Foreign Earned Income Exclusion (FEIE): Qualifying Tests & Key Tax Benefits
Ryan Millan, CPA
Key Points
The Foreign Earned Income Exclusion (FEIE) allows U.S. taxpayers living abroad to exclude up to $120,000 (2023) of foreign-earned income from U.S. taxation.
To qualify, taxpayers must meet either the Physical Presence Test or the Bona Fide Residence Test.
FEIE applies only to earned income, not passive income such as dividends, rental income, or pensions.
Incorrectly claiming FEIE or misunderstanding its requirements can lead to IRS penalties or tax liabilities.
Professional tax guidance from international CPAs ensures compliance with IRS regulations and maximizes tax benefits.
What Is the Foreign Earned Income Exclusion (FEIE)?
The IRS Foreign Earned Income Exclusion (FEIE) is a powerful tax benefit that allows U.S. expatriates, digital nomads, and international business owners to reduce or eliminate U.S. taxation on foreign-earned income. Under this provision, qualifying individuals can exclude up to $120,000 (2023 tax year) from U.S. taxable income, adjusted annually for inflation.
However, claiming FEIE is not automatic, and taxpayers must meet strict residency and physical presence requirements to qualify.
Who Qualifies for the Foreign Earned Income Exclusion?
To claim FEIE, you must:
Have Foreign Earned Income – Income must be earned abroad through wages, salaries, or self-employment.
Have a Tax Home in a Foreign Country – Your primary place of business or residence must be outside the U.S.
Pass One of Two Residency Tests:
A) Physical Presence Test
B) Bona Fide Residence Test
Physical Presence Test (PPT)
The Physical Presence Test requires you to be physically present in a foreign country for at least 330 full days within a 12-month period. These days do not need to be consecutive, but any time spent in the U.S. (excluding transit) will break the qualifying period.
This test is ideal for digital nomads and frequent travelers who do not have a permanent residence abroad but can maintain the required 330 days outside the U.S.
Key Considerations:
330 days apply to any rolling 12-month period, not just a calendar year.
Travel days into or out of the U.S. do not count as full foreign residency days.
If circumstances (such as COVID-19 or emergencies) prevent you from meeting the 330-day requirement, the IRS may waive the test under specific conditions.
Bona Fide Residence Test (BFRT)
The Bona Fide Residence Test requires you to establish residency in a foreign country for an uninterrupted tax year (January 1–December 31) and demonstrate an intention to reside there indefinitely.
This test is generally preferred by expatriates with long-term foreign employment or permanent relocation.
Key Considerations:
The IRS considers factors like a foreign address, visa status, family presence, and business ties.
Short visits to the U.S. do not disqualify you, but extended stays may raise red flags.
This test is subjective—unlike the Physical Presence Test, which is purely time-based.
FEIE Limitations & Common Misconceptions
What FEIE Does NOT Cover:
Passive income (dividends, rental income, Social Security benefits, etc.).
U.S.-sourced income (income earned from U.S. companies or clients may not qualify).
Self-employment tax (even if FEIE reduces taxable income, self-employed individuals must still pay Social Security & Medicare taxes).
Foreign Tax Credit: What Is It and How Does It Work?
The Foreign Tax Credit (FTC) is a tax benefit that allows U.S. taxpayers to offset U.S. tax liability with foreign taxes paid on the same income. If you work in a country with higher tax rates than the U.S., the FTC can help prevent double taxation.
Key Benefits:
Reduces or eliminates U.S. tax owed on foreign income.
Can be claimed alongside FEIE, but not on the same income.
Any unused credit can be carried forward for up to 10 years or back 1 year.
The FTC is particularly useful for expatriates in high-tax countries where the foreign tax paid exceeds U.S. tax liability. To claim the FTC, taxpayers must file IRS Form 1116 along with their return.
FEIE & Foreign Tax Credit: Can You Claim Both?
Yes! The Foreign Tax Credit (FTC) can be claimed alongside FEIE if you pay foreign taxes on income exceeding the exclusion limit. However, you cannot use both benefits on the same income.
How to Claim the Foreign Earned Income Exclusion
File IRS Form 2555 along with your annual tax return.
Choose a qualifying test (PPT or BFRT).
Keep detailed records of travel, foreign residency, and income.
Understand IRS filing deadlines, including extensions for expats (automatic two-month extension to June 15).
FAQs: Foreign Earned Income Exclusion
1. Do I need to file a U.S. tax return if I qualify for FEIE?
Yes. Even if you exclude all your foreign-earned income, you must still file a tax return annually to claim the exclusion.
2. Can I claim FEIE if I work remotely for a U.S. company?
Maybe. If you are a full-time remote employee for a U.S. company, your income is generally considered U.S.-sourced and may not qualify. However, self-employed individuals may be eligible.
3. What happens if I fail the Physical Presence Test due to unexpected travel?
You may lose your FEIE eligibility unless the IRS grants relief under special circumstances.
4. Can I revoke FEIE and claim it again later?
If you revoke FEIE, you typically cannot claim it again for five years unless you get IRS approval.
