Foreign Earned Income Exclusion: Who Qualifies and How Much You Can Exclude

The Short Answer

If you live and work outside the United States, you may be able to exclude up to $130,000 of foreign earned income from your 2025 federal tax return, and the IRS has adjusted that ceiling to $132,900 for 2026 (set by Revenue Procedure 2025-32; the amount is indexed for inflation each year). To qualify, you need foreign earned income, a tax home outside the U.S., and you must pass either the Bona Fide Residence Test or the Physical Presence Test. This isn’t a tax credit you apply for after the fact — it’s an exclusion you claim on Form 2555, attached to your regular Form 1040.

Why This Rule Exists

The U.S. is one of the only countries that taxes citizens on worldwide income no matter where they live. Without some relief, an American teaching English in Seoul or working remotely from Lisbon would owe U.S. tax on the same income already taxed by their host country. Congress created the Foreign Earned Income Exclusion (FEIE) to prevent a chunk of double taxation and to keep U.S. workers competitive for jobs abroad. It’s not a loophole — it’s a deliberate policy choice, codified in Internal Revenue Code Section 911, and administered through IRS Publication 54 and Form 2555.

Who Actually Qualifies

Three boxes have to be checked, every single year you claim the exclusion.

1. You need foreign earned income

This means wages, salary, or self-employment income you earned for services performed while physically in a foreign country. It does not include:

• Pension or annuity income
• Interest, dividends, or capital gains
• Social Security benefits
• Pay received as a U.S. government employee (civilian or military)
• Income earned while physically in the U.S., even if your employer is foreign

If you’re a digital nomad who spends part of the year working from a U.S. address, only the income earned while you were physically abroad counts.

2. You need a tax home in a foreign country

Your “tax home” is generally the location of your main place of business or employment, not where your family lives. If your job is based in the U.S. even though you travel abroad frequently, you likely don’t have a foreign tax home.

3. You need to pass one of two residency tests

Bona Fide Residence Test: You must be a bona fide resident of a foreign country (or countries) for an uninterrupted period that includes a full calendar tax year (January 1–December 31). The IRS looks at facts and circumstances — your visa status, whether you set up a household, paid local taxes, and intended to stay indefinitely rather than on a short assignment.

Physical Presence Test: You must be physically present in a foreign country (or countries) for at least 330 full days during any 12-month period. This test is purely mechanical — it doesn’t care about your intentions, only your actual day count. Layovers in the U.S. and time in international waters or international airspace don’t count toward your 330 days, though travel directly between two foreign countries that takes less than 24 hours does not cost you a full day.

Most first-year expats use the Physical Presence Test because it doesn’t require establishing formal residency. Long-term expats with a visa and a lease abroad often use Bona Fide Residence instead, since it lets you count the whole calendar year without a strict day-counting exercise.

How Much You Can Actually Exclude

The exclusion amount is capped each year and adjusted for inflation. According to IRS.gov, recent limits look like this:

A few mechanics that trip people up:

• The cap is per person, not per household. A married couple who both work abroad and both qualify can each claim the full exclusion — potentially sheltering up to $265,800 combined for 2026 (2 × $132,900).
• The exclusion is prorated for partial years. If you only qualify for 200 days out of the year, you exclude roughly 200/365 of the annual maximum, not the full amount.
• It only offsets federal income tax, not self-employment tax. If you’re a freelancer or independent contractor abroad, you still owe the 15.3% self-employment tax on your net earnings even after excluding the income from regular income tax.

A Worked Example

Say Maria is a U.S. citizen working as a marketing consultant in Portugal for the full 2025 calendar year. She earns $95,000 in self-employment income, all for work performed while physically in Portugal, and she was present there more than 330 days.

• Her foreign earned income: $95,000
• The 2025 FEIE cap: $130,000
• Since $95,000 is below the cap, she can exclude her entire $95,000 from U.S. federal income tax.
• She still owes U.S. self-employment tax (Social Security and Medicare) on the $95,000, because the exclusion doesn’t touch that separate tax.
• She may also owe Portuguese income tax, depending on Portugal’s rules and any U.S.-Portugal tax treaty provisions — that’s a separate question from the FEIE and worth checking with a tax professional familiar with both countries.

