The foreign earned income exclusion (FEIE) lets qualifying U.S. persons exclude a capped amount of foreign earned income from U.S. taxable income when they meet either the bona fide residence test or the physical presence test and have a tax home in a foreign country. You claim it on Form 2555 (or 2555-EZ when that form applies for your year). The annual exclusion cap is inflation-adjusted—confirm the current IRS limit before you plan.
FEIE is a sibling to the foreign tax credit (Form 1116). Many people compare both; you generally cannot double-dip the same dollar of tax benefit in conflicting ways. Filing overview: Filing taxes for beginners.
Who FEIE is for (high level)
| Requirement (orientation) | Plain-English cue |
|---|---|
| U.S. citizen or resident alien | FEIE is a U.S. return concept |
| Tax home in a foreign country | Your main place of business is abroad—not a U.S. abode you never really left |
| Bona fide residence or physical presence | Residence: established in a foreign country for an uninterrupted period that includes a full tax year. Presence: generally 330 full days in foreign countries in a 12-month period |
| Foreign earned income | Wages, self-employment earnings for services performed abroad—not most investment interest/dividends |
Housing exclusion/deduction pieces can sit beside FEIE on Form 2555 with their own limits. Self-employed filers still need to think about self-employment tax and how FEIE interacts with SE tax worksheets—exclusion of income for income tax is not automatic relief from every payroll-like tax.
Worked example: physical presence + wage income
Taylor, a U.S. citizen, works remotely for a foreign employer from Portugal for a full calendar stretch that clearly clears 330 days abroad in the chosen 12-month window. Taylor earns the equivalent of $95,000 in foreign wages and has no U.S. abode. For a year when the FEIE cap is above $95,000 (confirm the IRS figure for that year), Taylor may be able to exclude the wages on Form 2555 if all tests are met.
If Taylor also paid Portuguese income tax, Taylor compares FEIE versus claiming a foreign tax credit on some or all of the income—sometimes a credit is worth more when foreign rates are high and you want to preserve U.S. stacking for other income. State residency can still create a bill even when federal FEIE applies (State tax basics. Contractor vs employee labeling still matters for forms (W-2 vs 1099.
FEIE vs foreign tax credit (choose with a worksheet)
- FEIE: reduces U.S. taxable earned income (up to the cap) when qualifying tests are met.
- Foreign tax credit: credits foreign income taxes against U.S. tax on foreign-source income, subject to limits.
- Stacking / rate effects: excluding income can change which dollars sit in which brackets; a credit can be more valuable when foreign tax is substantial.
- Revoking FEIE: electing and later revoking has timing rules—read IRS instructions before you flip strategies year to year.
Common tripwires
- Counting tourist days wrong on the physical-presence test.
- Assuming stock dividends or U.S.-sourced remote pay automatically qualify as foreign earned income.
- Ignoring state tax residency after a move abroad.
- Forgetting that FEIE does not replace FBAR / Form 8938 reporting when account thresholds are met (Form 8938 vs FBAR overlap).
- Mixing FEIE math with foreign withholding on investments without checking character of income.
Checklist
- Confirm tax home and bona fide residence or physical presence with a day-count log.
- Separate earned income from investment income before applying FEIE.
- Compare Form 2555 vs Form 1116 outcomes for your foreign tax rate.
- Check state residency rules even if federal FEIE applies.
- Review SE tax / housing worksheets if self-employed.
- Use current-year IRS exclusion and housing caps—not last year’s blog post.
Educational only. Not tax or legal advice. FEIE, Form 2555, and foreign-tax-credit rules are fact-specific; confirm with IRS instructions and a qualified tax professional.