often help you mitigate the impact of double taxation or avoid it entirely. In some cases, the FEIE can even help you pay less in taxes as an expat than you would in the US. Of course, just as with all tax strategies, whether or not the FEIE is right for you depends on your individual circumstances.

While the nitty-gritty details of tax breaks like the FEIE can be complex, we’re here to simplify it for you. After all, as a dedicated US expat tax firm, helping Americans abroad optimize their tax strategies and reduce their tax bills is our bread and butter. Read on as we break down what the FEIE is, who qualifies for it, how to claim the exclusion, and more.

What is the Foreign Earned Income Exclusion (FEIE)?

The FEIE is a major tax break for expats that allows Americans to exclude a certain amount of their foreign earned income from ordinary federal income taxes. 

The other key tax breaks for expats include the Foreign Tax Credit (FTC) and Foreign Housing Exclusion/Deduction (FHE/FHD), both of which we’ll go into more detail on later.

FEIE thresholds

For tax year 2024 — aka the taxes you file in 2025 — the maximum exclusion for the FEIE is $126,500. However, as you can see below, this number increases slightly each year to account for inflation.

Tax Year	Return Filing Year	FEIE Amount
2023	2024	$120,000
2024	2025	$126,500
2025	2026	$130,000

Limitations of the FEIE

Applies only to foreign earned income

To be FEIE eligible, income must be actively earned. This includes types of income like:

• Salary/wages
• Self-employment income
• Commissions
• Tips 
• Bonuses
• Certain taxable benefits (e.g. vacation or severance pay)

On the other hand, you cannot exclude unearned/passive income under the FEIE. Types of income that are ineligible for the FEIE include:

• Rental income
• Dividends
• Capital gains
• Interest from bank accounts or investments
• Lottery winnings
• Pension/retirement income
• Social Security benefits
• Annuities
• Child support/alimony
• Distributions from a trust

Furthermore, active income must also be foreign-sourced to be eligible for the FEIE. This means that the income must come from work or services performed outside of the US. In other words, you generally must be sitting and earning the income from a physical location abroad such as in Italy for it to qualify. Accordingly, payments from a US-based company for work or services you performed while abroad are still FEIE-eligible.

Excludes income from ordinary federal income taxes only

The FEIE excludes qualifying income from ordinary federal income taxes, aka the tax rates ranging from 10% to 37% (depending on overall taxable income) that the US government levies on income. It does not, however, exclude your income from other types of taxes.

For example, self-employed expats who claim the FEIE must still pay a tax of 15.3% (12.4% for Social Security, 2.9% for Medicare) on their net self-employment income. 

It’s worth noting that most states don’t recognize the FEIE. As a result, income you exclude from federal taxation under the FEIE may still be subject to state taxes if you qualify as a state tax resident.

No “double dipping” on excluded income

The IRS generally doesn’t allow you to apply multiple tax breaks to the same item of income. For example, if you use the FEIE to exclude all $80,000 of your self-employment income from federal income taxes, you cannot claim the FTC with any foreign taxes you paid on that income. 

Furthermore, you cannot make contributions to tax-advantaged US retirement accounts from income excluded under the FEIE.

How to qualify for the Foreign Earned Income Exclusion (FEIE)

Before you claim the FEIE, you must meet at least one of two different tests.

The 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 out of any365-day period that overlaps the relevant tax year. These 330 days do not need to be consecutive, however. Note that only days where you spent all 24 hours outside of the US count as a full day for the purposes of this test.

Proving you met the Physical Presence test requires you to log all of the countries you were physically present in over the relevant 365-day period and how much time you spent there. Keeping a record of your international travel throughout the year will make it easier to accurately report this information after the end of the tax year.

The Bona Fide Residence Test

To meet the Bona Fide Residence Test, you must be an established resident of a foreign country for an uninterrupted period that includes an entire calendar year.

While the IRS doesn’t require you to provide proof of your residency status on the FEIE tax form, it is a good idea to keep evidence on hand in the event of an audit. This might include foreign residence cards, foreign income tax returns, or rental contracts, among other official documentation.

