Foreign Earned Income Exclusion or FEIE

As a U.S. citizen or resident alien, you are taxed on your worldwide income if you live or reside in a foreign country. However, you could qualify for the foreign-earned income exclusion, thus reducing your taxable income. This page covers the qualification requirements, foreign earned income exclusion, housing expense, housing deductions, and meal and lodging amounts for given tax years.

What is Foreign-Earned Income?

Before we get into qualifying for the Foreign Earned Income Exclusion (or FEIE), we should define our terms. Foreign Earned Income seems like it should be simple to define. However, there's a bit more to it.

Foreign earned income is income you receive for services performed in a foreign country during the period your tax home (the general area of your main place of business, employment, or post of duty where you are permanently or indefinitely engaged in working) is in a foreign country and whether you meet the bona fide residence test or physical presence test. How or where you are paid does not affect the income's source. 

So, income for work done in any country outside the US is counted as Foreign Earned Income, even if you're working for a company with headquarters in the United States. There are a few things that don't count when tabulating your income, and those are listed below:

• Previously excluded value of meals and lodging furnished for the employer's convenience
• Pay you received as a U.S. Government employee
• Recaptured, unallowable moving expenses
• Annuity or pension payments (including Social Security benefits)
• Payments received after the end of the tax year following the actual tax year in which you performed the services that resulted in earned income
• Amounts that are included in your income because of your employer's contributions to a nonexempt employee trust or a nonqualified annuity contract.

Qualifying for an FEIE

The foreign-earned income exclusion and the foreign housing exclusion (also known as the foreign housing deduction) are based on foreign-earned income. For this purpose, foreign earned income is income you receive for services you perform in a foreign country in a period during which your tax home is in a foreign country, and you meet either the bona fide residence test or the physical presence test.

To claim the foreign earned income exclusion and/or the foreign housing exclusion, you must meet all three of the following requirements.

1. Your tax home must be in a foreign country.
2. You must have had foreign-earned income.
3. You must be one of the following.
1. A U.S. citizen who is a bona fide resident of one or more foreign countries for an uninterrupted period that includes an entire tax year.
2. A U.S. resident alien is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country for an uninterrupted period that includes the entire tax year.
3. A U.S. citizen or a resident alien who is physically present in a foreign country for at least 330 full days over 12 consecutive months.

You may also exclude the value of food and housing provided by your employer on their premises and for their convenience. However, such amounts are not foreign-earned income and would be separate from this exclusion.

Don't sweat if you qualify but aren't sure what to exclude. See below for a breakdown of both types of exclusion; fill out Form 2555 to secure your exclusion, and then utilize eFile's automatic tax tools to handle the rest. We'll do all the hard math so you can sit back wherever you are and enjoy your foreign surroundings.

Foreign Earned Income Exclusion

Please remember that the maximum amount of foreign income you can exclude is adjusted yearly for inflation. For tax year 2022, you can exclude the lower of your foreign earned income or $112,000 per qualifying person. In 2023, the maximum exclusion is $120,000 per person. 

If a married couple both work abroad and meet the bona fide residence test or the physical presence test, you can each choose the foreign earned income exclusion. For the 2023 tax year, it is possible for you to exclude a maximum of $240,000 jointly.

If your eligibility for foreign-earned income exclusion is only for a part of the year, then you are required to modify the maximum limit according to the number of qualifying days within that year.

Qualified housing expenses have a cap for foreign housing exclusion or deduction. Typically, housing costs are capped at 30% of the highest foreign-earned income exclusion. For 2023, the housing amount limitation is $36,000. The limit on the foreign tax home will depend on where it is located and how many qualifying days are present in the tax year.

If you are claiming a foreign housing exclusion, please note that this amount must be calculated first because The exclusion for income earned from foreign sources is based on your foreign-earned income, with any foreign housing exclusion you claim subtracted.

Maximum Foreign Earned Income Exclusion Amount

The amount of foreign income that you can exclude is limited to your annual maximum dollar amount limit or actual foreign wages, whichever is less. Below are the maximum amounts for foreign income tax exclusion since the 2006 Tax Year (adjusted for inflation):

Foreign Housing Exclusion

You can deduct foreign housing expenses from your income if you work abroad and pass the bona fide residence or physical presence test. Note that the exclusion only applies to employer-paid expenses, while the deduction applies to self-employment earnings.

To calculate your foreign housing amount, subtract the base housing amount from your total foreign housing expenses. The base amount can be found on Form 2555 and is calculated based on the maximum foreign earned income exclusion.

Only count reasonable housing expenses for yourself, your spouse, and dependents (if they lived with you) during the part of the year you qualify for foreign earned income exclusion. Exclude lavish expenses and expenses related to buying property, furniture, or improvements that increase property value.

Please note that there is a limit on how much you can spend on housing expenses, which varies based on your location. It is important to keep in mind that your foreign housing expenses cannot exceed your total foreign earned income for the taxable year.

Calculate your foreign housing exclusion before your foreign earned income exclusion. You must claim the full amount of housing exclusion you are entitled to. If you exclude foreign housing amounts, you cannot claim a foreign tax credit or deduction for those taxes. Otherwise, your housing exclusion may be invalid.

While eFiling your taxes, note that foreign housing deduction must not exceed foreign earned income minus foreign earned income exclusion and housing exclusion. You cannot claim both deductions and exclusions unless you're self-employed. These deductions lower your income tax but not your self-employment tax.

Whether you're eFiling for this year or getting some back taxes done, the above information should more than cover any questions you had about getting the FEIE and keeping more of your money in your pocket.

Claim the Foreign Income Tax Exclusion

When you prepare your Tax Return on eFile.com, you do not have to worry about finding the proper forms and following different rules. After answering a few simple questions, the eFile app will select and generate the correct forms needed to claim the FEIE. As mentioned above, this is Form 2555, Foreign Earned Income, which can be used if you are also claiming foreign housing cost amount exclusion or if you are only claiming the foreign income tax exclusion. Form 2555 should be filed with your timely filed Form 1040 (Individual Income Tax Return) or Form 1040-X (Tax Amendment). For more, check out a view of a full list of foreign income-related tax forms.

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