The Foreign Earned Income Exclusion allows qualifying US expats to exclude a specified amount of foreign earned income from US taxation. For the 2025 tax year (filed in 2026), the exclusion amount is $130,000. This figure is adjusted annually for inflation. If you earn below this threshold from foreign employment sources, you may owe zero US income tax.
Importantly, the FEIE applies only to earned income—wages, salaries, self-employment earnings, and bonuses. It does not cover passive income such as dividends, interest, capital gains, or rental income. Those income types remain subject to US taxation, though the Foreign Tax Credit may help offset taxes paid on them to a foreign government.
To claim the FEIE, you must pass either the Bona Fide Residence Test or the Physical Presence Test. Each has distinct requirements:
Bona Fide Residence Test: You must be a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year (January 1 through December 31). This test considers your intention to remain in the foreign country, your employment ties, and your overall lifestyle. Part-year residents cannot use this test in their first or final year abroad.
Physical Presence Test: You must be physically present in a foreign country or countries for at least 330 full days during any consecutive 12-month period. The 330 days do not need to be consecutive, and the 12-month period can start on any date. Days spent traveling over international waters do not count toward the 330-day threshold, which is a common source of confusion.
| Feature | Bona Fide Residence | Physical Presence |
|---|---|---|
| Minimum time | Full calendar year | 330 days in 12 months |
| Intention matters | Yes, heavily weighed | No, purely objective |
| Trips to US allowed | Yes, if temporary | Limited by 35-day cap |
| Best for | Long-term settlers | Frequent movers, nomads |
In addition to the FEIE, qualifying expats can claim the Foreign Housing Exclusion, which deducts a portion of foreign housing expenses from taxable income. The base amount is 16% of the FEIE limit ($20,800 for 2025), and the maximum is 30% of the FEIE limit ($39,000). However, many high-cost cities have higher limits. For example, Hong Kong, Singapore, and Geneva allow significantly higher housing deductions. Eligible expenses include rent, utilities (excluding telephone), property insurance, and occupancy taxes, but not mortgage payments or furniture.
The Foreign Tax Credit provides a dollar-for-dollar reduction in US tax liability for income taxes paid to a foreign government. Unlike the FEIE, the FTC applies to all types of income—earned and passive—and there is no dollar cap. This makes it especially valuable for expats whose income exceeds the FEIE threshold or who have significant passive income.
The FTC is claimed on Form 1116, which requires you to categorize income into separate baskets: passive category income, general category income, and (for certain years) specific categories like section 901(j) income. Credits in one category cannot offset US tax on income in another category, which can limit the credit's usefulness if your foreign taxes and US tax liability fall in different baskets.
| Feature | FEIE | FTC |
|---|---|---|
| Income types | Earned income only | All income types |
| Maximum benefit | $130,000 (2025) | Unlimited |
| Carryforward | None | 1 year back, 10 years forward |
| Foreign tax paid | Not required | Required |
| Best for | Lower income, low-tax countries | Higher income, high-tax countries |
| Form required | Form 2555 | Form 1116 |
You can claim both the FEIE and the FTC on the same return, but not on the same income. If you exclude income under the FEIE, you cannot also claim the FTC on taxes paid on that excluded income. This means you need to strategize which mechanism to apply to which income streams.
As a general rule, the FEIE is better when you live in a low-tax country (such as the UAE, Singapore, or Hong Kong) because you may pay little or no foreign tax, making the FTC worthless. The FTC is superior when you live in a high-tax country (such as Germany, France, or Denmark) because foreign taxes paid often exceed what you would owe to the IRS, resulting in zero US tax and excess credits that can carry forward for up to 10 years.
Scenario A: Expats in a low-tax country. A US citizen earning $120,000 in the UAE pays zero UAE income tax. Using the FEIE, they exclude $120,000 from US taxation and owe no US income tax. The FTC would be useless here because no foreign tax was paid.
Scenario B: Expats in a high-tax country. A US citizen earning $200,000 in Germany pays approximately $75,000 in German income tax. If they use the FEIE, they exclude $130,000 but still owe US tax on the remaining $70,000. However, using the FTC instead, they can credit $75,000 in foreign taxes against their US liability on the full $200,000, likely reducing US tax to zero and generating carryforward credits.
Beyond the Form 1040 with FEIE or FTC attachments, US expats must be aware of several additional filing requirements:
If you claim the FEIE and later realize the FTC would be more beneficial, you can revoke the FEIE election. However, once revoked, you cannot re-elect the FEIE for the next five years without IRS approval. This creates a significant planning constraint, so think carefully before switching. In practice, you should model both scenarios using a tax calculator before committing to an approach.
If you move mid-year, you may be able to use both the FEIE and FTC for different periods. The FEIE can be prorated based on the number of qualifying days in the year, and the FTC can cover income earned before or after your qualifying period.
Some US states do not recognize the FEIE or FTC, meaning you could still owe state taxes while living abroad. States with no income tax (such as Florida, Texas, Nevada, Washington, and South Dakota) are ideal for expats. California, Virginia, New Mexico, and South Carolina are notoriously aggressive in maintaining residency claims on former residents. If you lived in one of these states before moving abroad, take steps to establish clear non-residency to avoid ongoing state tax obligations.
Disclaimer: The information provided on this page is for general informational purposes only and does not constitute financial, legal, or tax advice. Always consult with a qualified professional advisor before making financial decisions. Rates, thresholds, and regulations change frequently — verify current figures with official government sources.