What Is the Foreign Earned Income Exclusion?

The Foreign Earned Income Exclusion is a provision in U.S. tax law for citizens and resident aliens living and working abroad. It allows these individuals to exclude a portion of their income earned in a foreign country from U.S. federal income tax. The primary purpose of this exclusion is to alleviate the potential for double taxation, where income could be taxed by both the foreign country of residence and the United States.

Qualifying for the Exclusion

To be eligible for the Foreign Earned Income Exclusion, you must satisfy three tests. The first is the tax home test, which requires that your main place of business, employment, or post of duty be in a foreign country. Your tax home is where you are permanently or indefinitely engaged to work, not where you maintain your family home. An abode in the United States generally disqualifies you from having a foreign tax home.

With a foreign tax home established, you must then meet either the bona fide residence test or the physical presence test. The bona fide residence test centers on your intention to remain a resident of a foreign country. To meet this, you must be a resident of a foreign country for an uninterrupted period that includes an entire tax year (January 1 to December 31). This refers to your residency status, not your constant physical presence, so brief trips back to the U.S. do not break your foreign residency.

The physical presence test requires you to be physically present in a foreign country for at least 330 full days during any 12-consecutive-month period. A full day is a continuous 24-hour period starting at midnight. The 12-month period can begin on any day of the month, offering flexibility. This test is purely quantitative and does not depend on the nature of your foreign residency.

Calculating the Exclusion Amount

Foreign earned income includes payments for personal services, such as wages, salaries, and professional fees. It does not include passive income like interest and dividends, nor does it cover pensions, annuities, or pay received as a U.S. government employee. Income must be received no later than the tax year after the year in which the services that earned it were performed.

For the 2025 tax year, the maximum amount you can exclude is $130,000 per qualifying person, an amount indexed annually for inflation. If you are married and both spouses independently meet the qualification tests, you can each claim the exclusion, potentially excluding up to $260,000 of combined income. You can only exclude up to the amount of foreign income you actually earned if it is less than the maximum limit.

If you do not meet either the bona fide residence or physical presence test for the entire tax year, you must prorate the maximum exclusion. The limit is adjusted based on the number of qualifying days in the year. For example, if you met the physical presence test for 200 days in the tax year, you would divide 200 by 365 and multiply the result by the maximum exclusion amount to find your prorated limit.

In addition to the income exclusion, you may also be able to exclude or deduct an amount for your foreign housing costs. This is known as the foreign housing exclusion for employees or the foreign housing deduction for self-employed individuals. This separate calculation accounts for reasonable expenses paid for housing, such as rent and utilities. The amount is based on your housing expenses relative to a base amount and is also subject to a limit, generally 30% of the maximum income exclusion, though it can vary by location.

Claiming the Exclusion

To claim the Foreign Earned Income Exclusion, you must file Form 2555, Foreign Earned Income, with your annual U.S. income tax return, Form 1040. You are still required to file a tax return to claim the benefit, even if all of your income is excluded. A separate Form 2555 must be completed for each spouse claiming the exclusion, even if you file a joint return.

On Form 2555, you will attest to meeting the qualification requirements. The form requires you to specify whether you are using the bona fide residence or physical presence test, provide details about your time abroad, and calculate your final exclusion amount.

Taxpayers living and working abroad receive an automatic two-month extension to file their tax return, moving the deadline from April 15 to June 15. If you need more time to meet the residency or presence tests, you can request a further extension to October 15 by filing Form 4868. Should you need even more time, you can file Form 2350 to request an extension beyond that date.

Interaction with the Foreign Tax Credit

You cannot apply the Foreign Tax Credit (FTC) or a foreign tax deduction to any income that you have excluded from U.S. tax using the Foreign Earned Income Exclusion. This prevents a double tax benefit on the same dollar of income. You must decide whether to exclude the income with the FEIE or to include the income and then claim a credit for foreign taxes paid on it using Form 1116.

The choice between the FEIE and the FTC often depends on the tax rate of your foreign country of residence. If you are in a country with a high income tax rate—one that is higher than your U.S. tax rate—the FTC is frequently more advantageous. It provides a dollar-for-dollar reduction of your U.S. tax liability. Conversely, if you reside in a country with low or no income taxes, the FEIE is typically the better option as there are no foreign taxes to credit.

It is possible to use both benefits in certain situations. For instance, if your foreign earned income exceeds the maximum exclusion limit, you can exclude up to the threshold using the FEIE. You may then be able to claim the FTC on the portion of your income that is above the exclusion amount and therefore still subject to U.S. tax.

A consequence of claiming the FEIE is its effect on your tax rate. The law requires that any of your non-excluded income be taxed at the marginal rates that would have applied if you had not claimed the exclusion. This “stacking” rule means your excluded income is added back for the sole purpose of determining the tax bracket for your remaining income. This calculation is performed using the Foreign Earned Income Tax Worksheet found in the Form 1040 instructions.