What Is the Foreign Tax Exemption and How Do I Qualify?

U.S. citizens and resident aliens are taxed on their worldwide income, meaning earnings from a foreign country are taxable by the United States. To prevent double taxation, a benefit known as the Foreign Earned Income Exclusion (FEIE) is available. This allows qualifying individuals to exclude a portion of their foreign earnings from U.S. income tax.

Many people searching for a “foreign tax exemption” are referring to this exclusion. It is not an automatic benefit, as taxpayers must meet specific requirements and claim it on their tax return.

Qualifying for the Foreign Earned Income Exclusion

To claim the Foreign Earned Income Exclusion, an individual must first satisfy the Tax Home Test. This requires your tax home, which is your main place of business or post of duty, to be in a foreign country. Your tax home must remain in a foreign country throughout your period of bona fide residence or physical presence to qualify. Beyond the tax home requirement, a taxpayer must meet either the Bona Fide Residence Test or the Physical Presence Test.

The Bona Fide Residence Test is centered on an individual’s ties to 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. The Internal Revenue Service (IRS) considers factors like your visa type and social and economic ties to determine if you have established residency.

The Physical Presence Test is a mathematical test based on time spent abroad. 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 12-month period. A “full day” is a continuous 24-hour period, and the days do not need to be consecutive.

Determining Your Excludable Income

Once qualified, you must determine which income is eligible. The benefit applies to “foreign earned income,” which includes payments for personal services like wages, salaries, and professional fees. It also includes self-employment income from work performed in a foreign country.

Unearned income, such as interest, dividends, capital gains, and pensions, does not qualify for the FEIE. Income from work in the United States and pay received as a U.S. government employee are also not considered foreign earned income.

The IRS sets an annual limit on the amount of foreign earned income that can be excluded. For the 2024 tax year, the maximum exclusion is $126,500, and for 2025, this amount increases to $130,000. If two spouses both work abroad and meet the tests, they can each claim the full exclusion on their foreign earnings.

Qualifying taxpayers may also claim the Foreign Housing Exclusion or Deduction for reasonable housing expenses like rent and utilities. The calculation is based on your housing expenses minus a “base housing amount,” which is 16% of the maximum FEIE. The total excludable housing amount is also capped, generally at 30% of the FEIE, though higher limits may apply in high-cost areas.

Information and Forms Needed to Claim the Exclusion

Claiming the exclusion requires completing Form 2555, Foreign Earned Income, and attaching it to your Form 1040 tax return. To complete the form, you will need to gather specific information based on your situation.

You will need to provide some of the following information:

• A detailed travel calendar with exact dates of arrival in and departure from the U.S. to prove you meet the Physical Presence Test.
• Information supporting your status as a foreign resident, such as your visa type and the dates your residency began, to meet the Bona Fide Residence Test.
• A complete breakdown of all foreign earned income received during the tax year.
• A list of all qualified housing expenses, such as rent and utilities, if you plan to claim the Foreign Housing Exclusion or Deduction.

The Filing Process

You must file a tax return to claim the exclusion, even if your income is below the standard filing threshold. The completed Form 2555 is attached to your Form 1040.

Taxpayers living abroad receive an automatic two-month filing extension, moving the deadline from April 15 to June 15. If you need more time, you can file Form 4868 to request a further extension to October 15.

A special extension is available via Form 2350 for those who need more time to meet either the Bona Fide Residence or Physical Presence tests. This form must be filed before your return’s due date. An extension to file is not an extension to pay, and interest will be charged on any tax not paid by the original deadline.

Once your return is filed, the excluded income is removed from your total income. Any remaining income is taxed at the rate that would have applied if the excluded income had been included. This calculation is done using the Foreign Earned Income Tax Worksheet.