A Guide to the Foreign Earned Income Exclusion (FEIE)

The Foreign Earned Income Exclusion (FEIE) is a provision that allows U.S. taxpayers to exclude a portion of their foreign-earned income from U.S. taxation. The rise of remote work and digital nomadism has made FEIE a common tax minimization strategy for Americans living abroad. 

Given FEIE’s increased popularity, we’re going to explore the provision in this article, provide some understanding of how FEIE works in practice, and examine some of the other exemptions that U.S. expats can benefit from. 

Table of Contents

1. What is the Foreign Earned Income Exclusion?
2. How do you qualify for the FEIE?
3. How to claim the FEIE using Form 2555 
4. What are the common mistakes when applying for the FEIE?
5. What is the Foreign Tax Credit (FTC)?
6. What is the Foreign Housing Exclusion? 
7. How do the FEIE and foreign living work in practice?
8. Financial and lifestyle considerations of living abroad
9. The importance of professional tax advice for expats
10. FAQs about the FEIE

What is the Foreign Earned Income Exclusion?

The Foreign Earned Income Exclusion (FEIE) allows qualifying U.S. taxpayers to exclude up to $130,000 of foreign-earned income from U.S. federal income tax (2025). For many expatriates and remote workers, FEIEs can mean considerable savings on U.S. taxes as foreign-earned income could be subject to double taxation. 

FEIE works by excluding foreign-earned income up to a specific limit. For example, if a taxpayer’s foreign-earned income is $150,000, they would only be subject to U.S. tax on the $20,000 that exceeds the 2025 $130,000 limit. 

The Internal Revenue Service (IRS) adjusts FEIE exclusion amounts annually based on inflation, with the exclusion amounts for the past 5 years being as follows:

That said, the FEIE only applies to foreign ‘earned’ income, with foreign ‘passive’ income ineligible for exclusion.

Earned income refers to wages, salaries, and self-employment earnings—essentially any income obtained through work. In contrast, passive income such as interest, dividends, and capital gains don’t qualify for exclusion under the FEIE.

How do you qualify for the FEIE?

Certain eligibility tests need to be met in order for expatriates to qualify for the FEIE provision. There are two primary tests to determine eligibility for the FEIE: the Physical Presence Test and the Bona Fide Residence Test.

The Physical Presence Test

The Physical Presence Test requires a number of characteristics to be met:

• The U.S. taxpayer must spend at least 330 days outside the U.S. within a consecutive 12-month period. 
• The U.S. taxpayer must have foreign-earned income. 
• This U.S. taxpayer must have a tax home in a foreign country (with a tax home defined as the location where an individual is engaged in work). 

There are challenges that come with this test, however, especially when it comes to tracking time abroad. Keeping accurate travel records can be problematic for individuals frequently traveling between countries.

It’s recommended that individuals use travel trackers or apps that allow them to log their days spent in different locations, ensuring that they meet the 330-day requirement.

The Bona Fide Residence Test

The Bona Fide Residence Test requires the following characteristics to be met:

• The U.S. taxpayer must have foreign-earned income. 
• The U.S. taxpayer must have a tax home in a foreign country.
• The U.S. taxpayer must have been a bona fide resident of a foreign country for at least one tax year.  

“Bona fide resident” status requires demonstrating permanent foreign living with no imminent return to the U.S. Key indicators of this status may include long-term housing (whether leased or owned), local bank accounts, or obtaining a residency visa.

How to decide which test to use for FEIE 

As a general rule, the Physical Presence Test is preferable for individuals who are working abroad temporarily (for at least 330 full days), while the Bona Fide Residence Test is best suited to individuals intending to live abroad permanently. 

However, choosing which test to use for FEIE qualification depends on a number of factors, and it’s advisable to speak to a tax professional to clarify your position. At Harness, we help individuals and small business owners find tax advisors who are experts in expat and international taxes, as well as other complex matters.

