How to Work with the Foreign Earned Income Exclusion

If you are a US citizen and you live abroad, you are taxed on your worldwide income. However, you may qualify to exclude your foreign earnings from income up to an amount that is adjusted annually for inflation ($112,000 for 2022, $120,000 for 2023, and $126,500 for 2024) if you are eligible for the Foreign Earned Income Exclusion (“FEIE”). 

To be eligible for the FEIE, you must have foreign earned income, your tax home must be in a foreign country, and you must be one of the following: 

•  A U.S. citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, 

• A U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, or 

• A U.S. citizen or a U.S. resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months. 

The gist of the above FEIE qualification rules is that the IRS expects you to be outside the U.S. for at least one full tax year before you become eligible to deduct the FEIE. 

If you qualify for the FEIE, you calculate your adjusted gross income on line 11 of the Form 1040, Individual Income Tax Return. Then, you report your FEIE on line 12 as an itemized deduction, reducing your taxable income by the amount of the FEIE. 

For those who plan to take advantage of the FEIE, it is important to have a tax consultant or attorney draft an opinion which analyzes and documents a conclusion that you are eligible for the FEIE. This opinion is kept for your internal records in event that there is an audit and you need to justify your eligibility for the FEIE to the IRS.