How the Foreign Earned Income Exclusion (FEIE) Works

What Qualifies as "Foreign Earned Income"?

The FEIE applies only to income earned from personal services performed in a foreign country—"earned" is the critical word here. This means money you exchange for your time, labor, or expertise while physically present abroad. Consulting fees, freelance income, salary from a foreign employer, and self-employment income all qualify as long as you performed the work outside the US. What doesn't qualify: passive income. Investment dividends, interest, rental income, capital gains, pensions, Social Security, and US government wages are all excluded from FEIE benefits. The IRS draws a clear line—if you didn't actively work for it abroad, it doesn't count.

Qualification Tests

You must meet one of two tests to qualify for FEIE:

1. Physical Presence Test

Be physically present in a foreign country for at least 330 full days during any 12-month period.

2. Bona Fide Residence Test

The Bona Fide Residence Test requires you to be a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year (January 1 - December 31). This test is more flexible than the physical presence test because you can spend time in the US without losing qualification—there's no strict day count. The key is establishing actual residency: you need a visa or work permit, local ties (apartment lease, bank account, gym membership), and the intention to remain there indefinitely, not just temporarily. You can't be a "bona fide resident" of a country while staying in tourist hotels and hopping around every few months. Once established for a full calendar year, you qualify for FEIE even if you visit the US for several weeks annually, making this the preferred test for digital nomads with a stable home base abroad.

Foreign Housing Exclusion

In addition to the $130,000 income exclusion, you can exclude certain housing expenses through the Foreign Housing Exclusion. Qualifying expenses include rent, utilities, property insurance, repairs, and even furniture rental—basically, the cost of maintaining a home abroad. The calculation works by subtracting a base amount ($20,800 in 2026, which is roughly 16% of the FEIE limit) from your total housing expenses. Anything above that base up to the location-specific maximum can be excluded.

The maximum varies dramatically by location—expensive cities like Tokyo, London, or Singapore have caps around $40,000-50,000, while cheaper locations might max out at $25,000-30,000. The IRS publishes annual limits by city. If you're paying $3,500/month ($42,000/year) in rent in Tokyo, you'd subtract the $20,800 base, leaving $21,200 in additional housing exclusion. Combined with the $130,000 FEIE, you could potentially exclude up to $150,000+ in total income from US taxes, which translates to $45,000-60,000 in tax savings depending on your bracket.

How to Claim FEIE

1. 1File Form 2555 with your tax return
2. 2Document your qualification (physical presence or bona fide residence)
3. 3Calculate your foreign earned income and housing expenses
4. 4File by the deadline (automatic 2-month extension for taxpayers abroad)

FEIE vs. Foreign Tax Credit

You can't use both FEIE and Foreign Tax Credit on the same income. Consider:

Self-Employment Tax Trap

FEIE does NOT exclude you from self-employment tax. Even if you exclude $130,000 of income from income tax, you still owe 15.3% SE tax on that amount.

Common Mistakes to Avoid

• Forgetting to track days in/out of foreign countries
• Assuming investment income qualifies (it doesn't)
• Missing the filing deadline
• Not considering the self-employment tax implications
• Revoking FEIE without understanding the 5-year rule

Key Takeaways