The Foreign Earned Income Exclusion (FEIE) is one of the most powerful tax benefits available to U.S. citizens and resident aliens living and working abroad. For tax year 2025, the FEIE allows qualifying taxpayers to exclude up to $126,500 of foreign earned income from U.S. federal income tax—a significant increase from $120,000 in 2024.

If you're a digital nomad, expat employee, or self-employed individual working overseas, understanding how to qualify for and claim the FEIE can save you tens of thousands of dollars annually. This comprehensive guide covers everything you need to know: eligibility requirements, the physical presence test vs. bona fide residence test, Form 2555 filing instructions, state tax implications, and common pitfalls to avoid.

What is the Foreign Earned Income Exclusion (FEIE)?

The Foreign Earned Income Exclusion, established under IRC Section 911, allows qualifying U.S. citizens and resident aliens to exclude foreign earned income from U.S. taxation. This exclusion applies to wages, salaries, professional fees, and self-employment income earned while your tax home is in a foreign country and you meet either the physical presence test or bona fide residence test.

2025 FEIE Limit: $126,500

For tax year 2025 (filed in 2026), the maximum exclusion amount is $126,500. This amount is adjusted annually for inflation by the IRS. Here's the historical progression:

Tax Year	FEIE Exclusion Limit	Increase from Prior Year
2025	$126,500	+$6,500 (5.4%)
2024	$120,000	+$8,000 (7.1%)
2023	$112,000	+$4,400 (4.1%)
2022	$107,600	+$5,000 (4.9%)
2021	$108,700	+$2,300 (2.2%)

Important: The FEIE only applies to earned income. It does not apply to passive income such as dividends, interest, capital gains, rental income, pensions, or Social Security benefits.

What Qualifies as Foreign Earned Income?

Foreign earned income includes:

Wages and salaries from foreign employers
Self-employment income from services performed abroad
Professional fees and consulting income
Bonuses and commissions attributable to foreign services
Tips and gratuities received for foreign work
Business profits from a foreign sole proprietorship

Income that does NOT qualify:

Dividends, interest, and capital gains
Pension distributions and Social Security benefits
Rental income from U.S. or foreign properties
Gambling winnings
Alimony
Income from U.S. government employment (with limited exceptions)

Who Qualifies for the FEIE in 2025?

To claim the Foreign Earned Income Exclusion, you must meet all three of the following requirements:

1. Tax Home in a Foreign Country

Your tax home must be in a foreign country. According to IRS Publication 54, your tax home is your regular or principal place of business, employment, or post of duty, regardless of where you maintain your family residence.

Key criteria:

You must have a regular place of work in a foreign country
Your employment must not be temporary or indefinite (under IRS definitions)
You cannot maintain a tax home in the U.S. while claiming FEIE
If you're an itinerant worker with no regular place of business, your tax home is wherever you regularly live

Example: Sarah works as a software engineer for a company in Portugal. She lives in Lisbon year-round and performs all work from Portugal. Her tax home is Portugal, and she qualifies for FEIE. However, if Sarah worked remotely for a U.S. company while traveling constantly between countries with no fixed base, the IRS might argue she has no tax home and doesn't qualify.

2. Foreign Earned Income

Your income must be earned from personal services performed in a foreign country (as opposed to passive investment income). See the section above for what qualifies.

3. Meet Either the Physical Presence Test OR Bona Fide Residence Test

This is where most people focus their attention. You must meet one of these two tests (not both):

Physical Presence Test (PPT)

The Physical Presence Test is a purely mechanical test based on counting days. You qualify if you are physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.

How to Count the 330 Days

Full days only: A full day is a continuous 24-hour period starting at midnight
The day you depart the U.S. and the day you return to the U.S. do not count as full days abroad
Days spent in international waters or airspace do not count toward the 330 days
The 12-month period can begin on any day and does not have to align with the calendar year or tax year
You can be in any foreign country—it doesn't have to be the same one

Example: Tom is a digital nomad who left the U.S. on March 15, 2025, and returned on February 10, 2026. His 12-month period runs from March 16, 2025 (first full day abroad) through March 15, 2026. During this period, he spent:

180 days in Thailand
90 days in Portugal
40 days in Mexico
20 days traveling back to the U.S. for holidays (not counted)
35 days in various other countries

Total: 345 full days abroad. Tom qualifies under the Physical Presence Test for the portion of 2025 and 2026 falling within his qualifying period.