How to claim the FEIE using Form 2555   

To claim the Foreign Earned Income Exclusion, you’ll need to file a Form 2555, providing key details about your income and residency. For married couples, both spouses will need to fill in a separate Form 2555, even if they’re filing taxes jointly. 

To complete a 2555 form, you’ll need to:

• Select between the Bona Fide Residence Test and the Physical Presence Test
• Record all international travel to and from the US during the tax year.
• Provide proof of your foreign-earned income.  

How to fill in Form 2555 

For the sake of clarity, we’ll use an example: Mark, a software developer, who moved to Germany from the United States for work at the very end of the 2023 tax year.   

Step 1: General Information (FORM 2555 Part I): Mark enters his name, SSN, occupation (e.g., “Software Developer”), and foreign address.  

Step 2: Bona Fide Residence or Physical Presence Test (Part II or III): Since Mark lived in Germany for all of 2024, he qualifies under the Bona Fide Residence Test and completes Part II. If he’d frequently traveled, he would instead complete Part III, listing the 12-month period he met the Physical Presence Test and his travel history. 

Step 3: Reporting Foreign Income (Part IV): Mark earned €4,500 per month (€54,000 annually). He enters this under “Foreign Earned Income.” If his employer-provided housing, its value is also included.  

Step 4: Calculating the FEIE (Part VII):   

For 2024 (filing in 2025), the maximum exclusion is $126,500. Mark calculates the exchange rate (e.g., 1 EUR = 1.10 USD) and converts his salary (€54,000 × 1.10 = $59,400). Since he lived in Germany all year, the percentage of time he resided abroad during the tax is 100% and he enters $59,400 as his FEIE.  

Finally, Mark reports total wages on his Form 1040 and enters the FEIE as a negative amount on Schedule 1, Line 8d, reducing his taxable income. 

While the example we’ve given here is relatively simple, completing Form 2555 can be a complicated process if there are multiple income sources, exchange rates, employer-provided perks, and partial-year residency. Misclassifying U.S. and foreign income or miscalculating the FEIE can result in audits or lost tax benefits, and it’s advisable to seek professional tax advice to avoid mistakes and optimize deductions for the best financial outcome.

 

What are the common mistakes when applying for the FEIE?

As mentioned, applying for the FEIE can be a complex process, with mistakes leading to potential tax liabilities, missed benefits, or penalties. Some of the most common errors expats make, include: 

Assuming you don’t need to file a U.S. tax return: Even if your foreign income is excludable, you must still file a tax return and submit Form 2555 to claim the FEIE.  

Failing to prorate the FEIE: If you move abroad midyear, you can’t claim the full FEIE amount. Instead, you must prorate the amount based on your qualifying days abroad under the Physical Presence Test (330 full days in any 12-month period).  

Revoking the FEIE without understanding the consequences: Once revoked, you can’t claim the FEIE again for five years without IRS approval (which requires a $2,000 Private Letter Ruling).

Choosing the FEIE when it’s not the best option: The FEIE may not be ideal if you have a high unearned income, earn more than the exclusion limit, or live in a high-tax country where the Foreign Tax Credit (FTC) may be more beneficial.  

What is the Foreign Tax Credit (FTC)?

The Foreign Tax Credit (FTC) is a tax reduction strategy often used in conjunction with the FEIE. The FTC allows U.S. expats to offset their U.S. tax debt with foreign income taxes paid on a dollar-for-dollar reduction basis. This means that in high-tax countries, the FTC can often eliminate U.S. tax debt entirely. 

However, the FTC has restrictions on eligible taxes and the maximum claim amount: 

Eligible taxes: Only income taxes (or taxes in lieu of income taxes) paid to foreign governments are eligible.  

Credit limit: Although the Foreign Tax Credit (FTC) doesn’t have a direct annual dollar limit, the amount of FTC you can claim in a given year is limited to your U.S. tax liability on your foreign income. If the foreign taxes you paid exceed this limit, the excess foreign tax can generally be carried forward for up to ten years or carried back one year (via an amended return). Maintaining accurate records of foreign income and taxes paid is therefore vital to calculating the correct FTC and maintaining tax compliance.

