Foreign Earned Income Exclusion
The Foreign Earned Income Exclusion (FEIE) allows qualifying US citizens and resident aliens living abroad to exclude a portion of their foreign-earned wages and self-employment income from US federal income tax, reducing the double-taxation burden on Americans working outside the United States.
For tax year 2024, the FEIE maximum exclusion amount is $126,500, indexed annually for inflation. To claim the exclusion, a taxpayer must meet either the bona fide residence test (residing in a foreign country as a legal resident for an uninterrupted period that includes an entire tax year) or the physical presence test (being present in a foreign country for at least 330 full days during any 12-month period).
The exclusion applies only to earned income — wages, salaries, professional fees, and self-employment income from services performed outside the United States. It does not apply to investment income such as dividends, interest, capital gains, or rental income, nor to income paid by the US government or its agencies. Self-employed individuals who claim the FEIE still owe self-employment tax on the excluded income, because SE tax is not an income tax and is not eliminated by the exclusion.
Taxpayers may also elect to exclude housing costs under the Foreign Housing Exclusion, which covers amounts paid for foreign housing above a base housing amount (16 percent of the FEIE maximum). The housing exclusion is particularly valuable in high-cost cities such as London, Hong Kong, or Zurich where housing allowances from employers represent a significant component of compensation.
Once a taxpayer revokes the FEIE election, they are barred from re-electing it for the following five tax years without IRS consent. This creates a planning consideration: taxpayers who move abroad should evaluate whether their foreign taxes are sufficient to cover their US liability before electing the FEIE, since the foreign tax credit and the FEIE cannot both be applied to the same income.