How to Claim the Foreign Earned Income Exclusion (FEIE)

The Foreign Earned Income Exclusion (FEIE) is a U.S. tax code provision providing tax relief for Americans living and working abroad. Its primary purpose is to prevent double taxation, where income is taxed by both the foreign country where it is earned and the United States. By allowing qualifying individuals to exclude a significant portion of their foreign earnings from U.S. income tax, the FEIE helps lessen the financial burden on expatriates. The exclusion is not automatic and requires taxpayers to meet specific criteria and actively claim it on their tax returns.

Meeting the Qualification Tests

To be eligible for the Foreign Earned Income Exclusion, a taxpayer must first satisfy the tax home test. This requires that your tax home—the general area of your main place of business, employment, or post of duty—must be in a foreign country. This location is determined by where you are permanently or indefinitely engaged to work.

Once the tax home test is met, you must qualify under one of two additional tests: the Bona Fide Residence Test or the Physical Presence Test. To meet the Bona Fide Residence Test, a U.S. citizen must prove they have been a resident of a foreign country for an uninterrupted period that includes an entire tax year (January 1 to December 31). This involves demonstrating stronger ties to the foreign country than to the U.S. A U.S. resident alien must be a citizen of a country with which the U.S. has an income tax treaty to use this test.

The Physical Presence Test is a more quantitative measure. To satisfy this test, a U.S. citizen or resident alien must be physically present in a foreign country for at least 330 full days during any consecutive 12-month period. These 330 days do not need to be consecutive, allowing for brief trips back to the U.S. A “full day” is a continuous 24-hour period starting at midnight.

Calculating Excludable Income and the Housing Amount

After qualifying for the FEIE, the next step is to determine which income is eligible for exclusion. “Foreign earned income” includes wages, salaries, professional fees, and other amounts received as compensation for personal services performed in a foreign country, including self-employment income. It does not cover passive income sources like dividends, interest, or capital gains, and wages paid by the U.S. government are also not considered foreign earned income.

The IRS sets a maximum amount of foreign earned income that can be excluded each year, and this amount is adjusted for inflation. For the 2025 tax year, the maximum exclusion is $130,000. If you reside in a foreign country for only part of the tax year, you must prorate this limit. For married couples, each spouse can individually claim the FEIE if they both meet the qualification tests.

In addition to the income exclusion, you may also be able to claim a foreign housing exclusion or deduction for reasonable housing expenses. Qualified expenses can include rent, utilities, and renter’s insurance. To calculate your housing amount, you subtract a “base housing amount” from your total qualified housing expenses, which is 16% of the maximum FEIE for that year.

The amount you can claim is also subject to an overall limit, generally 30% of the maximum FEIE. This limit can be higher for those living in specific high-cost localities designated by the IRS. If you are an employee, this benefit is claimed as a housing exclusion; if you are self-employed, it is claimed as a housing deduction.

Completing Form 2555

To claim the Foreign Earned Income Exclusion, you must complete and file Form 2555, Foreign Earned Income. The form is structured to walk you through the qualification and calculation processes.

The form is divided into several parts. Part I gathers general information, such as your name and foreign address. Parts II and III are dedicated to the qualification tests. In Part II, you will provide information to establish that you meet the Bona Fide Residence Test, including the dates you established residency. If qualifying under the Physical Presence Test, you will complete Part III, where you must list your travel dates.

Part IV of Form 2555 is where you calculate your foreign earned income exclusion. Here, you will list your foreign earned income and then apply the annual exclusion limit, prorated if necessary. Part VI is used to figure the foreign housing exclusion or deduction. The results from these calculations are then carried over to determine your total exclusion, which is reported on your Form 1040.

Filing the Election and Tax Return

Claiming the Foreign Earned Income Exclusion is an election that, once made, remains in effect for all subsequent years unless you revoke it. To revoke the election, you must attach a statement to your tax return for the first year you do not wish to claim the exclusion. This choice should be considered carefully, as revoking it can prevent you from claiming the exclusion again for the next five tax years without IRS consent.

Taxpayers living abroad are granted an automatic two-month extension to file their tax returns, moving the typical April 15 deadline to June 15. If more time is needed beyond June 15, you can request an additional extension to October 15 by filing Form 4868. An extension to file is not an extension to pay; any tax liability is still due by the original April deadline.

After completing both your Form 1040 and the attached Form 2555, the final step is to submit the package to the IRS. You can file electronically using approved tax software or mail a paper return. When mailing, you must send it to the specific address designated for taxpayers filing Form 2555, which can be found in the Instructions for Form 1040.