If Maria had instead earned $145,000, she could only exclude $130,000. The remaining $15,000 would be taxed on her U.S. return, though she might be able to reduce that further using the Foreign Tax Credit for taxes paid to Portugal, or the Foreign Housing Exclusion described below.

Don’t Forget the Housing Exclusion

Many expats stack a second benefit on top of the FEIE: the Foreign Housing Exclusion or Deduction. It lets you exclude a portion of employer-paid (or self-employment) housing costs — rent, utilities (not including phone), and certain fees — above a base amount.

For 2025, the base housing amount is generally 16% of the FEIE ($20,800), and qualifying housing expenses are capped at 30% of the FEIE ($39,000) for most locations — meaning the maximum housing exclusion in a standard location is $18,200 ($39,000 minus the $20,800 base), though the IRS publishes higher limits for expensive cities like Hong Kong, Geneva, and Tokyo in the Form 2555 instructions. This is claimed on the same Form 2555 and can meaningfully increase your total exclusion if your rent abroad is high.

How and When to Claim It

1. File Form 2555 along with your Form 1040. You must affirmatively elect the exclusion — the IRS doesn’t apply it automatically.
2. Keep records of your travel dates if you’re relying on the Physical Presence Test. A simple spreadsheet or stamped passport pages can substantiate your day count if the IRS asks.
3. Use the automatic extension. U.S. citizens living abroad on the regular April filing deadline get an automatic two-month extension to June 15. If you need more time to meet the 330-day requirement, you can file Form 2350 for an extension until you qualify.
4. Watch the revocation rule. If you claim the exclusion one year and then choose not to claim it in a later year, you generally can’t claim it again for five years without IRS approval. This matters if your income abroad sometimes exceeds the exclusion cap and you’re weighing the Foreign Tax Credit instead.

A Common Misconception

Excluding income under the FEIE lowers your taxable income, but it doesn’t necessarily lower your Adjusted Gross Income (AGI) for every purpose — and claiming it carries hard trade-offs: per the Form 2555 instructions, you cannot take the Additional Child Tax Credit at all in a year you file Form 2555, and excluded income doesn’t count as compensation for IRA contribution purposes. If you’re trying to claim refundable credits while living abroad, run the numbers carefully or talk with a preparer experienced in expat returns, since the FEIE can sometimes reduce a credit’s value by shrinking your “earned income” below what the credit requires.

FAQ

Can I claim the Foreign Earned Income Exclusion and the Foreign Tax Credit in the same year?

Generally not on the same dollar of income. You can use the Foreign Tax Credit on income above the excluded amount, but you can’t claim both benefits on the income you’ve already excluded under the FEIE. Many expats in high-tax countries skip the FEIE entirely and use only the Foreign Tax Credit, since it isn’t capped the way the exclusion is.

Does the Foreign Earned Income Exclusion cover self-employment tax?

No. The exclusion only reduces federal income tax liability. Self-employed Americans abroad still owe the 15.3% self-employment tax (Social Security and Medicare) on their net self-employment earnings, unless a Totalization Agreement between the U.S. and the host country says otherwise. Check SSA.gov for the list of countries with Totalization Agreements.

What happens if I don’t quite meet the 330-day requirement this year?

You can still qualify later by filing an amended return once you hit 330 days within a qualifying 12-month period, even if that period spans two tax years. Alternatively, Form 2350 lets you request a filing extension specifically to give yourself time to meet the Physical Presence Test before your return is due.

Sources

• IRS.gov, “Foreign Earned Income Exclusion”: https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion
• IRS.gov, “About Form 2555, Foreign Earned Income”: https://www.irs.gov/forms-pubs/about-form-2555
• IRS.gov, “About Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad”: https://www.irs.gov/forms-pubs/about-publication-54
• Social Security Administration, “International Agreements (Totalization Agreements)”: https://www.ssa.gov/international/agreements_overview.html

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