What Is the FEIE?
The United States taxes its citizens and permanent residents on worldwide income — no matter where you live or work. The Foreign Earned Income Exclusion (FEIE) is the primary relief mechanism for Americans living abroad, allowing you to exclude up to a set amount of foreign earned income from US taxation.
For 2025, the exclusion is $130,000. For 2026, it’s $132,900 per IRS Rev. Proc. 2025-32 (adjusted annually for inflation).
This means if you’re a US citizen working in London earning $120,000, you could potentially owe zero US federal income tax on that salary — though you still need to file a return.
Who Qualifies?
You must meet two requirements: a tax home in a foreign country, and one of two presence tests.
1. Tax home test
Your tax home must be in a foreign country. Your tax home is generally where you regularly work — not necessarily where you maintain a residence. If you work abroad but maintain a US office or return to the US frequently for work, your tax home may still be in the US.
2. Presence tests (choose one)
| Test | Requirement |
|---|---|
| Bona fide residence test | You’re a bona fide resident of a foreign country for an entire calendar year (Jan 1 – Dec 31). Requires genuine establishment of residence — not just being present. |
| Physical presence test | You’re physically present in a foreign country for at least 330 full days during any 12-month period. Days of transit through the US count as US days. |
The physical presence test is more objective and commonly used. The bona fide residence test requires demonstrating intent to reside (housing lease, local bank accounts, social ties) and is determined based on facts and circumstances.
What Income Qualifies?
The FEIE only applies to earned income — compensation for personal services:
| Qualifies | Does NOT qualify |
|---|---|
| Wages and salaries | Investment income (dividends, interest, capital gains) |
| Self-employment income | Rental income |
| Bonuses and commissions | Pensions and annuities |
| Housing allowances | Social Security benefits |
| Professional fees | Alimony |
Important: If you’re self-employed, the FEIE reduces your income tax but does not reduce your self-employment tax (Social Security and Medicare). You’ll still owe SE tax on the full amount.
Foreign Housing Exclusion
On top of the FEIE, you can claim the Foreign Housing Exclusion (FHE) for qualified housing expenses that exceed a base amount.
Base amount (2025): approximately $19,240 (16% of the FEIE limit)
Qualifying housing expenses include rent, utilities (not including telephone), insurance, parking, and furniture rental. Mortgage payments and purchased furniture don’t qualify.
Maximum housing exclusion: Varies by location — high-cost cities (London, Tokyo, Hong Kong) have higher limits. The general cap is 30% of the FEIE limit (~$39,000 for 2025).
Housing exclusion = Actual qualifying expenses − Base amount (up to the location cap)
How to Claim: Form 2555
You claim the FEIE by filing Form 2555 with your federal tax return. Key points:
- You must file a US tax return even if all income is excluded — the exclusion isn’t automatic
- The election must be made by the return due date (including extensions)
- Once you revoke the FEIE election, you cannot re-elect for 5 years without IRS approval
- Form 2555 requires detailed information about your foreign residence, employer, and presence
First-year filers
If you moved abroad mid-year, you can use the physical presence test with a 12-month period that spans two tax years. You’ll need to file an extension until you’ve met the 330-day requirement.
FEIE vs Foreign Tax Credit
You have two options for avoiding double taxation — but you can’t use both on the same income:
| FEIE (Form 2555) | Foreign Tax Credit (Form 1116) | |
|---|---|---|
| Mechanism | Excludes income from US taxation | Credits foreign taxes paid against US tax |
| Best for | Low-tax countries (Dubai, Singapore, Hong Kong) | High-tax countries (UK, Germany, France, Japan) |
| Income cap | $130,000 (2025) / $132,900 (2026) | No cap |
| Investment income | Not covered | Covered |
| Self-employment tax | Still owed | Can reduce SE tax via treaty |
Rule of thumb: If you pay significant foreign taxes (more than your US liability would be), the Foreign Tax Credit is usually better. If you’re in a low-tax or no-tax jurisdiction, the FEIE saves you more.
You can use the FEIE for earned income and the Foreign Tax Credit for other income (like investment income) in the same year — just not for the same dollars.
Worked Example
Alex, a US citizen, works as a software engineer in Singapore earning $150,000 in 2025. Singapore’s effective income tax rate on this salary is approximately 7%.
Using the FEIE
| Item | Amount |
|---|---|
| Foreign earned income | $150,000 |
| FEIE exclusion | −$130,000 |
| Taxable income (before other deductions) | $20,000 |
| US tax on $20,000 (at stacking rates) | ~$2,800 |
| Singapore tax paid | ~$10,500 |
| Foreign Tax Credit on remaining $20,000 | −$2,800 |
| US tax owed | $0 |
Alex excludes $130,000 via the FEIE, then uses the Foreign Tax Credit to offset US tax on the remaining $20,000. Combined result: zero US federal income tax.
Without the FEIE: US tax on $150,000 would be approximately $25,000. After the Foreign Tax Credit of $10,500, Alex would owe ~$14,500 to the IRS.
Common Mistakes
- Not filing at all: Many expats assume they don’t need to file. You must file a US return regardless of where you live — failure to file can result in penalties and loss of the FEIE election.
- Missing the 330-day count: A single extra day in the US can disqualify you for the physical presence test. Track your travel carefully.
- Revoking without understanding the consequences: Once revoked, the 5-year lockout means you can’t re-elect even if your circumstances change.
- Forgetting FBAR and FATCA: The FEIE doesn’t exempt you from reporting foreign bank accounts (FinCEN 114) or foreign financial assets (Form 8938).
The Bottom Line
The FEIE lets US expats exclude up to $130,000 (2025) of foreign earned income from US taxation — potentially eliminating your entire US tax bill if you live in a low-tax country. Pair it with the Foreign Housing Exclusion for additional savings. But it’s not automatic: you must file Form 2555, meet a qualifying test, and continue filing US returns every year.
Use the FEIE calculator to estimate your tax savings and compare the exclusion with the Foreign Tax Credit for your specific situation.