Foreign Earned Income Exclusion: U.S. Tax Basics

Bureaucracy Without Pain — a no-nonsense guide from an international tax advisor

“The FEIE isn’t a loophole; it’s the law. Use it, don’t abuse it, and the IRS will usually leave you in peace.”
— My mentor, a 30-year IRS revenue agent

Why the Foreign Earned Income Exclusion Matters

If you are a U.S. citizen or green-card holder living abroad, the Internal Revenue Code still follows you like a loyal (but occasionally aggressive) Labrador. The Foreign Earned Income Exclusion (FEIE), under IRC §911, lets you exclude up to USD 108,700 (tax year 2021) of earned income from U.S. federal tax. Indexed for inflation, that threshold rises to USD 112,000 for 2022 and USD 120,000 for 2023. The exclusion often eliminates any U.S. tax due, making the difference between “Why did I move?” and “Pass the ceviche—I saved five figures.”

Key benefits

• Cuts or eliminates U.S. tax on wages or self-employment income earned abroad.
• Reduces Adjusted Gross Income (AGI), which can improve eligibility for U.S. child tax credits or IRA contributions.
• Combines with the Foreign Housing Exclusion (FHE) for high-rent cities (think Singapore or Zürich).
• Works in tandem with the Foreign Tax Credit (FTC) when your foreign tax rate is lower than the U.S. rate.

Who should care

• Digital nomads freelancing from Medellín, Chiang Mai, or Madeira.
• Corporate expats on local contracts.
• U.S. entrepreneurs running foreign-registered companies (but beware Subpart F and GILTI—topics for another day).
• Dual citizens who haven’t “officially” resettled but do spend 330+ days outside the States.

If you’re transferring a 401(k) or UK SIPP while abroad, read our pension transfers when you change country primer; timing the rollover around FEIE eligibility can shave off additional U.S. tax.

The Legal Foundations—Minus the Jargon

1. Internal Revenue Code §911(a) authorizes the exclusion.
2. Form 2555 is the mechanism; it rides along with your Form 1040.
3. Eligibility hinges on one of two tests:
4. Bona Fide Residence (BFR) — you’re a tax resident of another country for an entire calendar year.
5. Physical Presence Test (PPT) — you’re physically outside the U.S. for 330 full days in any 12-month window.

That’s it. Everything else is paperwork, deadlines, and common sense.

Step-by-Step: How to Claim the FEIE

1. Confirm you have earned income

Excluded: wages, commissions, freelance revenue, self-employment profit.
Not excluded: dividends, capital gains, pensions, rental income (use FTC or other strategies for those).

2. Choose your qualifying test

You can switch tests year to year, but once you elect BFR you must usually stick with it if circumstances remain unchanged.

3. Track days like a hawk

Use flight itineraries, passport stamps, and smartphone GPS logs. A single three-hour layover in LAX is not a full day in the U.S., but an overnight red-eye that arrives at 10 p.m. is. Precision matters; the IRS auto-flags “near-miss” returns.

4. Gather foreign tax documentation

Even if you expect zero U.S. tax, you’ll need local payslips, employer statements, or P&L accounts. They support both FEIE and FTC, which you might still need for income above the exclusion cap.

5. Run the numbers

Use tax software or a spreadsheet:

1. Convert foreign earnings to USD using the annual average exchange rate (IRS publishes a list).
2. Subtract the exclusion.
3. Add back disallowed deductions proportionally (the “stacking rule” pushes excluded income into higher brackets).
4. Compare to FTC scenarios to confirm FEIE is optimal.

For digital nomads in low-tax jurisdictions—say, working under the Colombia digital nomad visa requirements and benefits—the FEIE almost always beats the FTC because Colombian tax on foreign-source income is 0% for the first 183 days.

6. Complete Form 2555

Sections at a glance:

• Part I: Your foreign address and employer type
• Part II: BFR or PPT test, with exact dates
• Part IV: Foreign earned income (line by line)
• Part VI: Foreign housing exclusion (optional)

Pro-tip: File electronically. Most consumer software hides Form 2555 behind an “expat income” wizard. Check the PDF before hitting “Send.”