A combination of the FEIE and FTC is often the most effective way for U.S. expatriates to reduce their tax liabilities. For instance, if a U.S. taxpayer has $250,000 in foreign-earned income, they can exclude up to $130,000 using the FEIE (2025). The remaining $120,000 may then be subject to taxation, but the U.S. taxpayer can potentially apply the Foreign Tax Credit to offset the taxes paid to the foreign country.

What is the Foreign Housing Exclusion?  

The Foreign Housing Exclusion allows U.S. expats to further reduce their taxable income by excluding a portion of qualifying housing expenses, such as rent, utilities (excluding TV and internet), insurance, property taxes, and furniture rentals. The exclusion amount varies based on location, with higher allowances for cities with a high cost of living.  

Expats eligible for the FEIE automatically qualify for the Foreign Housing Exclusion and can claim both by filing Form 2555.  

Self-employed expats may also benefit from the Foreign Housing Deduction, which allows them to deduct housing costs exceeding a base amount. 

How does the FEIE and foreign living work in practice? 

The FEIE regulations that govern foreign work and income may be relatively well-defined, however, the practical implementation of FEIE rules and the broader concerns of expat living need to be carefully considered.

To gain a more pragmatic view into FEIE and the decision to become an expat, we spoke to Neil Johnson, a tax advisor who’s recently moved to Mexico, about his experience—and to Lewis Chessis, a tax advisor who specializes in taxation strategies for U.S. citizens living abroad.  

A tax advisor’s personal experience experience with FEIE

Neil’s decision to relocate to Mexico was influenced by both professional and personal considerations. As a tax advisor, he saw the opportunity to benefit from the FEIE, but the move also promised an improved lifestyle and lower living costs. 

“Not everything is about tax,” says Neil, “It’s also about cost of living. What I’m paying for rent on a three-bedroom, three-and-a-half-bathroom house with a pool in Mexico is what I pay in property taxes in the U.S.”

In preparing for his move, Neil took several key steps to meet the FEIE requirements. First, he sold his U.S. home to establish his intent to live abroad permanently and applied for a Mexican residency visa with his wife to help fulfill the Bona Fide Residency Test.

Additionally, Neil secured a long-term property lease in Mexico, with plans to eventually purchase a property. “I currently have a six-month lease on a house in Mexico that I can extend another six months, with the intention to buy a home down there.”

However, Neil points out that buying property abroad can be challenging without first experiencing the location. “It’s  hard to purchase something before you have boots on the ground and figure out where you want to buy.” 

Counting the days

Neil’s strategy includes staying abroad for over 330 days each year, which is essential for meeting the Physical Presence Test. “We’ll definitely be outside of that. Even if we come back to the US for doctor’s appointments or business calls, I doubt we’ll spend more than 30 days in the US in any given 12-month period.”

Neil emphasizes the importance of strict tracking of U.S. visits. “It’s something that people need to be really diligent about,” he says, and advises expats to be cautious of common mistakes, such as overstaying in the U.S. or inaccurately reporting foreign income. 

Managing daily life and avoiding red flags

While countries like Mexico may offer better property value per dollar spent, expats also need to factor in other day-to-day considerations. To circumvent the unreliability of the Mexican postal service, for example, Neil uses a virtual mailbox in Chicago to handle his mail. “I have a virtual mailbox in Chicago because getting or sending mail in Mexico is next to impossible.” 

As straightforward as solutions like virtual mailboxes may sound, however, expats need to be sure that such arrangements don’t create U.S. tax obligations. Neil is careful to stress to U.S. tax authorities that “I’m not conducting any business in Illinois. It’s just a mailing address.”

