How to Work with the Foreign Earned Income Exclusion

For U.S. citizens who live and work abroad, managing your tax liability can often start with the Foreign Earned Income Exclusion (FEIE). Under Section 911 of the Internal Revenue Code, eligible taxpayers may exclude up to a specified amount of foreign earned income from U.S. federal income taxation—$120,000 for 2023 (and $127,700 for 2024)—provided they meet certain residency tests and file Form 2555 with their tax return.

To qualify, U.S. individuals must either meet the bona fide residence test—demonstrating that they have established residency in a foreign country for an uninterrupted period that includes an entire tax year—or the physical presence test, requiring at least 330 full days of physical presence in one or more foreign countries during any 12-month period (IRC § 911(d)(1)(A)-(B)). Choosing between these tests depends on each taxpayer’s travel and residency circumstances. Once qualified, foreign housing costs in excess of a base amount may also be deductible against U.S. taxable income under Section 911(c), subject to local limitations.

However, using FEIE requires careful handling. Not all income qualifies—the exclusion applies only to “earned income,” which typically means wages and self-employment income, and does not apply to investment income, interest, or capital gains. Additionally, an individual must still file a U.S. tax return and claim FEIE (you cannot exclude it on a Foreign Bank Account Report or other automatic basis). And importantly, use of the FEIE may affect your ability to claim certain tax credits or itemized deductions, because the excluded income may reduce your taxable income base.

Moreover, FEIE does not shield an expatriate from all U.S. tax obligations. Social Security and Medicare self-employment tax may still apply to foreign self-employment income if the country of residence lacks a totalization agreement with the U.S. Lastly, the FEIE does not exempt you from foreign country income tax, which must be paid and may give rise to a foreign tax credit (via Form 1116). In short, FEIE can be a powerful tool for U.S. taxpayers abroad—but it requires careful planning, documentation, and coordination with foreign and U.S. tax systems to be fully effective.