Calculating Your Exclusion with PPT

If your 12-month qualifying period overlaps two tax years (as it usually does), you must prorate your exclusion. The formula is:

(Number of qualifying days in the tax year ÷ Total days in the tax year) × $126,500

For Tom's example above, if his qualifying period is March 16, 2025 – March 15, 2026:

2025: Qualifying days = 291 (March 16 – Dec 31). Exclusion = (291 ÷ 365) × $126,500 = $100,833
2026: Qualifying days = 74 (Jan 1 – March 15). Exclusion = (74 ÷ 365) × $126,500 = $25,667

Pros and Cons of the Physical Presence Test

Pros:

Objective and easy to calculate (just count days)
No need to establish residency or ties to a foreign country
Flexible—you can move between countries
Ideal for digital nomads and location-independent workers

Cons:

Requires strict tracking of travel days
Limited flexibility for U.S. trips (maximum ~35 days per year)
May require prorating the exclusion if the period spans two tax years
Border crossings and international flights must be carefully documented

Bona Fide Residence Test (BFR)

The Bona Fide Residence Test is more subjective. You qualify if you are a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year (January 1 – December 31).

What Does "Bona Fide Resident" Mean?

The IRS looks at multiple factors to determine if you are a bona fide resident of a foreign country, including:

Intent: Do you intend to live in the foreign country indefinitely or for an extended period?
Residence permit or visa: Do you have legal residency status (work visa, residence permit, etc.)?
Physical presence: Do you actually live in the country most of the time?
Economic ties: Do you have a bank account, lease, employment, or business in the foreign country?
Social ties: Are you integrated into the local community? Do you have family there?
Submitted statements to foreign authorities: Did you declare yourself a resident for foreign tax purposes?

Important: Simply being physically present in a foreign country does not automatically make you a bona fide resident. The IRS evaluates your intent and actions.

Tax Treaties and Bona Fide Residence

If you claim benefits under a tax treaty as a resident of a foreign country, this generally disqualifies you from using the bona fide residence test. However, you may still use the physical presence test.

Example: Maria moved to Germany on August 1, 2024, on a work visa. She rented an apartment, opened a German bank account, enrolled her children in German schools, and filed German tax returns as a resident. By January 1, 2025, she has established bona fide residence. Since she meets the entire-tax-year requirement (Jan 1 – Dec 31, 2025), she qualifies for FEIE in 2025 and can also claim partial exclusions for 2024 and 2026 if she remains a bona fide resident.

Partial Year Qualification

Unlike the PPT, once you qualify as a bona fide resident for an entire tax year, you can also claim the exclusion for parts of the year before your qualifying period started and after it ended, as long as your bona fide residence was uninterrupted.

In Maria's case:

2024: She can exclude income earned from August 1 – December 31, 2024 (even though she wasn't a bona fide resident for the entire 2024 tax year)
2025: Full year exclusion (up to $126,500)
2026: If she returns to the U.S. on October 1, 2026, she can still exclude income earned from January 1 – October 1, 2026

Pros and Cons of the Bona Fide Residence Test

Pros:

More flexibility for U.S. visits (no strict day counting)
Once qualified, easier to maintain year-over-year
Allows partial year exclusions in first and last years of foreign residence

Cons:

Subjective—IRS can challenge your bona fide residence status
Requires strong evidence of intent and ties to the foreign country
Must reside abroad for at least one full calendar year to qualify initially
Tax treaty complications can disqualify you

How to Claim the FEIE: Form 2555

To claim the Foreign Earned Income Exclusion, you must file Form 2555 (Foreign Earned Income) with your U.S. federal tax return (Form 1040). For detailed guidance, consult IRS Publication 54 (Tax Guide for U.S. Citizens and Resident Aliens Abroad).

Form 2555: Step-by-Step

Part I: General Information

List your foreign address and employer information
Indicate which test you're using (Physical Presence or Bona Fide Residence)

Part II: Physical Presence Test (if applicable)

Provide your 12-month qualifying period
List dates you entered and left the U.S.

Part III: Bona Fide Residence Test (if applicable)

Provide dates of bona fide residence
Answer questions about your foreign residence status

Part IV: Tax Home

Describe your tax home location and abode

Part V: Foreign Earned Income

Report wages, self-employment income, and other earned income

Part VI: Housing Deduction (for self-employed)

If you're self-employed, you can also claim a housing deduction for qualified housing expenses

Part VII: Housing Exclusion (for employees)

If your employer provides housing or a housing allowance, you may be able to exclude part of it

Part VIII: Taxpayers with Moving Expense Deductions

Generally only available to active-duty military members as of 2025

Part IX: Calculation of Exclusion

The form calculates your maximum exclusion and the amount you're actually excluding

Filing Deadlines and Extensions

U.S. expats automatically receive a 2-month extension to file taxes—until June 15 instead of April 15. However, any taxes owed are still due by April 15, and interest accrues on unpaid balances.