Lewis Chessis’s perspective on tax compliance when living abroad

Lewis Chessis is a tax advisor on the Harness platform with extensive experience helping U.S. citizens navigate the often-confusing realm of international tax compliance. One of the most common misconceptions among U.S. citizens abroad is the assumption that relocating removes their U.S. tax obligations. 

“The reason why U.S. taxation on worldwide income is such a big deal is because many people forget they’re still subject to U.S. tax even after relocating.” The U.S. is one of the few countries that taxes its citizens regardless of where they live, meaning that even if an expat has no income from U.S. sources, they still need to file a U.S. tax return.  

“The Foreign Tax Credit allows people working in high-tax countries like the UK to offset their U.S. tax liability by the amount they’ve already paid in taxes abroad,” says Lewis. This ensures that expats are not taxed twice on the same income. 

However, those in low- or no-tax countries, such as the UAE or Singapore, face additional hurdles. “If you go to a zero-tax jurisdiction, like Singapore, you don’t get the same benefits. In such cases, an expat may owe full U.S. tax on their income, making financial planning even more important.” 

FBAR and FATCA 

Beyond income tax, expats must also deal with the reporting requirements for foreign assets. U.S. citizens with financial accounts overseas must comply with the Foreign Bank Account Report (FBAR) and the Foreign Account Tax Compliance Act (FATCA), which require detailed disclosures of foreign-held assets. “If you hold over $10,000 in foreign accounts, the IRS requires you to file an FBAR form,” says Lewis. Failing to do so can result in severe penalties, even if no tax is owed. 

Consequently, for some expats, renouncing U.S. citizenship becomes an attractive option to eliminate tax burdens. However, Lewis warns that renouncing citizenship is no simple decision. “There’s no set amount of wealth or income where it’s clear that renouncing citizenship is a good idea,” he says. “U.S. citizens with high net worth may be subject to an exit tax… a final levy on unrealized capital gains, making the process costly.”

Expatriation also has long-term consequences, including potential restrictions on future U.S. travel and inheritance taxes for family members who remain U.S. citizens. Ultimately, reducing tax obligations may be a prime factor in the expat equation, however, the wider implications and complexities of a foreign move require careful analysis and thought. 

Financial and lifestyle considerations of living abroad

While the Foreign Earned Income Exclusion (FEIE) can offer significant tax benefits, it’s important to recognize that living abroad isn’t solely a financial decision. The prospect of lower living costs can be tempting, but it often comes with trade-offs that aren’t immediately apparent.

Housing, for example, can be more affordable in some countries, but this can mean compromising on infrastructure, safety, or access to reliable utilities and services. Inexpensive properties might be located in areas with inconsistent internet, limited public transportation, or unreliable healthcare facilities—factors that can significantly impact your day-to-day life.

Healthcare costs are often lower abroad, yet the quality and availability of care can vary widely depending on the region. While some cities offer excellent medical facilities, rural areas may lack specialized care or require additional travel for treatment. Additionally, expats often face hidden expenses such as visa and residency fees, international banking charges, and costs related to currency fluctuations, which can erode savings over time.

Cultural and lifestyle adjustments also play a role. Language barriers, different legal systems, and unfamiliar bureaucratic processes can add layers of complexity to daily life. Even simple tasks like setting up utilities, accessing government services, or navigating local regulations can require more time and effort than expected.

Ultimately, while the FEIE and reduced living expenses can enhance financial security, it’s essential to weigh these benefits against the practical realities of life abroad. Careful planning, realistic expectations, and professional advice can help ensure that the financial advantages align with your broader lifestyle goals.

The importance of professional tax advice for expats

The Foreign Earned Income Exclusion offers significant tax benefits for U.S. citizens living abroad, reducing the impact of double taxation. However, managing the complexities of FEIE requires expert planning and guidance. 

A professional tax advisor can play a vital role in determining eligibility for the FEIE, navigating the detailed requirements of the physical presence and bona fide residence tests, and implementing optimal tax strategies tailored to an individual’s specific circumstances.

At Harness, we can help you find a tax advisor with expertise in international and expat taxation, as well as other complex situations.

