How to Claim the US Foreign Income Exclusion

The Foreign Earned Income Exclusion is a provision in the U.S. tax code for citizens and resident aliens who live and work abroad. Its purpose is to mitigate double taxation, where income is taxed by both the foreign country of residence and the United States. Since the U.S. taxes its citizens on their worldwide income, this exclusion allows qualifying individuals to exempt a portion of their foreign earnings from U.S. federal income tax.

The exclusion is not automatic and requires taxpayers to meet specific criteria and file the appropriate forms with the Internal Revenue Service (IRS). It applies only to earned income, such as wages and salaries, and not to passive income like dividends or interest.

Determining Your Eligibility

To claim the Foreign Earned Income Exclusion (FEIE), a U.S. citizen or resident alien must satisfy three requirements. First, you must have foreign earned income. Second, your tax home must be in a foreign country. Finally, you must meet either the bona fide residence test or the physical presence test.

The IRS may waive the minimum time requirements for these tests if you were required to leave a foreign country because of war, civil unrest, or similar adverse conditions. To qualify for this waiver, you must show that you could have met the time requirements if not for these conditions.

The Tax Home Test

A requirement for the FEIE is establishing that your tax home is in a foreign country. The IRS defines a tax home as the general area of your main place of business or employment, not as your personal residence. Your family home could be in the United States, but if your primary place of employment is abroad, your tax home would be in that foreign country.

An assignment’s duration helps determine your tax home’s location. An assignment expected to last for more than one year is considered indefinite, which supports establishing a foreign tax home. You cannot claim the exclusion if your abode, meaning your home or residence, is in the United States, unless you are serving in a designated combat zone.

The Bona Fide Residence Test

The Bona Fide Residence Test evaluates your intention and the nature of your stay in a foreign country. To meet this test, a U.S. citizen must be a resident of a foreign country for an uninterrupted period that includes an entire tax year (January 1 through December 31). A U.S. resident alien must be a citizen of a country with which the U.S. has an income tax treaty and also meet this requirement.

Unlike the Physical Presence Test, this test is based on establishing genuine residential ties, and the IRS will consider factors like your housing and community involvement. Brief trips back to the U.S. for vacation or business do not disqualify you, as long as you maintain your foreign residence. However, you will not be considered a bona fide resident if you make a statement to foreign authorities that you are not a resident.

The Physical Presence Test

The Physical Presence Test is a mathematical test based on the amount of time you spend in a foreign country. To qualify, a U.S. citizen or resident alien must be physically present in a foreign country for at least 330 full days during any period of 12 consecutive months. These 330 days do not need to be consecutive.

A full day is a continuous 24-hour period beginning at midnight, so any day you spend partially in the United States does not count. Travel days over international waters also do not count as days of presence in a foreign country. The 12-month period can begin on any day of the month.

Identifying Qualifying Income and Exclusion Limits

Qualifying Foreign Earned Income

Foreign earned income is compensation you receive for personal services performed in a foreign country. This includes salaries, wages, commissions, bonuses, and professional fees. For self-employed individuals, it is the income generated from business activities conducted abroad. The source of the income is determined by where the work is physically performed, not by the location of the employer.

In contrast, unearned income like interest, dividends, capital gains, pensions, and annuity payments does not qualify. Pay received as a military or civilian employee of the U.S. government is also not considered foreign earned income.

Exclusion Limits

The amount of foreign earned income you can exclude is capped annually. For the 2024 tax year, the maximum exclusion is $126,500 per qualifying person, and for 2025, it is projected to be $130,000. If you only qualify for a portion of the tax year, you must prorate the maximum exclusion based on the number of qualifying days.

If you are married and both you and your spouse work abroad and meet the eligibility tests, you can each claim the exclusion up to the limit. The exclusion cannot exceed your total foreign earned income for the year.

Foreign Housing Exclusion and Deduction

In addition to the income exclusion, qualifying taxpayers may also claim a benefit for their housing costs. This can be taken as a foreign housing exclusion or a foreign housing deduction, depending on whether you are an employee or self-employed. This benefit allows you to account for a portion of your reasonable housing expenses, such as rent and utilities.

The calculation is based on your qualified housing expenses but is subject to a limit. The maximum housing expenses you can consider are 30% of the maximum foreign earned income exclusion, which is $37,950 for 2024. This amount can be adjusted by the IRS for specific high-cost localities.

Information and Forms for Claiming the Exclusion

Required Form

The primary document for claiming the exclusion is Form 2555, Foreign Earned Income. This form is used to calculate both the foreign earned income exclusion and the related foreign housing exclusion or deduction.

Information Needed to Complete Form 2555

Before starting Form 2555, you should collect several key pieces of information:

• Your full foreign address and the name and address of your employer
• A detailed record of your travel dates to and from the United States, used to verify eligibility under the Physical Presence Test
• A comprehensive list of all your foreign earned income, including sources and amounts
• A detailed breakdown of your qualifying housing expenses, such as rent, utilities, and repairs, for the housing exclusion or deduction

Completing the Form

Form 2555 is divided into several parts. Part I gathers general information, including your address and tax home details. You will then complete either Part II for the Bona Fide Residence Test or Part III for the Physical Presence Test, but not both. Part IV is where you will list your gross foreign earned income for the tax year. If you are claiming the housing exclusion, you will complete Part VI to calculate the allowable amount.

The Filing Process

Attaching to Your Tax Return

The completed Form 2555 must be attached to your annual U.S. income tax return, Form 1040 or Form 1040-SR. The exclusion is claimed by entering the calculated amount from Form 2555 onto Schedule 1 of Form 1040. This action reduces your total income, thereby lowering your taxable income.

Submission Methods

You can submit your tax return package by mailing a paper copy to the IRS. Taxpayers filing Form 2555 must send their returns to a specific address designated for international filers, which is listed in the Form 1040 instructions. Alternatively, you can use an IRS-approved e-filing software service to submit your return electronically.

Filing Deadlines and Extensions

While the standard U.S. tax deadline is April 15, U.S. citizens and resident aliens living abroad receive an automatic two-month extension to file, making their deadline June 15. For 2025, this deadline is June 16, as June 15 falls on a Sunday. This is an extension to file, not to pay; any tax owed is still due by the April 15 deadline to avoid interest and penalties.

If more time is needed, you can file Form 4868 by the June deadline to request a further extension to October 15. A final, discretionary extension to December 15 may be requested by writing to the IRS with a valid reason.