The Foreign Earned Income Exclusion (FEIE) is a valuable tax benefit for U.S. citizens and resident aliens who live and work abroad. It lets qualifying individuals exclude up to $120,000 of their foreign-earned income from U.S. federal income tax in 2024, helping to avoid double taxation on overseas earnings.
Who Qualifies for the FEIE?
To claim the FEIE, you must meet the following key requirements:
- Your tax home must be in a foreign country: Your tax home refers to your primary place of business or employment, not the U.S. You cannot claim FEIE if your tax home remains in the United States.
- You must have foreign earned income: The income you exclude must come from work you physically perform while abroad. This includes wages, salary, or self-employment income earned outside the U.S. Income from U.S. sources, such as rental income or remote U.S. jobs, is not eligible.
- You must satisfy either the Bona Fide Residence Test or the Physical Presence Test:
- The Bona Fide Residence Test requires you to live in a foreign country continuously for an entire tax year (January 1 to December 31) with the intention of residing there indefinitely or for an extended period.
- The Physical Presence Test requires you to be physically present in one or more foreign countries for at least 330 full days within any 12-month period. The days do not have to be consecutive.
Understanding the Bona Fide Residence Test
This test focuses on your residency status from a tax perspective. To qualify, you must establish a bona fide residence in a foreign country where you live and work for a full tax year. The IRS considers factors like your visa status, where you pay local taxes, your family’s location, and your intentions for remaining abroad. If you plan to return to the U.S. soon or maintain a U.S. residence, this can affect your qualification.
Understanding the Physical Presence Test
This is a more straightforward test based on counting days. You need to spend at least 330 full 24-hour days outside the U.S. in foreign countries during any continuous 12-month period. These days need not be consecutive, allowing flexibility for travel.
Practical Examples
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Example 1: Jamie works in Germany and lived in Berlin for all of 2023 without returning to the U.S. She maintained her family in the U.S. but intended to stay abroad long-term. Jamie qualifies under the Bona Fide Residence Test.
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Example 2: Alex freelances and travels across multiple countries. He spent 340 days outside the U.S. over 12 months but has not established formal residency anywhere. Alex qualifies under the Physical Presence Test.
How Much Income Can You Exclude?
For the 2024 tax year, the FEIE exclusion limit is up to $120,000 per taxpayer, adjusted annually for inflation. Income exceeding this limit remains taxable under U.S. law.
How to Claim the FEIE
You must file IRS Form 2555 with your individual tax return (Form 1040) each year you wish to claim the exclusion. Form 2555 documents your foreign earned income, verifies your tax home, and confirms which test you passed to qualify. Missing or incorrect filings can delay processing or disqualify your claim.
For additional guidance on filing, see our Form 2555 Foreign Earned Income guide.
Common Mistakes When Claiming FEIE
- Assuming short-term overseas stays qualify.
- Misunderstanding where your tax home is located.
- Forgetting to file the required IRS Form 2555.
- Confusing FEIE with the Foreign Tax Credit (see our guide on Foreign Tax Credit).
Tips to Maximize Your FEIE Benefits
- Track your travel days exhaustively to meet the Physical Presence Test.
- Maintain clear proof of your tax home and residence abroad.
- Understand that FEIE does not reduce self-employment taxes.
- Remember state tax obligations might still apply despite FEIE.
- Consult with a tax professional specializing in expatriate tax matters.
Additional FAQs
Can U.S. government employees claim the FEIE?
No, federal employees do not qualify to exclude their foreign income under FEIE.
Can you combine FEIE and Foreign Tax Credits?
Generally, no. You must choose the option that offers the better tax benefit for your situation, but you cannot apply both to the same income.
What if I return to the U.S. midyear?
You may qualify for a prorated exclusion based on the months you lived abroad.
Does FEIE exclude self-employment tax?
No, self-employment taxes still apply on income excluded by FEIE.
Sources
- IRS Publication 54: Tax Guide for U.S. Citizens and Resident Aliens Abroad
- IRS Form 2555 Instructions
- Investopedia: Foreign Earned Income Exclusion
This detailed guide helps U.S. taxpayers understand the qualifications and benefits of the Foreign Earned Income Exclusion, enabling smarter tax planning while living abroad.
