The Foreign Earned Income Exclusion: A Complete Guide for Expats 

American expatriates can significantly reduce their US tax liabilities with the Foreign Earned Income Exclusion (FEIE). For the tax year 2024, the FEIE allows up to $126,500 of foreign income exclusion per person, contingent upon meeting specific tests like the physical presence or bona fide residence criteria. 

This comprehensive tax guide dives into essential FEIE information, addressing critical questions like its definition, eligibility criteria, and potential savings.

What Is the Foreign Earned Income Exclusion? 

The Foreign Earned Income Exclusion (FEIE) is a tax benefit that expats can use to exclude foreign income from US taxation. It’s designed to help expats avoid double taxation. 
Because your foreign income will likely be taxed in your country of residence, the FEIE protects you from paying taxes twice on the same income. However, there are limits to how much foreign income you can exclude using the FEIE.

FEIE Limit

The FEIE exclusion amount is adjusted for inflation every year. For income earned in 2024, the maximum exclusion amount is $126,500. In the table below, you can see the FEIE exclusion amounts for every year since 2020.

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. This also includes self-employment income.
Passive income, on the other hand, includes interest, dividends, capital gains, rental income, and retirement income. Passive income is not eligible to be excluded with the FEIE.

Foreign vs. US Earned Income 

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

The reverse is also true. If you are working in the US, your earnings are considered to be US-earned income, even if you’re being paid by a foreign company. This is true no matter who pays your salary, whether it is a US company or a foreign company.

How to Qualify for the Foreign Earned Income Exclusion 

Two tests can determine whether you qualify for the FEIE: the physical presence test and the bona fide residence test.  

1. The Physical Presence Test

The physical presence test is one way Americans living overseas can qualify for the FEIE and save money on their US tax return. To pass this test, all of the following must be true: 

• You have foreign-earned  income.
• You have a  tax home in a foreign country.
• You have been physically present in a foreign country for at least 330 days out of any 12-month period.

The concept of a “tax home” is often misunderstood. A tax home is where an individual is permanently or indefinitely engaged in work—regardless of where their personal residence is. To quote the IRS: “Having a tax home in a given location does not necessarily mean that the given location is your residence or domicile for tax purposes.” 

However, 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. 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 foreign bank account (among other factors), your abode could be your host country. 

2. The Bona Fide Residence Test

The alternative to qualifying with the physical presence test is by using the bona fide residence test. To pass this test, all of the following must be true: 

• You have foreign-earned income.
• You have a tax home in a foreign country.
• You have been a bona fide resident of a foreign country for a full tax year.

The definition of a “bona fide resident” can seem murky. The biggest factor here for passing the test is that you must demonstrate that you are permanently living abroad with no immediate plans to return to the US. This would include having a long-term lease or owning a home, having local bank accounts and utility bills, etc. 
To learn more about bona fide residency, visit the IRS website.

Which Test Should I Use to Qualify for the FEIE? 

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.  
On the other hand, if you moved to a foreign country with no intention of returning, you can probably use the bona fide residence test. (Other factors will also need to be considered while determining which test is right for you.)

Using Form 2555 for Foreign Earned Income Exclusion 

You can claim the FEIE by filing Form 2555. To do this, you will need to know the following: 

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

If you are filing with a spouse, both of you will have to complete your own Form 2555—even if you file a joint return. 

Foreign Earned Income Exclusion Extensions

If you haven’t lived outside of the US long enough to claim the FEIE, you may be able to request an extension to file your expat taxes until you meet the time requirements. You will do this by filing IRS Form 2350. 

Scenario:

You moved abroad on October 1, 2024. By the standard tax filing deadline of April 15, 2025, you will have been abroad for approximately 197 days, which is insufficient to meet the Physical Presence Test requirement of 330 full days in a 12-month period.

Extension Request:

To allow yourself additional time to satisfy the 330-day requirement, you can file Form 2350, Application for Extension of Time To File US Income Tax Return. This form is specifically designed for taxpayers who expect to qualify for the FEIE but need extra time to meet either the Bona Fide Residence Test or the Physical Presence Test.

• Filing Deadline for Form 2350: Submit Form 2350 on or before the due date of your Form 1040. For the 2024 tax year, this is April 15, 2025. However, if you are “out of the country” on the regular due date, you are allowed an automatic two-month extension to June 16, 2025. Ensure you file Form 2350 before this date to request an extension.
• Extension Period: When granted, the extension typically allows you to file your return after you’ve met the 330-day requirement. In your case, if you anticipate meeting the Physical Presence Test by staying abroad until at least September 26, 2025, you can request an extension to file your return until that date.
• Filing Your Return: Once you’ve met the 330-day requirement, you can file your tax return, claiming the FEIE for the qualifying period. Attach Form 2555, Foreign Earned Income, to your Form 1040 to report your foreign earned income and calculate the exclusion.

