What is Foreign Earned Income Exclusion (FEIE)?

Understanding the Foreign Earned Income Exclusion (FEIE)

For U.S. citizens and resident aliens working abroad, taxes can get complicated. One key provision that can help reduce tax liability is the Foreign Earned Income Exclusion (FEIE). This exclusion allows qualifying taxpayers to exclude a certain amount of foreign-earned income from U.S. taxation, which can lead to significant tax savings.

What is the Foreign Earned Income Exclusion (FEIE)?

The FEIE is a tax benefit provided by the IRS that allows U.S. citizens and resident aliens living and working abroad to exclude a portion of their foreign-earned income from U.S. federal income tax. For the 2024 tax year, the maximum exclusion is $126,500 per qualifying individual. This amount is adjusted annually for inflation.

Who Qualifies for the FEIE?

To claim the FEIE, taxpayers must meet the following criteria:

• Foreign Earned Income – The income must be earned from services performed in a foreign country. Passive income such as dividends, rental income, or pensions does not qualify.
• Tax Home in a Foreign Country – The taxpayer’s primary place of business, employment, or residence must be in a foreign country.
• Meet Either the Bona Fide Residence Test or the Physical Presence Test:
  1. Bona Fide Residence Test – The taxpayer must be a resident of a foreign country for an uninterrupted period that includes an entire tax year.
  2. Physical Presence Test – The taxpayer must be physically present in a foreign country for at least 330 full days in a 12-month period.

How to Claim the FEIE

To claim the FEIE, eligible taxpayers must file Form 2555, Foreign Earned Income, along with their U.S. tax return (Form 1040). The form requires details about foreign income, residency status, and travel history to ensure compliance with IRS regulations.

Additional Considerations

• Housing Exclusion/Deduction: In addition to the FEIE, taxpayers may also qualify for a Foreign Housing Exclusion or Deduction, which covers certain housing expenses incurred while living abroad.
• Self-Employment Tax: The FEIE only applies to income tax, not to self-employment taxes (Social Security and Medicare), which are still required if applicable.
• Foreign Tax Credit vs. FEIE: Taxpayers may also be able to claim the Foreign Tax Credit (FTC) if they paid taxes to a foreign government. In some cases, using the FTC instead of the FEIE may be more beneficial, depending on individual circumstances.

Conclusions

For U.S. expatriates and those working overseas, the Foreign Earned Income Exclusion is a valuable tool to reduce taxable income and avoid double taxation. However, tax laws are complex, and improper use of the exclusion could lead to penalties or missed tax-saving opportunities. Consulting a qualified CPA or tax professional can ensure you maximize your benefits while staying compliant with U.S. tax laws.

If you have questions about the FEIE or need help filing your taxes, US Tax Team is here to assist you. Contact us today to discuss your tax situation and optimize your tax strategy!