Living Abroad? Here’s How the Foreign Earned Income Exclusion Can Lower Your U.S. Tax Bill

Ask any American living abroad what keeps them up at night, and double taxation is right up there with jet lag and missing decent bagels. As a U.S. citizen, resident alien, or self-employed global adventurer, the IRS expects you to report your worldwide income—even if you earn every penny in a foreign country.

Enter the Foreign Earned Income Exclusion (or FEIE, if you’re on nickname terms). This handy IRS tax benefit is designed to help U.S. taxpayers avoid paying federal income tax twice on the same money. By using the FEIE when you file your U.S. tax return, you can exclude a big chunk of your foreign earnings, shrinking your U.S. tax bill and keeping more of your hard-earned income in your own pocket (and maybe, just maybe, in your favorite bakery abroad).

Ready to see how the FEIE can save you money—and your sanity? Let’s break it down.

What is the Foreign Earned Income Exclusion?

The Foreign Earned Income Exclusion (FEIE) is the IRS’s way of giving Americans abroad a break on U.S. taxes, allowing you to exclude a significant portion of your foreign salary or self-employment income from your taxable income when filing your annual Form 1040. Here’s what you need to know about how it works and who qualifies:

Who qualifies?

U.S. citizens and resident aliens who live and work in a foreign country, and who meet either the bona fide residence or physical presence test. Students, take note: claiming the FEIE can impact your FAFSA eligibility, so check how it might affect your financial aid.

What counts as “foreign earned income”?

Only money you actually earn for work performed in a foreign country—think salary, wages, or freelance income. It does not include rental income, passive income, or capital gains.

Why do your tax year, calendar year, and where you actually live matter?

The IRS cares about your physical location and permanent residence to determine if you’re truly earning abroad. You must use the calendar year as your tax year, and your eligibility is tied to where you spend your time and call home.

How much can you exclude—and what counts?

So, how big is the break you’ll get from the IRS? Each year, the IRS sets a new maximum exclusion amount—meaning the most foreign earned income you can take off your U.S. tax bill. For 2023, that figure was $120,000, and for 2025 it’s jumped to $130,000 per qualifying taxpayer. (Always check the latest IRS numbers when you file, as this can change with inflation.)

When it comes to what actually counts toward that exclusion:

• Qualifying income includes: wages, salaries, and self-employment income you’ve earned for work performed in a foreign country.
• Not covered: rental income, passive income, investment gains, and capital gains don’t qualify for the FEIE (though you may be able to use the Foreign Tax Credit for those).

Don’t confuse the FEIE with the Foreign Housing Exclusion or deduction—that’s a separate benefit for Americans abroad with high housing costs. If your foreign housing expenses exceed a certain threshold, you can exclude or deduct even more, using the foreign housing exclusion (for employees) or the foreign housing deduction (for self-employed individuals).

Qualifying for the FEIE: The two main tests

To unlock the benefits of the Foreign Earned Income Exclusion, the IRS needs you to prove that your foreign income truly comes from living—and working—abroad. That’s where these two tests come in. Qualifying under either the Physical Presence Test or the Bona Fide Residence Test is what separates a short-term traveler from a bona fide resident of a foreign country in the eyes of the IRS. Pass one of these, and you can claim the FEIE and lower your U.S. tax bill significantly.

Physical Presence Test

• To qualify, you must spend at least 330 full days in a foreign country during any 12-month period.
• “Full days” mean midnight to midnight spent abroad; days in international waters, airspace, or brief U.S. visits don’t count.
• This test is popular with digital nomads, remote employees, and self-employed expats who travel but maintain a tax home outside the U.S.

Bona Fide Residence Test

• You must establish uninterrupted residency in a foreign country for an entire tax year and prove a true intent to make it your permanent home (not just a long vacation).
• Requires evidence like local bank accounts, a permanent address, and community ties.
• Best suited for expats who settle long-term and want to show the IRS they’ve truly “put down roots” abroad.

How to claim the Foreign Earned Income Exclusion

Ready to put the FEIE to work for your tax situation? Here’s how to get it done—without tripping up on paperwork or deadlines.