How to claim the FEIE with Form 2555

If you want to claim the FEIE, you must complete Form 2555 and file it along with the rest of your tax return. Form 2555 consists of nine different sections:

• Part I: Share general information, like your name, occupation, employer, where your tax home is, and whether you’ve filed the form before
• Part II: This section is only for those who meet the Bona Fide Residence Test. In it, you’ll share details of your foreign residence, like when it started, whether you must pay income taxes, how many days out of the tax year you spent in the US, and which visa you entered your country of residence under
• Part III: This section is only for those who meet the Physical Presence Test. In it, you’ll share the start and end dates of the relevant 365-day period, your primary country of employment, and which countries you stayed in and for how long
• Part IV: Enter detailed information about your foreign income earned over the tax year, like your total wages and salary, the value of certain non-cash benefits, and any reimbursements or allowances you received. At the end, you’ll use these figures to calculate your total foreign earned income
• Part V: Indicate whether or not you will also be claiming the FHE or, if you’re self-employed, the FHD. If so, you will need to complete Part VI. Otherwise, you can skip right to Part VII. 
• Part VI: This section is only for those who plan to claim the FHE or FHD. In it, you’ll share details on your foreign housing expenses, including how much you incurred, where you incurred them, and whether your employer reimbursed you for any of them. At the end, you’ll calculate your total allowable foreign housing exclusion
• Part VII: Calculate your total allowable foreign earned income exclusion
• Part VIII: Calculate your total allowable exclusion taking into account both the FHE and FEIE
• Part IX: Calculate your total allowable foreign housing deduction 

You should attach Form 2555 to your annual tax filing, usually Form 1040, by mail or electronically, but keep in mind that not all US tax software facilitates US expat tax returns. While most Americans have a tax deadline of April 15th, expats receive an automatic two-month extension until June 15th. If you need extra time to file, you can file Form 4868 to extend the deadline further to October 15th.

FEIE alternatives & supplementary strategies

If you don’t qualify for the FEIE, don’t worry — you may be able to claim other tax breaks. And even if you do qualify for the FEIE, you may be able to combine it with other tax benefits like the ones below.

The Foreign Tax Credit (FTC)

The FTC allows Americans to claim dollar-for-dollar US tax credits on any foreign income taxes they’ve paid. In order to qualify, taxes must be:

• Legal
• Payable by you
• Based on income
• Paid or accrued

Remember, you can’t claim the FTC on taxes you paid on income excluded under the FEIE. However, you can claim it on different items of income. Notably, you can claim the FTC for foreign taxes you’ve paid on unearned income like rental income and investment earnings.

In some situations, it may be beneficial to forego the FEIE in order to claim the FTC for taxes you’ve paid on your active foreign earned income. This is especially true when:

• Your foreign earned income significantly exceeds the FEIE threshold
• You have a large amount of passive income
• You live in a country with higher taxes than in the US
  • Note: In this situation, claiming the FTC often not only eliminates your US tax bill, but also gives you surplus credits to use on future tax bills.
• Your foreign housing expenses are negligible, and therefore wouldn’t benefit as much from the FHE/FHD
• The FEIE would reduce your Adjusted Gross Income (AGI) enough that you wouldn’t qualify for other advantageous tax credits

Foreign Housing Exclusion/Deduction (FHE/FHD)

The FHE and FHD both refer to a tax break that helps expats offset the cost of certain qualifying foreign housing expenses. Which one you claim depends on your employment status — employees claim the FHE, while self-employed taxpayers claim the FHD. 

The FHE/FHD covers expenses like:

• Rent
• Utilities
• Necessary repairs
• Property insurance
• Occupancy taxes
• Residential parking
• Furniture rental

Notably, the FHE/FHD excludes: 

• Lavish or excessive expenses
• Domestic labor (e.g. the cost of hiring a cleaner or home chef)
• Mortgage payments
• Furniture purchases
• Home improvement projects

It’s important to note that the FHE and FHD don’t allow you to exclude or deduct qualifying expenses dollar-for-dollar. Instead, you’ll need to calculate your allowable amount.

Other tax breaks & strategies

US expats aren’t limited only to expat-specific tax breaks. Often, they can claim many of the same tax credits and deductions as they would in the US, including the Child Tax Credit (CTC) and the Lifetime Learning Credit (LLC). It’s possible for the FEIE to lower your AGI so much that you don’t qualify for certain tax credits, though, so you’ll need to double-check your eligibility.

Some of the many other ways you could reduce your US tax burden could include:

• Claiming benefits of an income tax treaty
• Setting up an S corp or C corp
• Making charitable donations
• Deferring foreign income

However, before leveraging any of these strategies, you should always consult with a tax professional.

Minimize your tax bill with Bright!Tax

The FEIE is one of the most important tax breaks for US expats. Those who meet either the Physical Presence Test or Bona Fide Residence Test can use the FEIE to exclude up to $126,500 in foreign earned income from taxation. To do so, they must file Form 2555.

That said, the FEIE may not be right for everyone. To ensure that the FEIE is a good fit for your particular circumstances, it’s critical to consult a tax professional — that’s where Bright!Tax comes in.

Resources: 

1. IRS releases tax inflation adjustments for tax year 2025
2. Figuring the foreign earned income exclusion
3. Foreign earned income exclusion – Physical presence test
4. Foreign earned income exclusion – bona fide residence test

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