What is the meaning of Foreign Earned Income Exclusion: What you need to know

The Foreign Earned Income Exclusion (FEIE) is a tax rule that lets qualifying U.S. citizens and resident aliens exclude a portion of their foreign earned income from U.S. tax so they don’t get taxed twice on the same income.

For the 2025 tax year, the maximum exclusion was $130,000 per qualifying taxpayer. For 2026 it rises to $132,900 per qualifying taxpayer.

On top of that, some expats may also benefit from the Foreign Housing Exclusion or Deduction, which can reduce taxable income further by covering certain housing costs abroad.

What Is the Foreign Earned Income Exclusion?

The Foreign Earned Income Exclusion allows U.S. citizens and resident aliens who live and work outside the United States to exclude up to a set amount of foreign earned income from U.S. federal income tax.

Foreign earned income includes:

• Wages and salaries earned while physically working in a foreign country

• Self-employment income from services you perform abroad

It does not apply to:

• Dividends

• Interest

• Capital gains

• Rental income

• Social Security benefits

The goal of the FEIE is to reduce double taxation on Americans working overseas.

Foreign Earned Income Exclusion Limits for 2024, 2025, and 2026

These are the maximum amounts you can exclude if you qualify:

• 2024: $126,500 per qualifying taxpayer

• 2025: $130,000 per qualifying taxpayer

• 2026: $132,900 per qualifying taxpayer

If both spouses work abroad and each meets the tests separately, each spouse can claim their own exclusion on Form 2555.

Read more about:  Child Tax Credit

Who Qualifies for the Foreign Earned Income Exclusion?

To use the FEIE, you must pass three main tests:

1. Your Tax Home Must Be Abroad

Your “tax home” is generally where your main place of work or business is located.

You’re more likely to qualify if:

• You live and work in a foreign country

• You have long-term housing abroad (rent or own)

• You have local bank accounts, residency permits, or visas

• Your personal and economic ties are mainly outside the U.S.

If your real “home base” is still in the U.S., you may fail the tax home requirement even if you spend time abroad.

Know about: Earned income Tax Credit

2. You Meet Either the Physical Presence Test or the Bona Fide Residence Test

You have two ways to show that you truly live abroad:

Physical Presence Test

You must be physically present in one or more foreign countries for:

• At least 330 full days

• During any 12-month period

The days don’t have to be consecutive, but travel days into or out of the U.S. usually don’t count as “full days,” so record-keeping is important.

Bona Fide Residence Test

You must be a bona fide resident of a foreign country:

• For an uninterrupted period that includes a full tax year

• With clear evidence you’ve established long-term residence (housing, work, family, etc.)

This test suits expats who have moved abroad more permanently and don’t plan to return to the U.S. in the short term.

3. Your Income Must Be Foreign-Earned

Only income from services you perform in a foreign country qualifies.

Examples that may qualify:

• A U.S. citizen working for a U.S. company but physically based in Germany

• A self-employed consultant living and working from Spain

• A remote employee living full-time in Portugal while working for a U.S. firm

Income that doesn’t qualify includes:

• Dividends and interest

• Rental income

• Capital gains

• Pension or Social Security income

How Do You Claim the Foreign Earned Income Exclusion?

To claim the FEIE, you must:

1. File a U.S. tax return (Form 1040) – even if you expect to exclude all your foreign income.

2. Attach Form 2555, which reports your:

• Foreign earned income
• Qualifying dates abroad
• Test you meet (Physical Presence or Bona Fide Residence)

3. Keep documentation:

• Pay stubs and employer contracts
• Travel logs and passport stamps
• Foreign lease agreements, visas, or residency documents

Most expats get an automatic filing extension to June 15, and those needing more time to meet presence tests may request extra time with Form 2350.

Prorating the Foreign Earned Income Exclusion

If you move abroad partway through the year, you may still qualify for a partial (prorated) exclusion.

Example (2026):

• FEIE limit for 2026: $132,900

• You lived and worked abroad for 274 days

• Prorated exclusion = $132,900 × (274 ÷ 365) = $99,766

This prevents you from losing the benefit just because you moved mid-year.

Foreign Housing Exclusion or Deduction

In addition to the FEIE, you may qualify for the Foreign Housing Exclusion or Deduction if you have significant housing costs abroad.

