Foreign Earned Income Exclusion (FEIE): Complete Guide for Expats

Tips for Foreign Earned Income Exclusion 2019

The Foreign Earned Income Exclusion (FEIE) is a handy money-saving provision that you’re definitely going to want to become familiar with if you happen to be an expat. How can you qualify for the exclusion? How is the maximum amount of the Foreign Earned Income Exclusion for the 2020 tax year determined? Get the answers you need below.

Foreign Earned Income Exclusion (FEIE): What is it?

The Foreign Earned Income Exclusion, or FEIE, is a tax benefit that allows you to exclude a certain amount of foreign-earned income (over $100,000 USD) from US taxation.

The FEIE is one of the ways that the IRS helps expats avoid double taxation on their foreign-sourced income. Because the IRS assumes that you will be taxed in your country of residence on your foreign-earned income, it allows you to exclude this income from US taxation using the FEIE.

How Much Is the Foreign Earned Income Exclusion?

Every year, the amount of the FEIE is adjusted for inflation. Sometimes, this can cause confusion since early projections of the new FEIE limit may underestimate or overestimate the allowed excludable amount.

The Foreign Earned Income Exclusion limit for 2020 is $107,600. For 2021, the FEIE limit will be $108,700.

Tax Year FEIE Amount
2021 (filed in 2022) $108,700
2020 (filed in 2021) $107,600
2019 (filed in 2020) $105,900
2018 (filed in 2019) $103,900
2017 (filed in 2018) $102,100

How to Qualify for the Foreign Earned Income Exclusion

To qualify for the FEIE, you must be one of the following:

  • A bona fide resident of a foreign country (or countries) for an entire tax year
  • Physically present in a foreign country (or countries) for at least 330 full days during any 12-month period

Using the Physical Presence Test to Qualify for the FEIE

The Physical Presence Test (PPT) is one way Americans working overseas can qualify for the FEIE and save money on their US Tax Return.

In order to pass this test, you must have:

  • Foreign Earned Income. This would include a salary, wages, bonus or self-employment income. Note that this does not include dividends, interest, pension distributions or capital gains.
  • A “Tax Home” in the Foreign Country. This is often misunderstood when attempting to qualify for tax benefits, but a “tax home” is where an individual is permanently or indefinitely engaged in work – regardless of where their personal residence is. To establish a “tax home,”, you must have a work engagement expected to last at least one year. If you’ve retained a personal residence (abode) in the US, you can’t be considered to have a tax home in a foreign country. Learn more about this requirement on the IRS website.
  • Been Physically Present in a Foreign Country for the Necessary Time frame. This time frame is 330 days out of a 365-day period. This does not have to be on a calendar-year basis, and can be adjusted over a two-year span as needed to qualify. An important thing to note is that you must spend 330 full days in the foreign country, as partial days and time spent traveling do not count. It’s critical that you track travel days carefully if planning to use the PPT, as you’ll need to be able to show details to the IRS if requested. Visit this link to download an app that will help you keep track of your days and travel.

Using the Bona Fide Residence Test to Qualify for the FEIE

The alternative to qualifying with the PPT is by using the Bona Fide Residence Test (BFT).

In order to use this test, you must have:

  • Foreign Earned Income. This is the same requirement as for the PPT; you must have income earned in a foreign country in order to pass the test and use the FEIE to save on your working overseas tax.
  • A “Tax Home” in a Foreign Country. This is the same requirement for using the PPT to qualify. You must establish a “tax home” by having a work engagement expected to last a year or more, and retaining a personal residence in the US means you do not have a “tax home” in a foreign country.
  • Been a Bona Fide Resident for the Specified Amount of Time. This means you must have been a bona fide resident of a foreign country for an entire tax year. The biggest factor here for passing the test is that you must demonstrate intent to stay in the foreign country indefinitely with no immediate plans to return to the US. You can read more about the specifics of a bona fide resident here.

Having a Home in The US Affects Bona Fide Residence 

If you’re like many expats, you may still have a home in the US. What you do with this home and how you classify it can make a difference in the types of tax benefits you will get as an expat.

Generally speaking, the government classifies your ‘tax home’ where you primarily live and work.

Your ‘abode’ is determined by where you manage your personal, family and economic ties. Where your family is can certainly play a role in determining your ‘abode,’ but if you show that you’ve established a residence in your host country by integrating into society, having a home and setting up a bank account, among other factors – your ‘abode’ could be your host country.

As far as your property back in the States, you could rent it out, let your family live in it, or even leave it vacant. You’ll want to keep accurate records of your home in your host country, also, since that can go a long way in helping prove you are integrated into the foreign society.

How Will You Qualify for the Foreign Earned Income Exclusion?

Before deciding which test you’ll use to qualify for the FEIE, it’s important to fully understand the difference between the bona fide residence and the physical presence test.

