When Should You Revoke the Foreign Earned Income Exclusion?

According to tax professional analysis, most Americans who revoke their Foreign Earned Income Exclusion end up saving thousands in US taxes annually. However, the decision requires careful timing since revocation triggers a mandatory 5-year restriction period.

You should revoke FEIE when you’re paying more US tax with the exclusion than without it, typically because you live in a high-tax country, earn significantly above the $130,000 exclusion limit (2025), or expect to relocate to low-tax jurisdictions. The revocation process is straightforward, but the 5-year restriction makes timing critical.

The Foreign Earned Income Exclusion isn’t always the money-saver expats expect. For many Americans in high-tax countries earning substantial incomes, FEIE can actually increase their US tax liability by reducing available foreign tax credits while taxing excess income at higher rates.

When Should You Consider Revoking FEIE?

Several clear indicators suggest FEIE revocation might save you money:

High-Tax Country Residence

If you live in countries with tax rates equal to or higher than US rates (like Germany, France, or Scandinavia), you’re likely paying substantial foreign taxes that could offset your US liability through the Foreign Tax Credit.

Income Significantly Above FEIE Limit

When your earnings substantially exceed $130,000 (2025 limit), the IRS taxes your “excess” income at higher rates while proportionally reducing your available foreign tax credits, often creating higher overall US tax liability.

Alternative Minimum Tax (AMT) Exposure

FEIE can trigger AMT in certain situations, particularly for high earners with significant deductions or investment income.

Future Low-Tax Country Plans

If you plan to move to countries with minimal or no income tax (UAE, Singapore, certain Caribbean nations), preserving foreign tax credit carryovers through FEIE revocation can provide future tax benefits.

Substantial Foreign Tax Credit Carryovers

When you accumulate unused foreign tax credits that expire after 10 years, revocation allows you to use them immediately rather than losing them.

How Do You Formally Revoke FEIE?

The revocation process requires formal documentation:

Step 1: Attach a Revocation Statement

You must attach a written statement to your tax return (or amended return) for the first year you don’t want to claim the exclusion. The statement should specify which choice(s) you’re revoking and include your name, address, and tax year of revocation. The official IRS guidance provides the specific requirements for this statement.

Step 2: Stop Filing Form 2555

For the tax year you want to revoke, file your Form 1040 without including Form 2555. However, the formal revocation statement is required—simply omitting Form 2555 without the statement may not constitute proper revocation.

Step 3: Revoke Housing Exclusion Separately (If Applicable)

You must revoke the Foreign Housing Exclusion separately from FEIE if you’ve been claiming both. These are independent elections, and revoking FEIE does not automatically revoke your housing exclusion.

Step 4: Use Foreign Tax Credit Instead

File Form 1116 to claim the Foreign Tax Credit on foreign taxes paid, which often provides greater tax benefits than FEIE for high earners in high-tax countries.

What Are the Consequences of Revocation?

• The 5-Year Restriction: After revocation, you cannot use FEIE again for five consecutive tax years unless you obtain IRS permission through a costly Private Letter Ruling process.
• Foreign Tax Credit Becomes Primary Strategy: During the restriction period, you’ll rely on Foreign Tax Credit to offset US taxes, which often provides dollar-for-dollar tax relief for expats in high-tax countries.
• Housing Exclusion Remains Available: Revoking FEIE does not automatically revoke your Foreign Housing Exclusion. You can continue claiming housing benefits unless you separately revoke that election.
• Potential for Better Long-Term Results: Many expats find that Foreign Tax Credit provides more consistent and substantial tax savings than FEIE, especially with career advancement and income growth.

Should You Revoke? A Decision Framework

Ask yourself these key questions:

Financial Analysis:

• Am I paying more US tax with FEIE than I would without it?
• Do my foreign taxes exceed what I’d owe the US on the same income?
• Am I leaving foreign tax credits unused each year?

Future Planning:

• Will I stay in this high-tax country for at least 5 years?
• Do I expect my income to continue growing?
• Am I planning moves to low-tax jurisdictions?

Risk Tolerance:

• Can I commit to losing FEIE access for 5 years?
• Am I comfortable with the complexity of foreign tax credit?
• Do I have professional tax guidance for this decision?

Common Revocation Scenarios

Corporate Expat in Germany

Sarah moved to Munich for a long-term assignment and earns $180,000 annually. With German taxes of $65,000, she’s accumulating $20,000+ in unused foreign tax credits yearly while paying US tax on income above the FEIE limit. Revocation makes sense.

Digital Nomad Entrepreneur

Mark runs an online business from Singapore (no income tax) but plans to relocate to Australia (high taxes) in two years. He should keep FEIE now and revoke when moving to Australia.

Retiree with Investment Income

Patricia retired to Portugal with pension and investment income. Since investment income doesn’t qualify for FEIE anyway, revocation allows her to use Foreign Tax Credit on all Portuguese taxes paid.

High-Earning Consultant

James provides services from London, earning $250,000 with £85,000 in UK taxes. The substantial foreign taxes far exceed his potential US liability, making revocation immediately beneficial.

What About Years Without Foreign Earned Income?

Good news: Years without foreign earned income don’t require formal revocation and don’t trigger the 5-year restriction period. Don’t file Form 2555 for those years without attaching a revocation statement. This preserves your future FEIE options.

This commonly applies to:

• Temporary returns to the US
• Career transitions between countries
• Years focused on investment income rather than earned income
• Retirement years with pension-only income

Key Resources:

• Foreign Earned Income Exclusion Guide
• Bona Fide Residence Test Vs Physical Presence Test
• FEIE vs Foreign Tax Credit
• Form 2555 Instructions

Strategic Timing for Revocation

• Revoke Early in High-Tax Country Residence: If you’ve permanently moved to a high-tax country, revoke FEIE in your first full year to maximize long-term benefits.
• Don’t Revoke for Temporary Assignments: Short-term assignments (2-3 years) may not justify losing 5 years of FEIE access, especially if you plan to move again.
• Consider Income Trajectory: If you’re approaching or exceeding FEIE limits in a high-tax jurisdiction, revoke before major income increases.
• Plan Around Restriction Period: Ensure you can commit to Foreign Tax Credit strategy for the full 5-year restriction period.

Your Next Steps

If You’re Considering Revocation:

1. Calculate Both Scenarios: Compare your tax liability with and without FEIE for your specific situation
2. Assess Long-Term Plans: Ensure revocation aligns with your 5+ year residence and career plans
3. Gather Documentation: Compile foreign tax records and income documentation for accurate analysis
4. Seek Professional Guidance: Complex revocation decisions benefit from expert tax analysis, especially given the high cost of Private Letter Rulings if you need to reverse the decision

If You’re Behind on Filing: Use Streamlined Filing Compliance Procedures to catch up before making revocation decisions. You can’t optimize your tax strategy until you’re current with IRS requirements.

Get Expert Guidance on FEIE Revocation

FEIE revocation decisions require careful analysis of your specific financial situation, foreign tax obligations, and long-term plans. The 5-year restriction and high cost of Private Letter Rulings make getting this decision right critical for your financial future.

Have questions about whether FEIE revocation makes sense for your situation? Contact us, and one of our customer champions will gladly help. If you need specific advice on your tax situation, click below to get a consultation with one of our expat tax experts.

This article provides general information about FEIE revocation considerations. Tax situations are highly individual, and this information should not be considered personalized tax advice. Consult with a qualified tax professional for guidance specific to your circumstances.