Who is FEIE for
The Foreign Earned Income Exclusion (IRC §911) lets US citizens and resident aliens who live and work abroad exclude up to a statutory limit (approximately $130,000 in 2026) of foreign earned income from federal income tax. The exclusion does not eliminate self-employment tax or US-source income tax, and it does not change the obligation to file a US Form 1040 or to report foreign accounts.
Eligibility requires:
- US citizen or resident alien;
- Foreign earned income (compensation for services performed in a foreign country);
- Tax home in a foreign country; AND
- Either the bona fide residence test OR the physical presence test.
FEIE is elective. Once elected, the election continues unless revoked. Revoking and re-electing within 5 years requires IRS consent.
The two qualifying tests
| Test | Requirement | Best for |
|---|---|---|
| Physical Presence Test (PPT) | Physically present in a foreign country (or countries) for at least 330 full days during a 365-day period | New expats, digital nomads, contract workers, anyone who can document day count |
| Bona Fide Residence Test (BFR) | Uninterrupted period of foreign residence that includes a full tax year (Jan 1 - Dec 31). Established by intent + facts. | Long-term expats with established life abroad — host country tax filings, family relocated, lease, etc. |
Day counting under PPT: A "full day" is a 24-hour period from midnight to midnight. Travel days within international airspace generally count as foreign-presence days if you are physically outside the US for the full 24 hours. Layovers in US airspace can disqualify a day. The 365-day window can begin on any day of any year — it does not have to be a calendar year. This means a new expat arriving July 2025 could potentially qualify for partial 2025 and full 2026 with proper window selection.
BFR test: The IRS considers facts including length of stay, nature of accommodation, family presence, host-country tax filings, intent to remain, integration into community, and prior US ties. A US citizen who establishes BFR for tax year 2024 generally remains qualified for 2025 and 2026 unless circumstances change materially.
What counts as "foreign earned income"
Foreign earned income is compensation for personal services performed in a foreign country, regardless of where it is paid. Examples:
- Salary from a US employer for work performed abroad — yes, foreign earned
- Salary from a foreign employer for work performed abroad — yes, foreign earned
- Self-employment net earnings from services performed abroad — yes, foreign earned (but Schedule SE still applies)
- Gig / freelance work performed while physically abroad — yes, foreign earned
- Rental income from foreign real estate — NO, this is unearned passive income
- Dividends, interest — NO, unearned
- Capital gains — NO, unearned
- US-source wages for work performed in the US (e.g., business trip) — NO, US source
- Pension distributions — NO, retirement income (different rules)
- Income earned as a US government employee — NO, excluded from FEIE under §911(b)(1)
The 2026 limits
| Item | 2025 | 2026 (estimated) |
|---|---|---|
| Maximum FEIE | $126,500 | ~$130,000 |
| Foreign housing exclusion base (16% of max) | $20,240 | ~$20,800 |
| Default housing exclusion ceiling (30% of max) | $37,950 | ~$39,000 |
| High-cost city housing ceilings (per IRS notice) | Up to ~$80,000+ | Up to ~$82,000+ |
The 2026 figures are estimates based on IRS COLA pattern. Final 2026 numbers are confirmed by IRS Rev. Proc. for 2026 inflation adjustments published in late 2025. The high-cost city list is updated annually in IRS Notice (recent example: Notice 2024-31 for 2024 year).
Worked example — $200,000 expat in 2026
An American software engineer working remotely for a US company while living in Lisbon, Portugal in 2026:
- Days outside US in 2026: 340 (qualifies under physical presence test)
- Tax home: Lisbon (rental apartment, family present, Portuguese banking, working in time zone of work)
- Salary from US employer (W-2): $200,000
- Lisbon rental cost: $34,000/year (above the high-cost city Lisbon allowance)
Calculation:
- FEIE election claims $130,000 of the $200,000 wages excluded from federal income tax
- Housing exclusion: rental cost $34,000 - base $20,800 = $13,200, capped at high-cost city allowance for Lisbon (~$28,500 in recent IRS notice). $13,200 is excluded.
- Total exclusion: $130,000 + $13,200 = $143,200
- Remaining taxable wages: $200,000 - $143,200 = $56,800
- Federal income tax on $56,800 (single filer, standard deduction $15,000) = approx $5,000-$6,000 depending on other adjustments
- FICA (employer pays through W-2): still applies on full $200,000 because PPT/BFR does not affect FICA on US employer wages. $176,100 × 6.2% + $200,000 × 1.45% = $13,818 employee FICA.
- Portuguese income tax: NHR or general regime depending on status. Foreign tax credit on Form 1116 may offset US tax on the non-excluded $56,800.
FBAR: If aggregate foreign accounts ever exceeded $10,000 in 2026, FinCEN 114 due April 15, 2027 (auto-extension to October).
FATCA Form 8938: If foreign assets exceeded $200,000 on last day of year or $300,000 at any time during year (single, abroad), Form 8938 is filed with Form 1040.
