Foreign Earned Income Exclusion Basics: A General Explanation for US Expats

The idea behind the exclusion

The United States taxes citizens and residents on worldwide income. To reduce double taxation for people working abroad, the tax code includes several relief mechanisms. One of the best known is the foreign earned income exclusion, often shortened to FEIE.

If you qualify, you can exclude part of your foreign earned income from US federal income tax, up to a yearly limit. The limit is adjusted for inflation, so check the current amount on the IRS site rather than relying on an old figure.

What counts as earned income

Earned income generally means pay for personal services performed abroad, such as wages, salaries or self-employment income. Passive income such as dividends, interest and capital gains is not part of the exclusion.

Where you perform the work matters. Income for work done while physically in the United States is generally not foreign earned income, so remote workers who return home for periods should track their days and location.

The tax home requirement

To use the exclusion, you generally need a tax home in a foreign country. Roughly speaking, that means your main place of business or work is outside the United States. People who have no fixed base and keep moving may find it hard to show a foreign tax home.

The details are technical, and the IRS provides definitions and examples. If your lifestyle is mobile, discuss this early with an adviser rather than discovering a problem at filing time.

The two ways to qualify

Besides the tax home, you must pass one of two tests.

• Physical presence test: you spend a minimum number of full days in foreign countries during a twelve-month period, as defined in the IRS rules
• Bona fide residence test: you are a genuine resident of a foreign country for an uninterrupted period that includes a full tax year
• Both tests have conditions and exceptions
• Days in the United States or certain restricted countries can affect eligibility

Other relief options

The exclusion is not the only tool. A foreign tax credit may reduce US tax by the amount of foreign income tax paid, and a housing exclusion or deduction may apply to certain housing costs. Which option is best depends on your country, your income and your tax rate there.

Sometimes people use the credit rather than the exclusion, particularly when they pay a high rate of foreign tax. Because choices can have lasting consequences, speak to a professional.

Filing and record keeping

You generally claim the exclusion by filing a specific form with your tax return, which also asks for details on your days abroad and your foreign tax home. Keep passports, travel logs, leases, pay slips and tax documents to support the claim.

State taxes, social security and foreign reporting such as the FBAR are separate topics. Qualifying for the exclusion does not remove other reporting duties.

Be careful about marketing claims online that promise to eliminate US tax if you move abroad. The exclusion is a specific provision with specific conditions, and it does not cover every kind of income or every kind of tax. Treat sweeping promises with caution, ask for the legal basis, and check against IRS publications or an enrolled professional.

Where to verify

The IRS publishes guidance for US citizens and resident aliens abroad, including the current exclusion limit and form instructions. Use those pages and a qualified cross-border adviser.

This article is general information, not tax advice. Rules and limits change, so confirm the figures for the relevant tax year.

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