You can request an additional extension to October 15 by filing Form 4868. If you need even more time (e.g., to meet the 330-day physical presence test), you can request an extension to December 15 by writing to the IRS.

Foreign Housing Exclusion or Deduction

In addition to the FEIE, you may also be able to exclude or deduct foreign housing expenses that exceed a base amount. For 2025, the base housing amount is 16% of the FEIE limit: 16% × $126,500 = $20,240.

Qualified Housing Expenses

Qualified housing expenses include:

Rent
Utilities (except telephone and TV/internet)
Real and personal property insurance
Parking fees
Furniture rental

Not qualified: Mortgage payments, purchased furniture, lavish or extravagant expenses.

Housing Exclusion vs. Deduction

Housing Exclusion: Available if you're an employee and your employer provides housing or a housing allowance
Housing Deduction: Available if you're self-employed

Example: James is a self-employed consultant living in London. His annual rent is $36,000, and utilities are $4,000. Total qualified housing expenses: $40,000. Base amount: $20,240. Excess: $40,000 - $20,240 = $19,760 housing deduction.

The housing exclusion/deduction can significantly increase your total tax savings beyond the $126,500 FEIE limit.

State Taxes and the FEIE

Here's a critical point many expats miss: The FEIE only applies to federal taxes. It does not eliminate state income tax obligations if you maintain domicile in a state with income tax.

States That Tax Worldwide Income

If you're domiciled in California, New York, Virginia, South Carolina, or New Mexico, those states may continue to tax your worldwide income even if you live abroad and claim FEIE on your federal return. Each state has its own rules for determining domicile.

Solution: Before moving abroad, consider establishing domicile in a zero-tax state such as:

Florida
Texas
Nevada
South Dakota
Wyoming
Tennessee
Washington

Your Tax Base specializes in helping expats establish Florida domicile, providing a street address, lease documentation, and mail forwarding to prove residency. This ensures you benefit from both federal FEIE and zero state income tax. Learn more.

FEIE vs. Foreign Tax Credit (FTC)

The Foreign Tax Credit (Form 1116) is an alternative to FEIE. It allows you to claim a dollar-for-dollar credit against U.S. taxes for foreign income taxes paid to another country.

Which Should You Choose?

Situation	Best Option	Reason
Income under $126,500 in a zero or low-tax country	FEIE	Excludes all income from U.S. tax; no foreign taxes to credit
Income over $126,500 in a high-tax country	FTC (or combination)	Foreign taxes paid likely exceed U.S. tax liability
Self-employed income under $126,500	FEIE + Housing Deduction	Maximizes exclusions; reduces self-employment tax base
Income in a country with no tax treaty	FEIE	Simpler than FTC; no treaty complications
High income ($200K+) in a high-tax country	Combination or FTC	FTC can offset tax on income above FEIE limit

Note: You can use both FEIE and FTC, but not on the same income. For example, you might exclude $126,500 with FEIE and use FTC on the remaining $50,000 if you earned $176,500.

Common FEIE Mistakes and Pitfalls

1. Not Counting Days Correctly (PPT)

Expats often miscalculate the 330-day requirement by counting partial days or travel days. Remember: days in transit and the day you leave/return to the U.S. do not count.

Solution: Use a spreadsheet or app to track every border crossing with dates and times. Keep all boarding passes and passport stamps.

2. Failing to Establish a Tax Home

If you're a perpetual traveler with no fixed base, the IRS may argue you don't have a tax home in a foreign country, disqualifying you from FEIE.

Solution: Establish a clear tax home by renting an apartment, getting a work visa, opening local bank accounts, and registering with local authorities.

3. Assuming FEIE Eliminates Self-Employment Tax

The FEIE excludes income from income tax but does not eliminate self-employment tax (Social Security and Medicare). If you're self-employed, you still owe ~15.3% self-employment tax on your net earnings, even if you exclude the income from income tax with FEIE.

Exception: If you're covered by a Totalization Agreement (e.g., living in Germany, UK, Canada), you may only pay into the foreign country's social security system.

4. Not Filing Form 2555

FEIE is not automatic. You must file Form 2555 to claim it. If you fail to file it with your original return, you can amend your return, but penalties may apply if you owed taxes.

5. Ignoring State Tax Obligations

As mentioned earlier, FEIE doesn't exempt you from state taxes if you maintain domicile in a state with income tax. Establish domicile in a zero-tax state before moving abroad.

