Overview
The Foreign Earned Income Exclusion (FEIE) reduces or removes U.S. federal income tax on wages, salaries, and self-employment income you earn while living and working abroad. It is designed to mitigate double taxation for Americans overseas, but it comes with strict tests, filing rules, and interactions with other tax benefits.
As a CPA and CFP® who’s advised many expatriates, I’ve seen the FEIE save clients thousands — but only when they documented time abroad, picked the right exclusion vs. credit strategy, and prepared Forms correctly. This guide explains the rules you must follow, common pitfalls, and practical filing steps.
Who can use the FEIE?
- U.S. citizens and U.S. resident aliens (green-card holders) whose tax home is in a foreign country and who either:
- Meet the Physical Presence Test: 330 full days in any 12-month period spent outside the U.S.; or
- Meet the Bona Fide Residence Test: established bona fide residence in a foreign country for an uninterrupted period that includes a full U.S. tax year.
Key point: your “tax home” must be in the foreign country. Temporary work assignments or short-term postings that keep your tax home in the U.S. may disqualify you.
(IRS: Foreign Earned Income Exclusion: https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion)
What income qualifies and what doesn’t?
Qualifying income
- Wages and salaries from foreign employment
- Net earnings from self-employment performed abroad
Non-qualifying income
- Passive income (interest, dividends, capital gains) generally does not qualify
- U.S.-sourced income (even if paid while abroad)
- Certain employer-provided benefits and allowances unless treated as earned income under U.S. rules
If you have mixed income, only earned income allocable to days physically spent abroad is eligible.
How much can you exclude?
The FEIE limit is adjusted for inflation each year (for example, for 2023 the maximum exclusion was $120,000). Because it changes annually, always check the current IRS limit before filing. (IRS FEIE page: https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion)
Which forms and schedules must you file?
- Form 2555, “Foreign Earned Income”: primary form to claim the FEIE. File Form 2555 with your timely federal income tax return (Form 1040).
- See our guide to Form 2555 for step-by-step help: Form 2555 – Foreign Earned Income.
- If you paid foreign income tax and want a dollar-for-dollar offset rather than excluding income, use Form 1116 to claim the Foreign Tax Credit. See: Foreign Tax Credit.
Important: You generally attach Form 2555 to your Form 1040 for the year in which you earned the income. If you’re filing late or claiming a prior-year exclusion, include an amended return (Form 1040-X) with the corrected Form 2555.
Deadlines, extensions, and special filing rules for expats
- Regular filing deadline for U.S. expats is the same as for domestic filers (April 15/16 depending on the year).
- Automatic two-month extension: U.S. citizens and residents living abroad on the due date generally get an automatic two-month extension to file (to June). You must pay any tax due by the original deadline to avoid interest.
- Form 2350: if you need extra time to meet the Bona Fide Residence or Physical Presence tests because of returning to the U.S., you can apply for an extension using Form 2350 (Application for Extension of Time to File U.S. Income Tax Return).
Choosing between FEIE and Foreign Tax Credit (FTC)
- FEIE removes (or reduces) taxable income. It often pairs with the foreign housing exclusion/deduction.
- FTC (Form 1116) gives a credit for foreign taxes paid and may be preferable if you pay high foreign income taxes or have substantial passive income.
- You cannot double-dip: income excluded under FEIE cannot also be used to generate a credit. Compare your effective U.S. tax after FEIE vs. FTC to decide. For mechanics and examples, see our explainer on the Foreign Tax Credit: Foreign Tax Credit.
In practice, I run both scenarios for clients: the FTC often wins when foreign tax rates exceed U.S. rates or when non-earned income is substantial.
Foreign housing exclusion and deduction
If you qualify for FEIE you may also qualify for a foreign housing exclusion or deduction for reasonable housing expenses (Form 2555). The housing amount has limits and may be reduced by a base amount. This is especially useful in high-cost cities.
Self-employment tax and the FEIE
- FEIE does not exclude you from self-employment tax (Social Security/Medicare) unless you’re covered by a totalization agreement between the U.S. and your host country.
- Check whether your country has a totalization agreement; if not, self-employment tax may still apply even if you exclude most income for income tax purposes. (Social Security Administration: totalization agreements pages.)
Partial-year claims and overlapping 12-month periods
- You can claim FEIE for a contiguous 12-month period that is not bound by the calendar year (especially under the Physical Presence Test).
- If you move mid-year, you can sometimes claim the exclusion for only the portion of the year you qualify; prorate the exclusion accordingly.
Recordkeeping and substantiation
Keep modern, organized records for at least three years (longer if you file amended returns or claim special relief). Useful items include:
- Passport entry/exit stamps or travel itineraries showing days abroad
- Employment contract, pay stubs, and W-2s/foreign equivalents
- Lease agreements, utility bills, and foreign tax returns
- Employer statements showing housing allowances
I recommend digital copies stored securely; when IRS auditors review FEIE claims they expect clear evidence of time and tax home.
Common mistakes to avoid
- Failing to file Form 2555 with your return or to attach required schedules.
- Miscounting days for the Physical Presence Test (partial days don’t count; count full 24-hour days outside the U.S.).
- Incorrectly treating passive income as earned income.
- Ignoring state tax residency rules — some states tax income despite FEIE (e.g., California has stringent residency rules).
- Overlooking self-employment tax exposure.
Examples (illustrative)
1) Remote worker for a U.S. employer living in Ireland for 11 months and meeting 330 days in a rolling 12-month window: they may exclude the portion of wages earned while meeting physical presence, file Form 2555, and still claim housing exclusion if eligible.
2) Entrepreneur with business income and dividend income: only the earned portion allocable to foreign days qualifies for FEIE; dividends remain taxable unless offset by the FTC.
When to seek professional help
- Complex assignments with frequent travel or split-family residences
- Significant self-employment income or U.S. sourced payments while abroad
- State residency disputes, claim overlaps with FTC, or when the IRS questions an FEIE claim
In my practice, clients with mixed-source income or intermittent U.S. visits get the most value from a tailored review — it avoids costly mistakes and ensures proper use of the FEIE and housing exclusion.
Resources and authoritative references
- IRS — Foreign Earned Income Exclusion: https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion
- IRS Form 2555 (PDF): https://www.irs.gov/pub/irs-pdf/f2555.pdf
- IRS Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad: https://www.irs.gov/pub/irs-pdf/p54.pdf
For a step-by-step walkthrough of Form 2555, see our site guide: Form 2555 – Foreign Earned Income. To compare FEIE vs. credits, review: How to Qualify for the Foreign Earned Income Exclusion.
Professional disclaimer
This content is educational and not a substitute for personalized tax advice. Rules for FEIE, FTC, and social-tax treatment depend on facts and may change; consult a qualified tax professional or the IRS for guidance specific to your situation.
If you want, I can:
- Review a sample set of travel records and pay statements to estimate your eligible exclusion; or
- Run a comparative calculation showing FEIE vs. Foreign Tax Credit outcomes for your tax year.