Foreign Earned Income Exclusion

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Foreign Earned Income Exclusion

The Foreign Earned Income Exclusion (FEIE) lets qualifying U.S. taxpayers exclude a portion of income earned while living and working abroad from U.S. federal income tax. It helps prevent double taxation for Americans working overseas, but you still must file U.S. tax returns and meet specific requirements to claim it.

Key points

  • 2024 FEIE maximum: $126,500.
  • 2025 FEIE maximum: $130,000.
  • Claim the FEIE using IRS Form 2555. Foreign taxes paid may be credited with Form 1116.
  • Housing costs paid with foreign earned income may be excluded or deducted (the foreign housing amount).
  • FEIE applies only to earned income (wages, salary, self-employment income). Investment income, pensions, Social Security, alimony, and similar income are not eligible.
  • Self-employment tax generally still applies even if you exclude the income for income tax purposes (unless covered by a totalization agreement).

Who qualifies

You must satisfy all of the following:
* Be a U.S. citizen or U.S. resident alien.
Have foreign earned income (wages or self-employment income for work performed outside the U.S.).
 Meet one of the presence tests:
* Bona fide residence test — a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year; or
* Physical presence test — physically present in one or more foreign countries for at least 330 full days during any consecutive 12‑month period.

Certain resident-aliens who are residents of foreign countries under tax treaties may also qualify.

How it works

  1. File Form 2555 to elect the FEIE for the tax year (or applicable 12‑month period).
  2. The FEIE reduces taxable income by up to the annual maximum for the year.
  3. The foreign housing amount is computed on Form 2555 and may further reduce taxable income. For employees the housing benefit is taken as an exclusion; for self‑employed individuals it is taken as a deduction.
  4. You may also claim a foreign tax credit (Form 1116) for foreign income taxes paid; how much credit you can claim depends on whether and how much income you exclude.

Foreign housing amount (overview)

  • The foreign housing amount equals allowable housing expenses paid with foreign earned income in excess of a base housing amount.
  • The base housing amount is 16% of the annual FEIE, prorated by the number of qualifying days.
  • Example (2024): 16% × $126,500 = $20,240 annual base; daily base = $20,240 ÷ 365 ≈ $55.45.
  • For most locations, allowable housing expenses are capped at 30% of the FEIE (30% × $126,500 = $37,950 for 2024), though higher limits may apply in certain high‑cost localities.
  • Employees treat the housing benefit as an exclusion; self‑employed taxpayers treat it as a deduction.

Example

Michael is a U.S. citizen working in Hanoi. For tax year 2024:
* Foreign salary: $225,000
Housing paid: $33,600
 Qualifying days abroad: 355
* Foreign income taxes paid: $75,000

Calculations:
1. FEIE (2024) excluded: $126,500.
2. Base housing amount (prorated): $20,240 × (355/365) ≈ $19,685.
3. Foreign housing amount: $33,600 − $19,685 ≈ $13,915 (subject to local caps).
4. Total excluded from U.S. taxable income ≈ $126,500 + $13,915 = $140,415.
5. Remaining U.S. taxable income from the salary ≈ $225,000 − $140,415 = $84,585.

Michael can also seek a foreign tax credit for the $75,000 he paid abroad. The credit and exclusion interact in ways that affect how much U.S. tax remains; Form 1116 and professional guidance are commonly used to compute the final U.S. tax liability.

Common questions

  • Do I still have to file a U.S. return if I live abroad?
    Yes. U.S. citizens and resident aliens must file U.S. tax returns reporting worldwide income, even if all income is excluded or offset by credits.

  • Can I exclude my foreign pension or investment income?
    No. The FEIE applies only to earned income from employment or self‑employment performed abroad.

  • Does FEIE affect Social Security or self-employment tax?
    FEIE does not exempt self‑employment earnings from self‑employment tax. Social Security obligations depend on U.S. law and any applicable totalization agreement with the foreign country.

Bottom line

The FEIE can significantly reduce or eliminate U.S. income tax on wages earned abroad, and the foreign housing amount can reduce taxable income further. Eligibility depends on residency or physical presence tests, and proper election requires filing Form 2555. Because the exclusion interacts with the foreign tax credit and self‑employment tax rules, many taxpayers consult a tax professional to determine the best approach.

Sources
* IRS — Foreign Earned Income Exclusion; Form 2555 and Instructions
* IRS — Foreign Housing Exclusion or Deduction; Form 1116 and related guidance