Foreign Earned Income Exclusion: Complete Guide for 2025

Introduction

The Foreign Earned Income Exclusion (FEIE) allows qualifying US citizens and resident aliens living abroad to exclude up to $130,000 of foreign-earned income from federal income tax in 2025. This limit increased from $126,500 in 2024, per IRS Revenue Procedure 2024-40.

FEIE applies only to earned income (wages, self-employment). Investment income, pensions, and Social Security are not eligible. Self-employment tax (15.3%) still applies to excluded income.

Qualification Tests

You must meet one of two tests:

Bona Fide Residence Test

• Be a bona fide resident of a foreign country for an entire tax year (January 1 - December 31)
• Your residence must be established (not just temporary)
• Factors include: length of stay, nature of assignment, family location, nature of ties to foreign country

• Must complete full calendar year
• Can claim partial-year exclusion in first and last years
• Brief trips to US don't disqualify you

• Foreign lease or property deed
• Foreign utility bills
• Foreign bank accounts
• Local tax filings
• Employment in foreign country

Physical Presence Test

• Be physically present in a foreign country for at least 330 full days during any 12-month period
• Days don't need to be consecutive
• Can use any 12-month period that includes part of the tax year

• Full 24-hour period required (midnight to midnight)
• Day of departure from US: doesn't count
• Day of arrival in US: doesn't count
• Transit through US: those days don't count
• International waters/airspace: doesn't count

• 380 days total abroad
• Subtract partial days = ~378 qualifying days
• Meets 330-day requirement
• Can claim FEIE for 2024 (prorated) and 2025 (prorated)

2025 Exclusion Amounts

| Category | 2025 Amount | 2024 Amount | |----------|-------------|-------------| | FEIE Maximum | $130,000 | $126,500 | | Housing Exclusion Base | $20,800 | $20,240 | | Housing Exclusion Max (base) | $39,000 | $38,025 |

Prorating the Exclusion

If you don't qualify for the full year, prorate:

$130,000 ÷ 365 = $356.16 per qualifying day

**Example:** 200 qualifying days = $71,232 maximum exclusion

Housing Exclusion

In addition to FEIE, you may exclude housing costs exceeding the base amount.

**Calculation:** 1. Total qualifying housing expenses 2. Subtract base amount ($20,800 for 2025) 3. Maximum exclusion depends on location

• Rent
• Utilities (except telephone)
• Property insurance
• Furniture rental
• Parking fees
• Repairs

• Mortgage payments (principal)
• Domestic labor
• Television/streaming subscriptions
• Home improvements

High-Cost Location Limits

IRS publishes higher limits for expensive cities:

| City | 2025 Housing Limit | |------|-------------------| | Hong Kong | $114,300 | | Tokyo | $93,480 | | London | $63,200 | | Singapore | $75,400 | | Most locations | $39,000 |

What FEIE Doesn't Cover

FEIE excludes only foreign earned income from federal income tax. These obligations remain:

Self-Employment Tax

• 15.3% (12.4% Social Security + 2.9% Medicare)
• Applies to full self-employment income
• Cannot be avoided through FEIE
• Some countries have totalization agreements that may help

State Income Tax

• Some states (California, New Mexico, South Carolina, Virginia) continue taxing residents abroad
• Breaking state residency requires specific steps
• Consult state-specific guidance

Medicare Surtax

• 0.9% additional Medicare tax on earned income over $200,000 (single)
• Calculated on total income, not FEIE-reduced amount

Investment Income

• Dividends, interest, capital gains
• Rental income
• Pension distributions
• Social Security benefits

How to Claim FEIE

Form 2555

File Form 2555 with your Form 1040.

• Foreign address
• Dates of qualifying presence
• Employer information
• Housing expenses (if claiming)

First-Year Election

Once you elect FEIE, it applies to all future years unless you revoke it. Revoking requires IRS approval to re-elect for 5 years.

Filing Deadline

• Automatic 2-month extension to June 15 for expats
• Can request additional extension to October 15
• File even if no tax due to preserve election

FEIE vs. Foreign Tax Credit

You cannot use both for the same income. Compare:

• Living in low-tax or no-tax country
• Foreign taxes are less than US taxes would be
• Income is under $130,000

• Living in high-tax country (UK, France, Germany)
• Foreign taxes exceed US taxes on same income
• Have significant investment income

• FEIE: Exclude income, no US tax, but no credit for Portuguese tax paid
• FTC: Pay US tax (~$14,000), claim $14,000 credit, carry forward excess

Key Takeaways

• 2025 FEIE limit: $130,000 (up from $126,500)
• Must meet Bona Fide Residence OR Physical Presence Test
• Physical Presence: 330 full days in foreign country during 12-month period
• Self-employment tax (15.3%) applies regardless of FEIE
• File Form 2555 with 1040; automatic June 15 deadline for expats

Next Steps

1. Calculate qualifying days for Physical Presence Test
2. Gather documentation supporting Bona Fide Residence
3. Determine if FEIE or Foreign Tax Credit is more beneficial
4. Prepare Form 2555 with Form 1040
5. Consider consulting expat tax professional for complex situations