The Foreign Earned Income Exclusion (FEIE) is a provision under IRC § 911 that allows qualifying U.S. citizens and resident aliens living abroad to exclude a portion of their foreign earned income from U.S. federal income tax. The exclusion does not remove the obligation to file a U.S. return. It reduces, or in many cases eliminates, the federal income tax owed on qualifying income.
Annual exclusion limits
The IRS adjusts the FEIE annually for inflation. The limits are:
- 2025: $130,000 per qualifying person
- 2026: $132,900 per qualifying person, per Rev. Proc. 2025-32
If both spouses have foreign earned income and both qualify, each may claim a separate exclusion. The combined exclusion reaches up to $260,000 in 2025 and $265,800 in 2026, subject to each spouse’s individual qualifying income.
You can use our FEIE savings calculator to estimate your potential exclusion.
Eligibility requirements
IRS guidance requires that all three of the following be satisfied:
- You have foreign earned income (income for services you performed in a foreign country)
- Your tax home is in a foreign country
- You meet either the Physical Presence Test or the Bona Fide Residence Test
All three must be satisfied for the same qualifying period. Foreign income alone, without a passing test, is not sufficient.
What counts as foreign-earned income
The FEIE applies to income received for personal services performed in a foreign country, including wages, salaries, professional fees, bonuses, and self-employment income.
Income that does not qualify includes:
- Investment income: dividends, interest, and capital gains
- Rental income
- Pensions and annuities, including Social Security benefits
- Pay received as a U.S. government employee or from a U.S. government agency
- Income earned in international waters or airspace, which the IRS does not treat as a foreign country
Self-employment income can be excluded for income tax purposes, but the exclusion does not reduce self-employment tax. Taxpayers covered by a U.S. Totalization Agreement with their country of residence may have a separate basis for reducing self-employment tax through that agreement.
The tax home requirement
Your tax home is generally your regular place of business or employment. If you have no fixed place of business, it is your regular place of abode.
The IRS is clear that you do not have a foreign tax home if your abode remains in the United States during the period you are working abroad, even if you are physically present overseas. This determination is separate from the residence tests below.
The Physical Presence Test
Under the Physical Presence Test, you must be physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.
The test operates as follows:
- The 12-month period does not have to align with the calendar year. Any consecutive 12-month window that begins or ends during the tax year you are filing for is acceptable.
- Days spent traveling over international waters or airspace do not count.
- The 330 days do not need to be consecutive.
- A full day is a continuous 24-hour period outside the United States.
Because the qualifying window is not fixed to January–December, taxpayers who relocate mid-year or return to the United States before year-end can often choose the 12-month window that produces the most qualifying days.
The Physical Presence Test is objective: it counts days and does not consider your intent, visa status, or ties to any particular country. This makes it the more common choice for taxpayers who divide time among multiple countries and have not established formal residency in one place.
The 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 a full calendar year, from January 1 through December 31.
This standard is fact-based, but it is a qualitative test that involves IRS judgment. Relevant factors can include:
- The nature, purpose, and expected duration of your stay
- Whether you intend to reside in the country indefinitely or for a defined term
- How long you spent in the country you are claiming as a residence
- Personal ties such as family, housing, and social connections in the foreign country
- Financial arrangements such as local bank accounts, a long-term lease or property ownership, and employment under a local or multi-year contract
- Statements made to a foreign government regarding your residence status
Taxpayers on multi-year assignments may find this test more practical because it does not require tracking individual days. It does, however, call for clear evidence of genuine foreign residency. That’s why tax experts often recommend that expats who qualify for the Bona Fide Residence Test still track their days in the country they are claiming as a residence to add additional qualitative evidence for the IRS.
For country-specific considerations, you may be interested in which countries qualify for the FEIE (as most countries do with the notable exception of Cuba).
Prorated exclusions for partial-year qualification
If you qualify for only part of the year (because the 12-month window you qualify for is not the same as the calendar year), the maximum exclusion is prorated based on the number of qualifying days relative to the total days in the year. The calculation is performed on Form 2555.
If you also claim the Foreign Housing Exclusion, those amounts are calculated first. The FEIE is then limited to your foreign earned income minus any housing exclusion already claimed.
The stacking rule and tax rate effects
The FEIE is an exclusion from income, not a deduction. The distinction affects how tax rates apply to income that remains after the exclusion.
Under the stacking rule in IRC § 911(b)(3), the IRS calculates your tax by first determining the rate applicable to your total income, including the excluded amount, then applying that rate only to the non-excluded portion. The excluded income comes off the taxable base but remains in the bracket calculation.
To illustrate: if you earn $150,000 in foreign earned income and exclude $132,900, you owe tax on $17,100. That $17,100 is taxed at the rate applicable to $150,000 of income, not $17,100.
For taxpayers whose foreign income falls entirely within the exclusion limit, this makes no practical difference since there is nothing left to tax. For higher earners, or those with income that falls outside the FEIE (passive income, U.S.-sourced income, or income above the annual cap), the stacking rule should be modeled before treating the exclusion as a complete tax solution.
The calculation is performed using the Foreign Earned Income Tax Worksheet in the Form 1040 instructions.
Interaction with the standard deduction
Claiming the FEIE does not prevent you from also claiming the standard deduction against any remaining taxable income. The two provisions apply independently of each other.
How to claim the FEIE
The FEIE is claimed by attaching Form 2555 (Foreign Earned Income) to your annual Form 1040. The form collects your qualifying period, the basis for the claim (Physical Presence Test or Bona Fide Residence Test), a description of your foreign employment or self-employment, and your foreign earned income for the year. If you are also claiming the Foreign Housing Exclusion or deduction, those calculations appear on the same form.
One procedural issue worth flagging: the FEIE is an election. Choosing not to claim it in a given year, or revoking a prior election, triggers a restriction on re-electing the exclusion for five years without IRS permission. Before waiving the FEIE for strategic reasons in a given year, consult a qualified tax professional about the multi-year consequences.
File Form 2555 with Nation.ly
Nationly is an iOS app that runs in the background and automatically tracks your physical presence by country, generating the location documentation you need to pass the Physical Presence Test or evidence to help document your residency for the Bona Fide Residence Test. At tax time, it exports a pre-filled Form 2555 with your location data, replacing what is otherwise a manual, error-prone process. For Americans abroad who need to document 330 qualifying days and file accurately, it removes the guesswork.