Often, your specific situation will determine which test is the best option for qualifying for the FEIE. For instance, if you are on a foreign assignment with a specified end date (but for at least 330 full days), you’ll likely need to use the physical presence test.

If you’re unsure, it’s a good idea to consult with an expat tax professional to better understand the requirements for your US expat taxes.

Which Form Do You Use for the Foreign Earned Income Exclusion?

Once you’re confident you qualify, you’ll need to complete and attach Form 2555 as part of your Federal Tax Return.

To complete Form 2555, you will need to include:

  • Which test (bona fide residence or physical presence) you will use to qualify
  • Dates you traveled internationally and to/from the US during the tax year
  • Your prior year Form 2555 (if available)
  • Documentation of your foreign earned income

Each expat is required to complete their own Form 2555. If you are married filing jointly, each spouse will need to complete their own Form 2555. You’ll then attach both forms to your joint US expat taxes.

What Is Foreign Earned Income?

The FEIE only allows you to exclude foreign-earned income from your US expat taxes. This makes it important to understand which income qualifies as “earned” and “foreign.”

Earned vs. Passive Income

Earned income is any income you’ve earned by “working.” Income from wages and salaries are considered earned.

Passive income, on the other hand, includes income from interest, dividends, capital gains, rental property income, retirement income, and similar.

Foreign vs. US Earned Income

Generally, the IRS classifies income by where it is earned. So if you are living and working abroad, then your income is considered to be foreign-earned income, even if you are being paid by a US company.

The opposite is true as well. If you are working in the US, your earnings are considered to be US earned income. This is true no matter who pays your salary, whether it is a US company or a foreign company.

Common Foreign Earned Income Exclusion Mistakes

1. Thinking You Don’t Need to File

According to the IRS, a frequent error made by those who want to use the FEIE is assuming that, since the income is excludable from tax, the taxpayer is not required to report income under the limit.

In other words, some taxpayers believe the exclusion recuses them from filing requirements if their income is under the limit. Don’t make that mistake! You must still file annual Federal Tax Returns, and in order to exclude this income, you must qualify and fill out the required Form 2555.

2. Failing to Prorate the FEIE When Needed

Under the Physical Presence Test, you can qualify for the FEIE by being outside the US for 330 out of any 365-day period. This 365-day period does not need to be the same as the tax year. For instance, you could qualify for the FEIE by living outside the US from April to April (rather than the tax year, which is January to December).

However, if you move abroad mid-year, you will not be able to claim the full FEIE amount, which is intended for the full tax year. You will only be able to claim the portion of the FEIE that corresponds with the amount of time you spent abroad.

To figure out what your maximum exclusion amount is, simply multiply the maximum excludable amount for the year by the number of your qualifying days in the year. Then, divide that number by the number of days in the year.

For example, if you moved abroad in April 2020, you’ll calculate your FEIE amount for the 2020 tax year as follows:

  • $107,600 (FEIE limit in 2020) x 274 days (number of qualifying days) ÷ 365 (total number of days in the year) = $80,774

The Foreign Housing Exclusion: Another Way to Save 

If you qualify for the FEIE, you are also eligible for the Foreign Housing Exclusion.

The Foreign Housing Exclusion allows you to reduce your US taxable income by a portion of your qualifying housing expenses. Qualifying housing expenses typically include rent, utilities (except TV and internet), insurance, property taxes, and furniture rentals.

Like the FEIE, to qualify for the Foreign Housing Exclusion, you must pass either the Physical Presence Test or the Bona Fide Residence.

The specific amount of housing costs that you can exclude depends on the country and city in which you reside. Generally, if you live in a city with a higher cost of living, you can exclude a higher amount from your US expat taxes.

Use this Foreign Housing Exclusion calculation to work out the amount you’ll be able to exclude.

Electing & Revoking the Foreign Earned Income Exclusion: When It May Cost You More

Once you choose to use the FEIE (and/or the Foreign Housing Exclusion) you must use it every year you have foreign earned income—unless you formally revoke it.

Once revoked, you cannot use the FEIE for another 5 years without requesting permission from the IRS in a Private Letter Ruling at a cost of $2,000. The IRS does not always grant these exceptions.

There are times when expats benefit from revoking the FEIE. Often, expats do this so that they can use the Foreign Tax Credit to offset their US taxes, instead of the FEIE. In these cases, the individual has typically moved permanently to a country with a higher tax rate than the US and earns more than the amount they can exclude with the FEIE. Review this example to determine if the Foreign Earned Income Exclusion is the best way for you to save.

You should work with your tax professional to determine if electing or revoking the FEIE is right for you, as the calculations can be confusing.

Let Greenback Help You Save on Your Expat Taxes

As a US expat, the Foreign Earned Income Exclusion is a great tool for reducing your tax liability. However, it’s always a good idea to discuss your options with an expat tax professional to identify the best ways to save.

Our expert accountants can help you uncover all the tax credits that apply to you. Get started today, and we’ll make becoming tax compliant a cinch!