Other Deductions and Exemptions for US Expats

In addition to the FEIE, the IRS offers several other tax benefits that expats can use to reduce or erase their US tax bill. Let’s look at a couple of the most common options. 

1. Foreign Tax Credit vs. Foreign Earned Income Exclusion

The Foreign Tax Credit lets Americans offset their US tax bill based on taxes they’ve paid (or owe) to a foreign government. For example, if you paid $15,000 in foreign taxes, you could claim a $15,000 tax credit to offset your US tax bill. 

If you live in a country with a higher income tax rate than the US, you may be able to erase your US tax bill entirely. However, the Foreign Tax Credit only applies to certain types of income, and there are unique considerations related to each foreign country. There is also a cap on how much you can claim each year.  

You can claim both the Foreign Tax Credit and the FEIE in the same year, just not on the same income. It’s important to understand which option will save you more based on your specific situation. Consult a tax professional to learn more. 

2. Foreign Housing Exclusion

The Foreign Housing Exclusion lets you 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. 

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 housing amount from your US expat taxes. 

If you qualify for the FEIE, you are automatically eligible for the Foreign Housing Exclusion. You can claim both benefits by filing Form 2555. 

Additionally, expats may be eligible for the Foreign Housing Deduction, which allows those who are self-employed to deduct excess housing costs that exceed the base housing amount from their taxable income. This deduction can be a valuable tool for reducing overall tax liability.

Common Foreign Earned Income Exclusion Mistakes 

Navigating the FEIE can be complex, and even small errors can lead to significant tax implications. Understanding the most common mistakes can help you avoid costly pitfalls and maximize your tax benefits. In this section, we’ll highlight typical FEIE errors that expats often make and provide tips on how to prevent them, helping you stay compliant and optimize your tax savings.

Thinking You Don’t Need to File a US Tax Return If You Qualify for the FEIE 

Many expat taxpayers make the mistake of thinking that since their income is excludable from tax, they are not required to report income under the limit. This is incorrect! You must still file an annual Federal Tax Return and report your income. However, if you qualify for the FEIE, you can attach Form 2555 to your return and exclude your foreign income from US taxation.

Prorating the FEIE When Needed

Under the Physical Presence Test, you can qualify for the FEIE by being outside the US for at least 330 full days within any 12-month period. This period does not need to align with the tax year or calendar year—for example, it could run from April to April.

Additionally, the 330 days do not have to be consecutive. However, if you move abroad midyear, you cannot claim the full FEIE amount, which applies to the entire tax year. Instead, you must prorate the exclusion based on the portion of the year you meet the qualifying criteria.

How to Calculate the Prorated FEIE

To calculate your maximum exclusion:

1. Multiply the FEIE limit for the year by the number of qualifying days you spent abroad.
2. Divide this total by the number of days in the year (365 days for non-leap years or 366 for leap years).

Maximum FEIE Exclusion Amount = (FEIE Limit for the Year) × (Number of Qualifying Days Abroad ÷ Total Days in the Year)

For example, if the FEIE limit is $126,500 for 2024, and you have 274 qualifying days abroad out of 365 days in the year, the calculation would be:

$126,500 × (274 ÷ 365) = $95,014

Thus, you would exclude $95,014 from your taxable income for the 2024 tax year.

Causing the FEIE To Cost You More 

The FEIE can be a major benefit for Americans living abroad. However, the FEIE isn’t ideal for all expats. For example, if you have significant unearned income, earnings over the annual FEIE threshold, or live in a country with a higher income tax than the US, then the FEIE may not be the best choice. In such cases, alternative tax strategies—such as the Foreign Tax Credit—may be more helpful. 

Once you choose 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 five years without requesting permission from the IRS in a Private Letter Ruling at the cost of $2,000. The IRS does not always grant permission, either.  

There are times when expats benefit from revoking the FEIE. Expats often do this to 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. 

It’s crucial to carefully assess your individual circumstances and seek guidance from a qualified tax professional service to determine if claiming the FEIE is the right choice for you.

Let Greenback Help You Save Money with Foreign Earned Income Exclusion  

The Foreign Earned Income Exclusion is a great tool for US expats to reduce their tax liability. If you’d like to learn more about how you can save on your expat taxes, our team of experts is standing by. At Greenback Expat Tax Services, we help Americans around the world file their taxes accurately and on time—while maximizing their savings. 
Contact us, and we’ll be happy to help you in any way we can. We look forward to hearing from you!