FEIE vs Foreign Tax Credit (FTC) — choosing the right tool
Many expats can choose between FEIE (Form 2555) or FTC (Form 1116). Key tradeoffs:
| Factor | FEIE | FTC |
|---|---|---|
| Mechanism | Excludes income from US tax | Credits foreign taxes paid against US tax |
| Best when | Low-tax host country (UAE, Singapore, certain expat zones) | High-tax host country (UK, Germany, Australia, Canada) |
| Limit | $130,000 (2026 est) per qualifying spouse | No income limit (subject to per-country and overall limitations) |
| Carryforward | None — use it or lose it | 10-year carryforward, 1-year carryback |
| SE tax effect | Does not reduce SE tax | Foreign income tax is not creditable against US SE tax |
| Stack with | Foreign housing exclusion | Itemized deduction for foreign tax (alternative) |
| Compatible | Stacks with FTC for income above $130K | — |
A common pattern: FEIE for the first $130,000 of foreign earned income, then FTC for income above that. This requires careful coordination because the FTC limitation is based on US tax on foreign source income, and the FEIE removes that income from the US tax base.
Form 2555 line-by-line summary
| Part | Lines | What it asks |
|---|---|---|
| Part I | 1-6 | General information: name, employer, foreign address, occupation, tax home location, prior FEIE election history |
| Part II | 9-12 | Bona fide residence test: dates established, contract terms, family presence, host country tax filings |
| Part III | 16-18 | Physical presence test: 365-day window, day count by country |
| Part IV | 19-26 | All foreign earned income for the year, broken out by source and currency |
| Part V | 27 | Foreign earned income excluded under §911(a)(1) |
| Part VI | 28-36 | Foreign housing: actual housing expenses, base amount, ceiling, exclusion or deduction |
| Part VII | 37-38 | Combined exclusion calculation |
| Part VIII | 39-44 | Self-employment specific calculation (foreign housing deduction for SE) |
| Part IX | 45-50 | Final exclusion amount, deduction allocation, modified AGI |
Form 2555 instructions are essential — they include the high-cost city list, currency translation rules, and partial-year computation methodology. The form is filed with Form 1040.
The reporting obligations beyond Form 2555
- FinCEN 114 (FBAR): Filed separately with FinCEN, not the IRS, on the BSA E-Filing System. Due April 15 with automatic extension to October 15. Reports foreign accounts where the aggregate exceeded $10,000 at any time during the year.
- Form 8938 (FATCA): Filed with Form 1040. Higher thresholds than FBAR — for expats single $200,000 EOY / $300,000 anytime; joint $400,000 / $600,000.
- Form 5471: US person with controlling interest in foreign corporation.
- Form 8865: US person with interest in foreign partnership.
- Form 3520 / 3520-A: Foreign trust transactions and ownership.
- Form 8621: Passive Foreign Investment Company (PFIC) — applies to most foreign mutual funds and ETFs.
- State tax returns: Many states (CA, NY) continue to tax their domiciliary residents abroad. Confirm domicile status before assuming state nonresident.
Penalties for non-filing of these forms can be severe (up to $10,000+ per form) even when no tax is owed.
Common FEIE pitfalls
- Foregoing FEIE while still electing. Once FEIE is elected, the election continues unless revoked. Choosing FTC for one year while FEIE is in effect can disqualify FEIE for that year and lock in 5-year revocation rules.
- Tax home in the US. If the IRS finds your tax home is the US (e.g., your "abode" is in the US even when you travel), FEIE is unavailable regardless of physical presence days.
- Day count errors. Failing to count travel days correctly. The "full day" rule is strict.
- FEIE on US-source income. Wages earned during US visits cannot be excluded. Allocation between US-source and foreign-source compensation may be required.
- Self-employment tax surprise. Many expats discover after filing that 15.3% SE tax still applies on the excluded amount. Totalization agreements (with Italy, Germany, UK, etc.) may eliminate US Social Security tax — but coverage requires Certificate of Coverage from host country.
- State tax. Some states do not recognize FEIE for state tax purposes. California taxes state residents on worldwide income with no FEIE.
- FBAR / Form 8938 missed. Filing FEIE without FBAR / Form 8938 when accounts exceeded thresholds invites penalties for non-filing of those separate forms.
FAQ
Can I claim FEIE if I work for a US company remotely from abroad?
Yes, if all FEIE requirements are met (tax home abroad, physical presence or bona fide residence). The fact that the employer is US does not disqualify FEIE. The W-2 will show all wages, and Form 2555 excludes the qualifying portion.
What about totalization agreements?
The US has totalization agreements with about 30 countries (UK, Canada, Australia, Germany, France, Japan, etc.) that prevent double Social Security taxation. If you are subject to host country social security, you may obtain a Certificate of Coverage exempting US Social Security/SE tax. Without a totalization agreement, US SE tax may apply on top of host country social insurance.
Can I claim FEIE for a partial year?
Yes, but the FEIE limit is prorated by the number of qualifying days. If you qualify for 200 of 365 days, your maximum exclusion is $130,000 × 200/365 ≈ $71,233. Partial year treatment uses the qualifying period.
Does FEIE help with the Net Investment Income Tax (NIIT)?
FEIE excludes income from regular income tax but is added back when computing modified AGI for NIIT (3.8%). Investment income above $200K single/$250K joint may still face NIIT even after FEIE. Foreign tax credit may not offset NIIT.