Foreign Earned Income Exclusion: How to Qualify and How Much You Can Exclude

Qualifying tests

How the Physical Presence Test works

You must be physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months. "Full day" means 24 hours — a day you spend partly in the U.S. does not count. The 12-month period does not have to align with a calendar year; you choose the period that gives you 330 qualifying days.

How the Bona Fide Residence Test works

You must be a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year (January 1 through December 31). This test is based on the nature and quality of your foreign residence, not just physical presence. The IRS considers factors like:

• Whether you established a permanent home in the foreign country
• Whether you pay taxes to the foreign country as a resident
• Whether your family accompanies you
• Your stated intent (temporary assignment vs. indefinite move)
• The nature and duration of your work abroad

Short trips back to the U.S. do not automatically disqualify you, as long as they are temporary and you maintain your foreign residence.

What counts as foreign earned income?

The FEIE only applies to earned income from services performed in a foreign country. This includes wages, salaries, professional fees, commissions, tips, and bonuses paid for work performed abroad. It does not include:

• Investment income (dividends, interest, capital gains)
• Pension or annuity payments
• Social Security benefits
• Income earned in the U.S. (even if you live abroad)
• Wages from the U.S. government

The critical mistake: FEIE does not eliminate self-employment tax

This is the most costly misunderstanding about the FEIE. Even if your foreign earned income is fully excluded from federal income tax, you still owe self-employment tax (15.3%) on net self-employment earnings. The FEIE only affects income tax, not FICA or SE tax.

If you are self-employed abroad, your SE tax obligation is determined by whether a totalization agreement exists between the U.S. and the country where you work. If it does, you may only owe social security taxes to one country. If no agreement exists, you owe U.S. SE tax on your net earnings. Use our self-employment tax calculator to estimate the amount.

The foreign housing exclusion

In addition to the income exclusion, you can exclude (or deduct, if self-employed) certain foreign housing expenses that exceed a base amount. Qualifying expenses include rent, utilities (but not telephone), insurance, occupancy taxes, and similar costs. The housing exclusion has a complex calculation:

1. Calculate your base amount: 16% of the FEIE limit, prorated for your qualifying days.
2. Add up qualifying housing expenses.
3. Subtract the base from your expenses. The difference is your housing exclusion, subject to an annual cap.

The annual cap varies by location — the IRS publishes a table of high-cost locations with higher limits in the Form 2555 instructions. Check the current Form 2555 instructions for location-specific limits.

Step-by-step: claiming the FEIE

1. Confirm eligibility. You must be a U.S. citizen or resident alien with a tax home in a foreign country who passes either the Physical Presence Test or the Bona Fide Residence Test.
2. Complete Form 2555. Part I establishes your qualifying test; Parts II through IV calculate the exclusion amount and any housing exclusion.
3. Attach Form 2555 to Form 1040. Report your total worldwide income on Form 1040, then exclude the qualifying amount on the applicable line.
4. Consider the stacking rule. Excluded income is stacked at the bottom of your income for tax bracket purposes, meaning any income above the exclusion starts at a higher bracket. This can increase the effective rate on non-excluded income.

Common FEIE mistakes

1. Not having a "tax home" in a foreign country. Your tax home is generally where your principal place of business is. If your employer's main office is in the U.S. and you work remotely from abroad without a foreign employer or business establishment, the IRS may argue your tax home is still in the U.S.
2. Forgetting the stacking rule. The FEIE can cause the remainder of your income to be taxed at a higher effective rate than you expect.
3. Revoking the FEIE without understanding the consequences. Once revoked, you cannot re-elect the FEIE for 5 years without IRS approval.
4. Assuming FEIE covers investment income. Only earned income qualifies. Passive income must be handled through the foreign tax credit.

For related international tax topics, see our green card holder tax obligations guide and working for a foreign employer guide.