Expat Taxes: FEIE

What Expats Need to Know About the Foreign Earned Income Exclusion

Living and working abroad may seem like a dream for many Americans. However, many that take the leap are surprised to find they are required to not just pay one, but two sets of taxes. Double taxation happens when expats owe taxes to both their home country and the country they live and work in. The US is one of only a handful of countries that tax based on citizenship, regardless of where you live and work, making double taxation a concern for any US expat. The good news is that there are options in place to help mitigate, or even eliminate, the effects of double taxation. One of the most effective options is called the Foreign Earned Income Exclusion.

What is the Foreign Earned Income Exclusion?

The Foreign Earned Income Exclusion (FEIE) allows US citizens or resident aliens living abroad to exclude income that would otherwise be taxable by the US. The FEIE for 2024 is $126,500. This means that if a person worked abroad and earned $150,000 that year, they could potentially exclude $126,500 of their income, leaving only $23,500 in taxable income for the US. Together, two spouses may be able to exclude as much as $253,000. The FEIE only applies to US taxes - it likely has no effect on your tax rate in the country you are living and working in.

How Do You Qualify for the Foreign Earned Income Exclusion?

Qualifying Income

First, you have to have eligible earned income. Not all income qualifies for the FEIE. If you are still working a salaried job or you are self-employed, you likely don’t have much room for concern. That’s because salary, wages, bonuses, commissions, and even self-employment income are all eligible for the exclusion. The earned income may come from a US or non-US employer. More passive income such as rental income, investment distributions, pension payouts, or capital gains will not qualify for the FEIE. This means that retirees may not benefit from the FEIE. It is also worth noting that income from a US government job, whether military or civilian, does not qualify for this exemption.

Bona Fide Residence and Physical Presence Test

On top of having qualifying earned income, you will also need to pass either the Bona Fide Residence Test or the Physical Presence Test. These tests are designed to prove that you are actually living and working abroad. Simply traveling for a few months to another country will not allow you to qualify for the FEIE.

The Bona Fide Residence Test requires you to prove that you have more ties to a foreign country than you do to the US.

  • You must remain a resident of that country for an uninterrupted period that includes an entire tax year.

  • You must be a US citizen, or a resident alien of a foreign country that the US has an income tax treaty with.

  • You must earn active income.

  • You must have a permanent place of work in a foreign country.

For this test, your intention, behavior, and foreign taxes all factor into meeting the requirements. It also requires you to meet these qualifications for an entire tax year (January 1 - December 31) before you are able to start claiming the exclusion.

The Physical Presence Test is less about having ties to a specific tax home, and more about your time abroad. To meet the criteria of the Physical Presence Test, you must live outside the US and in a foreign country for 330 full days during a consecutive 12-month period. These full days are calculated from midnight to midnight, not just a 24 hour time span. The tracking of the Physical Presence Test is more of a hassle, but it does provide added flexibility! You are not required to have strong ties to one country, so it allows you to move to multiple countries and/or take extended trips, as long as they’re not within US borders. Additionally, it applies to any consecutive 12-month period, not a strict January to December tax year.

How Much Is The Exclusion?

The Foreign Earned Income Exclusion allows you to exclude up to $126,500 of qualified income from your taxes. For couples that both work abroad and both pass either the Bona Fide Residence or Physical Presence Test, up to $253,000 in earned income may be excluded.

Should I Claim the Foreign Earned Income Exclusion?

Whether or not you should claim the FEIE depends on your specific situation. However, if you are working abroad and have earned income, it is worth considering and seeing if you qualify! Two common factors to consider though are your foreign tax rate and your ability to participate in an IRA. If you pay a higher rate of foreign taxes than in the US, it may be worth considering the Foreign Tax Credit instead. Also, if you are wanting to contribute to a Roth IRA, you will need to be careful about how much income you are excluding. If the FEIE excludes all of your earned, taxable income, you won’t qualify to contribute to the IRA. You can read more about Roth contribution rules for expats here.


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Chris Saxtonexpats, taxes, double taxation