Foreign Earned Income Exclusion: The Ultimate Guide For U.S. Expats

Let’s face it: living abroad doesn’t remove you from the U.S. tax system. Still, the Foreign Earned Income Exclusion is one of the few rules that can meaningfully reduce what you owe. If you’re looking to leverage this opportunity, read on. Our U.S. expat tax guide looks at how the FEIE works in practice, from foreign earned income exclusion requirements to Form 2555 instructions, and explains when the Foreign Tax Credit may be a better fit.

What Is The Foreign Earned Income Exclusion?

The Foreign Earned Income Exclusion, usually shortened to FEIE, is a rule in the U.S. tax system that lets Americans working abroad remove a portion of their earned income from U.S. taxation.

It exists because the United States taxes its citizens no matter where they live, which often leads to situations where someone pays tax in the country where they work and then faces another tax bill from the IRS. The exclusion eases that pressure by allowing you to exclude a specific amount of income and treat it as non-taxable under U.S. tax rules.

Needless to say, this rule makes remote work abroad far more manageable for many expats and long-term travellers.

How To Qualify For The Foreign Earned Income Exclusion

To claim the FEIE, you need to show that you live and work outside the United States in a way the IRS considers genuine. Before assuming you qualify, it’s important to understand the foreign earned income requirements the IRS uses to assess eligibility.

Your tax home must be abroad

Your tax home is where you carry out your business or employment. You’ll usually meet this requirement if:

• your main work is performed in a foreign country
• your professional ties are clearly outside the United States

You must pass one of the residency tests

There are two ways to qualify; you only need one of them.

1. The Bona Fide Residence Test

You pass this test if you become a resident of another country for an uninterrupted period that covers an entire tax year (January 1 through December 31).

That said, the IRS doesn’t define “bona fide residence” through a single rule. It looks at the mix of circumstances related to your stay, such as your visa type, local registration, the availability of long-term housing, and how settled your life is abroad. While there’s no requirement to become a permanent resident of that country, you need to show that you live there in a stable, continuous way.

In addition, you need to intend to stay for a meaningful length of time. Someone who enters a foreign country for a short contract and plans to leave immediately afterward may struggle to meet this test, even if they happen to stay for many months. On the other hand, if your presence abroad is indefinite or open-ended, that usually works in your favour.

The good news is that temporary trips out of the country like visiting family or taking holidays don’t break your residence, as long as you keep your home base in the foreign country.

2. The Physical Presence Test

The Physical Presence Test ignores your intentions, tax residency status, and personal ties. All it cares about is how many full days you spend outside the United States.

To qualify, you must spend at least 330 full days (from midnight to midnight) in one or more foreign countries within any 12-month period. The 12-month window doesn’t need to match the tax year, so it works well for digital nomads and anyone whose travel schedule doesn’t match a tidy calendar year. The test allows occasional short visits to the United States, provided they don’t reduce your total below 330 full days.

Your income must be earned abroad

Regardless of the test you use, the FEIE applies only to income earned from work performed in a foreign country. If your job or freelance activity takes place abroad and you meet the tax home requirement plus one of the residency tests, you’re typically in good shape to claim the exclusion.

What Counts As Foreign Earned Income?

Foreign earned income refers to the money you receive for work you carry out while you’re physically outside the United States. The key factor is the physical location where the work is performed, meaning it doesn’t matter where the payment is made or whether the employer is a U.S. or foreign entity. 

Income that generally qualifies

Foreign earned income includes money you receive for active work. Some examples include:

• wages or salary from a job you perform outside the U.S.
• freelance assignments completed while living or travelling abroad
• consulting engagements
• payments for services you deliver as a contractor
• profit from self-employment

Income that does not qualify

Money from assets falls outside the exclusion. This category includes:

• dividends or interest
• capital gains
• rental income
• royalties
• payments tied to property, investments, or ownership, not labour

Even if this money lands in your account while you’re overseas, it doesn’t count.

Why the timing of the work matters

Income is considered earned on the day you do the work. If you fly back to the United States for a few weeks and continue working during that visit, the income tied to those tasks is considered to be earned in the U.S., even if the funds reach you after you leave again. Remote workers often overlook this detail, especially when they move between countries.

What self-employed people should know

The FEIE rules work a little differently for self-employed expats. The IRS looks at your profit – the amount left after you subtract your business expenses – and treats that as your earned income. If the work itself is performed outside the United States, that profit usually qualifies for the exclusion.

One thing that often surprises self-employed expats is that the FEIE does not remove U.S. self-employment tax. In the United States, employees have Social Security and Medicare withheld by their employer, but self-employed people pay these on their own. While the exclusion protects expats from U.S. income tax, it doesn’t cancel Social Security and Medicare obligations. That’s why some people still face a tax bill even when all of their profit is excluded under the FEIE.

However, there is one exception. If you live in a country that has a totalization agreement with the United States, you may be covered by that country’s social security system instead. In that case, you generally don’t owe U.S. self-employment tax, so it’s worth checking whether your country of residence has such an agreement.