6. Mixing Up Bona Fide Residence and Physical Presence

You cannot switch between tests mid-year or use both in the same year. Choose the test that best fits your situation and stick with it for that tax year.

FEIE and Retirement Contributions

If you exclude all your income with FEIE, you cannot contribute to a Roth IRA because Roth contributions require taxable compensation. However, you can still contribute to a Traditional IRA if you have earned income.

For self-employed individuals, excluding income with FEIE reduces the amount you can contribute to retirement accounts like SEP-IRAs and Solo 401(k)s, which are based on net self-employment income after the FEIE exclusion.

FEIE and the Child Tax Credit

Starting with tax year 2018, the Child Tax Credit (CTC) is available even if you claim FEIE, as long as your modified adjusted gross income (MAGI) is below the phaseout thresholds ($400,000 for married filing jointly, $200,000 for others). The credit is worth up to $2,000 per qualifying child under 17.

However, if you exclude all your income with FEIE and have zero U.S. tax liability, the refundable portion of the CTC (Additional Child Tax Credit) may be limited or unavailable.

Frequently Asked Questions (FAQ)

Can I claim FEIE if I work remotely for a U.S. company?

Yes, as long as your tax home is in a foreign country and you meet either the physical presence test or bona fide residence test. The nationality of your employer does not matter—what matters is where you perform the work.

Do I have to pay Social Security and Medicare taxes if I claim FEIE?

If you're self-employed, yes—FEIE does not exempt you from self-employment tax. If you're an employee of a foreign company, you generally don't pay U.S. Social Security/Medicare taxes (you pay into the foreign country's system). If you're an employee of a U.S. company abroad, you likely still pay U.S. Social Security/Medicare unless covered by a Totalization Agreement.

Can I claim FEIE if I only lived abroad for part of the year?

Yes, using the physical presence test. Your 12-month qualifying period can span two tax years, and you prorate your exclusion based on the number of days in each year that fall within your qualifying period.

What happens if I claim FEIE and then get audited?

The IRS may request documentation proving your physical presence (passport stamps, flight records, hotel receipts, lease agreements) or bona fide residence (residence permits, foreign tax returns, employment contracts). Keep thorough records for at least 3 years after filing.

Can I revoke FEIE once I've claimed it?

Yes, but once you revoke it, you cannot claim FEIE again for 5 years without IRS approval. Revoking FEIE might make sense if you want to use the Foreign Tax Credit instead.

Does the FEIE apply to income from investments?

No. FEIE only applies to earned income from personal services. Capital gains, dividends, interest, rental income, and pensions do not qualify.

Can married couples both claim FEIE?

Yes. If both spouses qualify, each can exclude up to $126,500, for a combined maximum exclusion of $253,000 in 2025.

What if I'm a digital nomad constantly moving between countries?

Use the physical presence test. As long as you're outside the U.S. for 330 full days in any 12-month period, you qualify, regardless of how many countries you visit.

Do U.S. territories count as foreign countries for FEIE purposes?

No. Puerto Rico, U.S. Virgin Islands, Guam, American Samoa, and the Northern Mariana Islands are not considered foreign countries. Income earned there does not qualify for FEIE (though some territories have their own tax rules).

Can I claim FEIE if I'm on a tourist visa?

For the physical presence test, yes—the type of visa doesn't matter. For the bona fide residence test, a tourist visa likely won't support bona fide residence status because it indicates temporary presence rather than intent to reside.

Final Thoughts

The Foreign Earned Income Exclusion is one of the most valuable tax benefits for Americans living and working abroad, potentially saving you over $30,000 annually in federal income taxes on the first $126,500 of foreign earned income in 2025. Whether you use the physical presence test (ideal for digital nomads) or the bona fide residence test (ideal for long-term expats), the key to success is understanding the requirements, maintaining meticulous records, and filing Form 2555 correctly.

Key takeaways:

2025 FEIE limit: $126,500 (up from $120,000 in 2024)
You must have a tax home in a foreign country
Choose physical presence test (330 days) or bona fide residence test (full tax year residency)
FEIE applies only to earned income, not passive income
File Form 2555 with your tax return—it's not automatic
FEIE does not eliminate self-employment tax or state tax obligations
Consider establishing domicile in a zero-tax state to maximize savings

Don't let state taxes erode your FEIE savings. Your Tax Base helps expats establish Florida domicile with a physical street address, lease documentation, utility bills, and mail forwarding—everything you need for IRS compliance and zero state income tax. Plans start at $14.99/month. Contact us today to secure your tax savings.

Foreign Earned Income Exclusion (FEIE) 2025: Complete Guide