Eligible housing expenses can include:

• Rent

• Utilities (except phone/internet)

• Property insurance

• Certain mandatory fees

The housing exclusion is generally for employees (wages), and the housing deduction is for self-employed individuals.

Example Housing Calculation (2026)

• Total housing cost for the year: $36,000
• You qualify for 340 days abroad
• Base housing amount = 16% of FEIE, calculated daily:
• $58.25 × 340 days = $19,805
  
  

So, you may be able to exclude $16,195 in housing costs in addition to your FEIE.

Foreign Earned Income Exclusion vs. Foreign Tax Credit

Many expats can benefit from using both the Foreign Earned Income Exclusion and the Foreign Tax Credit (FTC) in the right combination.

Often, expats:

• Use FEIE for part of their salary

• Use FTC to cover foreign tax on remaining income (or on passive income)

Does Remote Work Qualify for the FEIE?

Yes, remote work can qualify, as long as:

• Your tax home is in a foreign country

• You meet the Physical Presence or Bona Fide Residence Test

• You physically perform the work outside the U.S.

Example:

• You live in Portugal and work remotely online for a U.S. company.

• Your income may qualify as foreign earned income if all other conditions are met.

Simply working from abroad for a U.S. employer does not disqualify you. What matters is where you are when you perform the services, not who pays you. Short trips or vacations abroad generally don’t qualify on their own.

2025–2026 FEIE Updates: What Expats Should Know

• 2024 FEIE: $126,500

• 2025 FEIE: $130,000

• 2026 FEIE: $132,900

These amounts are indexed annually for inflation, and housing base amounts and caps are also adjusted. For 2026, for example, the base and maximum housing amounts are higher, which can increase your housing exclusion if you live in high-cost cities.

Common Mistakes to Avoid with the FEIE

Many expats lose money or face problems because of simple mistakes:

• Not filing a U.S. tax return because “everything is excluded”

• Miscounting days for the Physical Presence Test

• Forgetting to prorate the exclusion in the year they move abroad

• Trying to exclude investment or rental income under FEIE

• Not coordinating FEIE and FTC properly

• Missing Form 2555 or filing it incorrectly

Even if you expect to exclude all your earned income, you generally still must file a return to claim the exclusion.

Can You Combine the Foreign Earned Income Exclusion with Other Tax Benefits?

Yes.

• Use FEIE to exclude a portion of salary or self-employment income
• Use the Foreign Tax Credit to cover foreign taxes on:
• Remaining earned income
• Passive income like interest, dividends, or capital gains

This combination can be especially powerful if you live in a high-tax country, helping you avoid paying U.S. tax on top of foreign tax.

How SK Financial CPA Can Help You Use FEIE Correctly

Handling FEIE, housing exclusions, and foreign tax credits at the same time can be confusing if you’re not dealing with expat tax rules every day.

We help expats:

• Check if they meet the Physical Presence or Bona Fide Residence test

• Calculate prorated FEIE when moving mid-year

• Claim the Foreign Housing Exclusion or Deduction accurately

• Decide when to use FEIE vs. Foreign Tax Credit – or both

• Complete Form 2555, Form 1116, and any extensions correctly

If you’re unsure whether you qualify or feel difficult by the forms, getting professional help can prevent costly mistakes and missed tax savings.

Conclusion

The Foreign Earned Income Exclusion is one of the most important tax tools for U.S. citizens and residents working abroad. It can reduce or even eliminate U.S. tax on your foreign salary, especially when combined with the Foreign Housing Exclusion and Foreign Tax Credit.

FAQs

Can I claim the Foreign Earned Income Exclusion if I work remotely for a U.S. company?

Yes, if you physically work outside the U.S., your tax home is abroad, and you meet either the Physical Presence or Bona Fide Residence Test.

What is the FEIE limit for 2025 and 2026?

For 2025, the limit is $130,000 per qualifying taxpayer; for 2026, it increases to $132,900.

Can I use both the Foreign Earned Income Exclusion and the Foreign Tax Credit?

Yes, but not on the same dollar of income. Many expats exclude part of their earned income with FEIE and use the Foreign Tax Credit on remaining or passive income.

Do I still have to file a tax return if all my income is excluded under FEIE?

Yes. You must file a U.S. return and attach Form 2555 to claim the exclusion.

What if I didn’t spend the full year abroad?

You may still qualify for a prorated FEIE amount if you meet the 330-day Physical Presence Test within a 12-month period.

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