Exclusion Limit

The Foreign Earned Income Exclusion comes with a limit – the maximum amount of income you can remove from U.S. taxation. The IRS recalculates this limit every year based on inflation. The foreign earned income exclusion in 2025 allows qualifying expats to exclude up to $130,000 of income earned abroad. It rises to $132,900 for income earned in 2026.

The foreign earned income exclusion calculation depends on the annual limit and how long you qualify during the tax year. If your foreign-earned income stays below the limit, you may be able to exclude the entire amount. If you earn more, everything above the limit falls under the usual U.S. rules. By the way, couples don’t share a single limit – each spouse who qualifies can claim their own exclusion.

Foreign Housing Exclusion And Deduction

The tax code lets you set part of your overseas housing costs aside when you calculate your taxable income, which is known as the Foreign Housing Exclusion if you’re an employee, or the Foreign Housing Deduction if you’re self-employed.

This includes rent, utilities (except phone charges), and certain types of insurance tied to your home abroad. Furniture purchases, home improvements, and luxury rentals do not qualify.

There is a base amount – 16% of the FEIE limit – that you must exceed before any exclusion applies. Anything above the base can be excluded, up to a maximum amount that varies by location. High-cost cities such as Hong Kong, Singapore, or Zurich come with higher limits, while most places follow the general cap published by the IRS each year.

For employees, the exclusion reduces your taxable wages. Self-employed people use the same rules but handle it as a deduction against their income. When used properly, Foreign Housing Exclusion and Deduction can make a real difference for expats whose housing costs take up a large part of their budget.

How To Claim The Foreign Earned Income Exclusion (Form 2555)

You claim the Foreign Earned Income Exclusion by filing Form 2555 with your U.S. tax return. The steps below outline the Form 2555 instructions in a straightforward way.

Begin by confirming your tax home and the residency test you’re using.

Form 2555 asks whether you qualify under the Bona Fide Residence Test or the Physical Presence Test, and it needs the dates that support your choice. This is the part where accuracy matters most, because the IRS relies on those dates to determine eligibility.

Add your foreign address and basic information about your work abroad.

Here, specify where you live and what kind of work you perform while outside the United States.

List the income you earned from work performed abroad.

Employees report their foreign wages; self-employed people use the profit from their services, not their gross revenue. Keep in mind that what counts is when the work was done, not when the payment arrived.

Include your housing expenses if you plan to claim the Foreign Housing Exclusion or Deduction.

Rent, utilities (except phone charges), and certain types of insurance can be added here. If your housing costs exceed the base amount, this section calculates how much can be excluded.

Let the form run the calculations.

Once you’ve entered your dates, income, and housing figures, Form 2555 determines the amount you can exclude. The final numbers feed into your main tax return and reduce your taxable income.

File your return by the appropriate deadline.

Expats receive an automatic extension to June 15, and they can request an extension to October if needed. These extensions apply to filing only. If you expect to owe tax, it’s better not to delay payment, since interest may apply.

Form 2555 doesn’t remove every type of tax, but it’s the document that makes the FEIE official. Filling it out properly ensures that the exclusion works the way it’s meant to.

FEIE vs. Foreign Tax Credit (FTC)

The Foreign Earned Income Exclusion isn’t the only way expats can reduce their U.S. tax bill. Another option, the Foreign Tax Credit, sometimes offers a better outcome. The credit applies when you pay income tax to a foreign country. Instead of removing your income from U.S. taxation, the FTC gives you a dollar-for-dollar credit for the tax you’ve already paid abroad. In many high-tax countries, this credit eliminates the entire U.S. liability without using the FEIE at all.

Still, the FEIE and the FTC solve different problems. The FEIE helps people who live or travel in places with little or no income tax, like digital nomads, because they have nothing to claim as a credit. People who settle in countries with stronger tax systems, such as Canada, most of Western Europe, Australia, and others, usually go the FTC route, since the foreign tax they pay tends to be higher than what they would owe in the United States.

It’s possible to use both FEIE and the FTC in the same year, but only in limited situations. Once you exclude a portion of your income under the FEIE, you can’t use a credit for foreign tax that relates to that excluded income. The two benefits have to apply to different parts of your earnings. Because of this, expats often choose one method and stick with it for the year, unless they have a mix of income types or work in multiple tax jurisdictions.

There is one more detail worth keeping in mind. The FTC comes with carryover rules, meaning unused credits can sometimes be applied to future tax years. The FEIE doesn’t offer anything similar. This difference makes the FTC more appealing to long-term residents of higher-tax countries.

Conclusion

Filing taxes as an expat still requires a U.S. return, even when most of your income comes from abroad. The Foreign Earned Income Exclusion is one of the most practical tools available to expats. When used correctly, it can significantly reduce how much of your income the IRS treats as taxable. However, the FEIE isn’t a one-size-fits-all solution. Whether it works for you depends on several factors, and in certain cases, the Foreign Tax Credit makes more sense.

We hope our U.S. expat tax guide helps you make informed decisions about your tax obligations.