 

FAQs

Below are some of the most frequently asked questions about the FEIE and other exclusions

What is the Foreign Earned Income Exclusion (FEIE)?  

The Foreign Earned Income Exclusion (FEIE) allows U.S. taxpayers to exclude up to $130,000  of foreign-earned income from federal income tax, reducing their U.S. tax liability. 

How do you qualify for Foreign Earned Income Exclusion?  

To qualify for FEIE, you must meet either the Physical Presence Test (330 days abroad) or the Bona Fide Residence Test (prove your primary residence in a foreign country for an entire tax year). Both tests require additional criteria to be met and it’s advisable to speak to a tax professional to clarify your tax strategy.

What is the Foreign Tax Credit (FTC)?

The Foreign Tax Credit (FTC) allows U.S. expatriates to offset their U.S. tax liability by claiming a credit for income taxes paid to foreign governments.

Can I combine FEIE with FTC?  

Combining FEIE with FTC is a common strategy. The FEIE excludes foreign-earned income, while the FTC offsets taxes paid to foreign governments, reducing your overall U.S. tax liability.

What is the Physical Presence Test? 

The Physical Presence Test requires you to be outside the U.S. for 330 days within a 12-month period. The Physical Presence Test also requires U.S. taxpayers to have both a foreign income and a foreign tax home. 

What is a tax home?

A tax home is defined as your prime location for business or employment, regardless of your family’s residence.

What is the Bona Fide Residence Test? 

The Bona Fide Residence Test requires you to establish a primary, permanent residence in a foreign country. You must demonstrate your intent to live abroad, such as obtaining a long-term residency visa or purchasing property.

Can I use FEIE if I only move abroad temporarily?

FEIE is primarily designed for long-term expatriates. However, if you meet the eligibility criteria, you can use FEIE, even if your stay is temporary.

What happens if I fail to meet FEIE requirements?  

If you fail to meet FEIE requirements, you may lose the exclusion and be taxed on your foreign-earned income. Non-compliance can also trigger penalties or audits, so it’s important to maintain proper documentation.

What is the role of an income tax treaty in foreign-earned income taxation?

An income tax treaty between the U.S. and another country can help prevent double taxation. While the Foreign Earned Income Exclusion reduces taxable income, a treaty may provide additional benefits for eligible taxpayers abroad.

What is FBAR? 

FBAR (Foreign Bank Account Report) is a required filing for U.S. citizens with over $10,000 in foreign financial accounts. FBAR helps the IRS track offshore assets and prevent tax evasion. 

What is FATCA?  

FATCA (Foreign Account Tax Compliance Act) is a U.S. law requiring foreign financial institutions to report accounts held by U.S. citizens. FATCA helps prevent tax evasion by ensuring overseas income is disclosed to the IRS. 

What is Form 2555?  

Form 2555 is used by U.S. expats to claim the Foreign Earned Income Exclusion (FEIE), which allows them to exclude a portion of their foreign earnings from U.S. taxation. Eligibility for FEIE depends on meeting specific residency or physical presence tests.

 

About the experts:

Lewis Chessis, EA, is a tax advisor on the Harness platform and the founder of Chessis Tax. He is a member of the National Association of Enrolled Agents, the Texas Society of Enrolled Agents, and the Texas Society of CPAs. He brings over a decade of experience working for Big 4 firms, advising expatriates and high-net-worth individuals. He is based in Houston, Texas.

 

Neil Johnson, CPA, is a tax advisor on the Harness platform and the founder of The Tax Dude. He has over thirty years of experience and now specializes in CFO services, equity compensation, cryptocurrency taxation, cannabis taxation and divorce related tax/financial planning matters. He is an expat based in Mexico.

 

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Content should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author/interviewee as of the date of publication and are subject to change. Material presented is believed to be from reliable sources, however, we make no representations as to its accuracy or completeness. All information and ideas should be discussed in detail with your tax advisor prior to implementation.