7. Attach to Form 1040 and file

Deadline: April 15 (U.S.). Automatic two-month extension to June 15 for taxpayers abroad. Further extension to October 15 via Form 4868 is possible, but pay any estimated tax by April 15 to avoid interest.

Costs and Timelines

Remember: an FEIE audit typically focuses on days in/out and foreign residency evidence. Supply those quickly and audits close fast—often by letter, not face-to-face.

Common Mistakes to Avoid

1. Missing the “330 full days” by one
   A delayed flight through Houston can cost you USD 5,000 in extra tax. Build a five-day buffer.

2. Double-dipping FEIE and FTC
   You can’t claim FTC on income you already excluded. Apply FTC only to the portion above the FEIE cap.

3. Assuming self-employment tax is excluded
   The FEIE knocks out income tax, not FICA. U.S. self-employed abroad owe 15.3% unless a Totalization Agreement says otherwise.

4. Late election
   First-year movers often forget to elect FEIE, then scramble. You can still elect within three years via an amended return, but interest may run.

5. State tax blind spots
   Some states—California, Virginia—tax you until you sever ties. FEIE does nothing at state level. Close bank accounts, relinquish driver’s license, and deregister to avoid a nasty state notice.

6. Overclaiming housing exclusion
   The base housing amount is 16% of the FEIE limit; special high-cost city lists exist, but you must prove actual rent.

A Quick Case Study

Profile: Lisa, 28, U.S. software developer, remote employee based in Lisbon since June 1, 2022. Salary USD 95,000; Portuguese tax on her U.S.-source salary is zero for five years under NHR regime.

1. Qualifies under PPT: June 1 2022 → May 31 2023, 330+ days abroad.
2. Files 2022 U.S. return including:
3. Salary: USD 95,000
4. FEIE cap 2022: USD 112,000 → entire salary excluded
5. U.S. tax liability: USD 0
6. Self-employment tax: N/A (she’s an employee).
7. State tax: She was a Texas resident—no state income tax.

Result: Zero federal tax, zero Portuguese tax. Total compliance cost: USD 89 for expat tax software and several pastel de nata while filling out Form 2555. Life is sweet.

Frequently Asked Questions

Q: Can I take the Child Tax Credit if my income is excluded?
A: Yes, but the refundable portion (up to USD 1,600 per child for 2023) may be limited because the credit phases out against modified AGI, which adds back the FEIE. Run both FEIE and FTC scenarios if you have kids.

Q: Does crypto income qualify?
A: Only if it’s earned—e.g., consulting fees paid in crypto. Capital gains from trading are not earned income; use FTC or carefully timed disposals.

Q: I returned to the U.S. mid-year. Do I lose FEIE?
A: You can prorate. Example: 200 qualifying days/365 × USD 120,000 ≈ USD 65,753 exclusion.

Q: What about military or Peace Corps volunteers?
A: Special rules apply; combat pay may already be excluded. Peace Corps housing allowances can count toward the FHE. Always disclose allowances on Form 2555, Part VI.

Pull-Quote: FEIE vs. FTC

“The FEIE is a scalpel—precise, but not always right tool. The FTC is a sledgehammer. Smart expats carry both.”

My Personal Checklist (Steal This)

Before April 15 each year:

1. Verify days abroad → spreadsheet + passports.
2. Download employer wage statement in local currency.
3. Grab IRS average FX rate; convert.
4. Open tax software, elect FEIE or FTC scenario.
5. Compare total tax; pick lower.
6. File Form 4868 if waiting on foreign docs.
7. Backup evidence to encrypted cloud folder.
8. Toast another year of paper-free bureaucracy with local beverage of choice.

Final Thoughts

The Foreign Earned Income Exclusion is not exotic, secret, or risky. It’s a well-established statute designed to keep U.S. workers competitive overseas. Master the rules once, document your days, and you’ll spend more time exploring new cultures and less time funding Uncle Sam.

Ready for a relocation plan that pairs tax optimisation with visas, healthcare, and housing? Start your free, data-driven plan with BorderPilot today—your passport (and your wallet) will thank you.