• Gather your documents: You’ll need IRS Form 2555, your annual Form 1040, and supporting documentation that proves your foreign residence, work history, and (sometimes) foreign bank accounts.
• Follow the steps: File your U.S. taxes on time—using the regular deadline or the automatic two-month extension available to expats. If you’re late or need to catch up, you may still be able to claim the exclusion by filing back taxes and explaining your situation.
• Avoid common mistakes: Don’t miss deadlines, overestimate your eligibility, or forget to include all required information and attachments. The IRS doesn’t hesitate to deny exclusions for incomplete or inaccurate forms.
• Know when to get help: If you’re unsure about your eligibility or your forms are getting complicated, consult a CPA or a tax guide with expat expertise to make sure you’re maximizing your benefits and staying compliant.

Claiming the FEIE isn’t hard once you know the steps—just stay organized, file on time, and ask for help if you hit a snag.

What the FEIE doesn’t cover: Self-employment, state taxes, and extra deductions

Even if you qualify for the Foreign Earned Income Exclusion, there are some U.S. tax obligations that don’t go away—plus, a few extra benefits you might miss if you’re not careful. Here’s what every expat needs to double-check:

• Self-employment tax still applies: The FEIE only shields you from federal income tax, not self-employment taxes (Social Security and Medicare). If you’re your own boss abroad, you may still owe these—unless your country has a totalization agreement with the U.S.
• State tax surprises: Some states cling tight to their expats! If you maintain significant ties (like a house, voter registration, or bank account), you may still need to file a state income tax return—even if you’re living overseas.
• Foreign Housing Exclusion/deduction: If your housing costs are high, you might get additional relief using the foreign housing exclusion (for employees) or deduction (for self-employed). These can help reduce your U.S. tax bill above and beyond the standard FEIE.

Can you use the Foreign Tax Credit (FTC) as well?

Many expats wonder if they can combine the FEIE and Foreign Tax Credit for extra tax relief—and the answer is often yes, but with some important caveats.

When can you combine the FEIE and FTC?

• If you have more foreign earned income than the annual FEIE limit, you can use the FEIE for the first portion, and then apply the FTC to foreign taxes paid on the remainder.
• The FTC is also useful for types of income that don’t qualify for the FEIE, such as investment earnings, rental income, or capital gains.

What can you not combine?

• You can’t claim the FTC and the FEIE on the same dollar of income—each must apply to different income types or amounts.
• Some credits (like the child tax credit) can be affected by which exclusion or credit you use, so coordination matters.

Why coordination is key

• Properly stacking the FEIE, FTC, and even tax treaty benefits can minimize your U.S. tax liability while keeping your filings IRS-compliant.
• You’ll need to file Form 1116 for the FTC and Form 2555 for the FEIE—make sure your filing matches your actual tax situation and deadlines.

What are the downsides or limitations of the FEIE?

The Foreign Earned Income Exclusion is a great tool for lowering your U.S. tax bill, but it’s not a cure-all. Here’s what to watch out for:

• Missed U.S. tax benefits: Using the FEIE can limit your ability to contribute to an IRA or qualify for certain U.S. tax credits, since your excluded income doesn’t count toward these thresholds.
• Social Security credits: If you’re self-employed and exclude all your foreign income, you may not be earning U.S. Social Security credits, which could impact future retirement benefits.
• Reporting requirements: The IRS and U.S. government require you to report foreign bank accounts and assets—often through FBAR (FinCEN 114) or FATCA reporting—no matter how much you exclude. Missing these forms can mean big penalties.
• Complexity: Late filings, tricky residency situations, or a mix of business and investment income are all good reasons to consult a CPA or expat tax professional who knows the forms and filing deadlines inside and out.

While the FEIE can save you money, it pays to know the fine print—and to ask for expert help when things get complicated.

Take full advantage of the FEIE

The Foreign Earned Income Exclusion is one of the best tools U.S. expats have for avoiding double taxation—but it works best when you plan ahead, keep good records, and know exactly which forms and deadlines apply to your situation. Careful preparation means fewer surprises (and fewer gray hairs) at tax time.

If you want to get the most out of the FEIE and keep your global finances IRS-compliant, Bright!Tax is here to help. Our team specializes in expat tax returns, smart planning, and all the paperwork that comes with living abroad—so you can focus on enjoying your adventure, not worrying about your next tax bill.

Frequently Asked Questions