Expat Tax Guide
Foreign Earned Income Exclusion (FEIE) 2026 — Exclude up to ~$126,500
The Foreign Earned Income Exclusion (FEIE) allows qualifying US expats to exclude up to $126,500 of foreign earned income from US taxation in 2026. To qualify, you must pass either the Physical Presence Test (330 days abroad) or the Bona Fide Residence Test.
What Is the Foreign Earned Income Exclusion?
The Foreign Earned Income Exclusion (FEIE), authorized under Internal Revenue Code Section 911, allows US citizens and resident aliens who live and work abroad to exclude a portion of their foreign earned income from US federal income taxation. The purpose of the FEIE is to prevent double taxation for Americans living abroad — they pay taxes in their country of residence, so the US allows them to exclude foreign-earned income from US tax up to a specified limit.
The FEIE is not a deduction or a credit — it is an exclusion, meaning the excluded income is simply removed from your taxable income calculation on Form 1040. This can result in substantial tax savings for expatriates.
It is important to understand that the FEIE is elective. You choose whether to claim it each year when you file your tax return. In some situations, it may be more advantageous to forgo the FEIE and instead claim the Foreign Tax Credit (FTC) to offset US tax with foreign taxes paid. You cannot claim both the FEIE and the FTC on the same dollar of income.
2025 & 2026 Exclusion Amounts
The FEIE amount is adjusted annually for inflation. Here are the current and projected amounts:
| Tax Year | Exclusion Amount | Housing Exclusion Base | Maximum Housing Exclusion |
|---|---|---|---|
| 2025 | $126,500 | $20,240 (16% of $126,500) | $37,950 (30% of $126,500) |
| 2026 (Projected) | ~$130,000 | ~$20,800 | ~$39,000 |
Married couples who both work abroad can each exclude up to the full amount. For example, a married couple both earning foreign income in 2025 could potentially exclude up to $253,000 combined ($126,500 x 2). Each spouse must separately qualify and file their own Form 2555.
The exclusion is prorated daily if you qualify for only part of the year. For example, if you qualify for 200 days in 2025, your maximum exclusion would be $126,500 x (200/365) = approximately $69,315.
Who Qualifies for FEIE
To qualify for the Foreign Earned Income Exclusion, you must meet all three of the following requirements:
- You are a US citizen or US resident alien. US citizens qualify regardless of where they live. Resident aliens must be citizens of a country with which the US has an income tax treaty in effect, or meet other specific criteria.
- You have a tax home in a foreign country. Your tax home is generally your regular or principal place of business or employment. If you have no regular workplace, your tax home is where you regularly live. A temporary assignment abroad (less than 1 year) generally does not establish a foreign tax home.
- You meet one of two tests: the Physical Presence Test or the Bona Fide Residence Test (detailed below).
The IRS defines a tax home as your regular or principal place of business or employment. If you have no regular place of business, your tax home is the place where you regularly live. Importantly, you are not considered to have a tax home in a foreign country for any period during which your abode is in the United States. The IRS makes a factual determination based on where you maintain your family, economic, and personal ties.
What Income Qualifies for FEIE
Only foreign earned income qualifies for the exclusion. The IRS defines earned income as:
- Wages and salaries paid by a foreign employer for services performed abroad
- Self-employment income from business activities conducted in a foreign country
- Professional fees for services rendered abroad
- Tips and commissions earned while working abroad
- Bonuses and other compensation for services performed in a foreign country
Income That Does NOT Qualify
The following types of income cannot be excluded under the FEIE:
- Investment income — interest, dividends, capital gains, rental income, royalties
- Pension and annuity income (even if from a foreign source)
- Social Security benefits
- Alimony received
- Gambling winnings
- Income from the US government (military or civilian government employees serving abroad)
- Income earned in the United States (even if you live abroad)
Physical Presence Test
The Physical Presence Test is the simpler and more commonly used test. To qualify, you must be physically present in a foreign country for 330 full days during any 12 consecutive months.
A "full day" means a 24-hour period from midnight to midnight. Partial days in a foreign country count as days present. Days spent traveling (including in transit) do not count unless you are physically in a foreign country for the entire day.
The 12-month period can be any 12 consecutive months — it does not need to correspond to the calendar year or tax year. You can choose the 12-month period that maximizes your days of presence abroad. The 330 days need not be consecutive.
To track your days: count every full day you are in a foreign country. Include the day you arrive if you remain in the country for the rest of the day. Include all days of partial presence. Do NOT count days spent in the US or in international airspace/waters. For expats who frequently travel, a day-tracking spreadsheet or dedicated app is essential for accurate counting.
Bona Fide Residence Test
The Bona Fide Residence Test is available only to US citizens. It requires that you:
- Be a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year (January 1 through December 31).
- Have your tax home in the foreign country during that period.
- Intend to reside abroad indefinitely or for an extended period.
The "bona fide residence" determination is based on your intent and facts and circumstances. Factors the IRS considers include:
- The length and nature of your stay abroad
- Whether you maintain a home in the US
- Where your family lives
- Where you register to vote and vote
- Where you have a driver's license and bank accounts
- Where you have social, cultural, and economic ties
- Whether you intend to return to the US
The Bona Fide Residence Test is more subjective than the Physical Presence Test, but it offers more flexibility because you do not need to count 330 days of physical presence. However, you can only qualify starting from the date you establish your foreign residence, not from your first day of arrival.
Foreign Housing Exclusion
In addition to the FEIE, you may qualify for the Foreign Housing Exclusion or Foreign Housing Deduction. This allows you to exclude (or deduct if self-employed) certain housing expenses paid with employer-provided funds.
The housing exclusion covers reasonable foreign housing expenses that exceed a base amount. The base amount is 16% of the FEIE amount (computed on a daily basis). For 2025, the base is $20,240 ($126,500 x 16%). The maximum exclusion is generally 30% of the FEIE amount ($37,950 for 2025), but this can be higher in designated high-cost cities.
Qualifying housing expenses include:
- Rent for your foreign residence
- Utilities (electricity, gas, water, trash)
- Real estate insurance and liability insurance
- Parking costs at or near your residence
- Furniture rental for the residence
- Repairs and maintenance (not capital improvements)
Expenses that do not qualify include mortgage payments, property taxes, domestic labor (cooks, maids), and capital improvements.
FEIE vs Foreign Tax Credit
You must choose between the FEIE and the Foreign Tax Credit (FTC) for each dollar of foreign income. The Foreign Tax Credit allows you to claim a dollar-for-dollar credit against your US tax liability for income taxes paid to a foreign country.
| Factor | FEIE | Foreign Tax Credit |
|---|---|---|
| What it does | Excludes income from US tax | Provides credit for foreign taxes paid |
| Income limit | ~$126,500 per person (2025) | No dollar limit |
| Foreign tax rate | Works best when foreign tax rate is lower than US rate | Works best when foreign tax rate is higher than US rate |
| Effect on US tax bracket | Lower taxable income (can reduce bracket) | Higher taxable income, then credit reduces tax |
| Self-employment tax | Does NOT exclude from SE tax | Does not apply to SE tax |
| Interaction | Cannot claim FTC on excluded income | Can be used on non-excluded income |
In many cases, a combination strategy works best: exclude earned income up to the FEIE limit, then claim the Foreign Tax Credit on non-excluded income (such as investment income or income above the FEIE limit). This requires careful tax planning and is best done with a tax professional experienced in expatriate taxation.
FBAR and FATCA Filing Requirements
Claiming the FEIE does not exempt you from foreign account reporting requirements. If you have foreign financial accounts, you may need to file:
FBAR (FinCEN Form 114)
If you have a financial interest in or signature authority over foreign financial accounts with an aggregate value exceeding $10,000 at any time during the calendar year, you must file the FBAR electronically with FinCEN. The FBAR is due April 15 (with an automatic extension to October 15). Penalties for non-compliance can be severe.
FATCA (Form 8938)
If you live abroad and your specified foreign financial assets exceed certain thresholds ($200,000 for single filers living abroad, $400,000 for married filing jointly), you must file Form 8938 with your tax return. The thresholds are higher for expats than for US residents.
Failure to file FBAR can result in civil penalties up to $10,000 per violation (or the greater of $100,000 and 50% of the account balance for willful violations). Failure to file Form 8938 carries a $10,000 penalty, with additional $10,000 penalties every 30 days after IRS notice, up to $60,000. These penalties are in addition to any tax, interest, and penalties on the underlying income.
Common FEIE Mistakes
Even experienced expats make these mistakes when claiming the Foreign Earned Income Exclusion:
1. Missing the 330-Day Count
Many taxpayers fail to accurately track their days. The 330 full days must be outside the US — days spent in international transit or on US soil do not count. Keep a detailed travel log or use a tracking app. A shortfall of even one day disqualified the entire exclusion.
2. Claiming for Non-Qualifying Income
The FEIE only covers earned income. Investment income, rental income, pensions, and Social Security do not qualify. Do not try to exclude these types of income on Form 2555 — it will result in an audit.
3. Not Filing Form 2555
The FEIE is not automatic. You must file Form 2555 with your Form 1040 to claim the exclusion. Filing Form 1040 without Form 2555 means the IRS will tax all your worldwide income. Even if your income is entirely excluded, you must still file Form 2555 to document the exclusion.
4. Forgetting State Tax Filing
Even if you qualify for the FEIE for federal purposes, your state of domicile may still require you to file a state tax return and pay state income tax on your worldwide income. States like California, New Mexico, South Carolina, and Virginia do not recognize the FEIE. Check your state's rules.
5. Double-Dipping FEIE and FTC
You cannot claim the Foreign Tax Credit on income you exclude under the FEIE. If you exclude $100,000 under the FEIE, you must allocate a proportionate share of your foreign tax payments to that excluded income, and those allocated taxes cannot be used for the FTC.
6. Not Considering the Self-Employment Tax Impact
The FEIE excludes foreign earned income from income tax but not from self-employment tax (Social Security and Medicare). If you are self-employed abroad, you will still owe self-employment tax on your net earnings, even if they are excluded from income tax under the FEIE.
In some situations, claiming the FEIE can actually increase your overall tax bill. For example, if you live in a country with income tax rates higher than US rates, you may be better off claiming the Foreign Tax Credit instead of the FEIE. Also, claiming the FEIE eliminates your ability to contribute to a Roth IRA (since you must have US taxable compensation). Run the numbers both ways before deciding.
Frequently Asked Questions
As a tax content specialist, I verify every detail in this guide against IRS Publication 54 (Tax Guide for US Citizens and Resident Aliens Abroad), IRC Section 911, and Form 2555 instructions. The Foreign Earned Income Exclusion is one of the most valuable tax benefits for Americans abroad, but the qualification tests are strict and the interaction with the Foreign Tax Credit requires careful planning. I update this guide each year to reflect inflation-adjusted exclusion amounts, housing exclusion limits, and regulatory changes.
— Lead Tax Content Strategist, TaxCalcHQ