Key Takeaways
- Exclude up to $132,900 foreign-earned income (2026).
- Must have tax home and earn income abroad.
- Pass bona fide residence or physical presence test.
- U.S. government employees generally ineligible for exclusion.
What is Foreign Earned Income Exclusion?
The Foreign Earned Income Exclusion (FEIE) allows qualifying U.S. citizens and resident aliens living abroad to exclude up to $132,900 of foreign-earned income from U.S. federal income tax for the 2026 tax year. This exclusion helps reduce your taxable income by excluding earned income earned outside the United States.
FEIE applies only to income generated from personal services performed in a foreign country, not passive income or payments from the U.S. government.
Key Characteristics
Understanding the main features of the Foreign Earned Income Exclusion can help you determine eligibility and benefits.
- Tax Home Requirement: You must have a tax home in a foreign country, meaning your main place of business or employment is outside the U.S.
- Residency Tests: You must pass either the Bona Fide Residence Test or the Physical Presence Test, which requires a day count of at least 330 full days abroad in a 12-month period.
- Income Limit: For 2026, the exclusion caps at $132,900 per qualifying individual, adjusted annually for inflation.
- Qualifying Income: Only income earned from working overseas qualifies; passive income such as dividends or interest does not.
- Self-Employment Tax: FEIE excludes income tax but does not eliminate self-employment tax obligations.
How It Works
To claim the FEIE, you must file IRS Form 2555 with your tax return, reporting your foreign earned income and qualifying days abroad. The exclusion amount is prorated based on the number of qualifying days in the tax year.
If you exceed the exclusion limit, the remaining income is subject to U.S. taxation, but you can also use the Foreign Tax Credit for additional relief. The exclusion covers only income tax, so you remain responsible for Social Security and Medicare taxes if self-employed.
Examples and Use Cases
FEIE benefits a wide range of professionals working overseas. Here are some practical scenarios:
- Airlines: Employees of Delta and American Airlines who spend significant time abroad may qualify for FEIE on their salaries earned overseas.
- Expats in Finance: U.S. citizens working remotely for financial firms can exclude qualifying investment advisory income earned while living abroad.
- Consultants and Contractors: Independent contractors working overseas for multinational companies may benefit by excluding their foreign-earned fees.
Important Considerations
While FEIE reduces your taxable income, it doesn't affect your overall ability to pay taxation on all income sources. Passive income like dividends from dividend stocks or capital gains remain taxable.
Careful documentation of your physical presence and income sources is essential to claim the exclusion successfully. If you revoke FEIE, you must wait five years before reapplying, so plan accordingly.
Final Words
The Foreign Earned Income Exclusion can significantly reduce your U.S. tax liability if you meet the residency and income criteria. Review your eligibility carefully and consider consulting a tax professional to maximize your benefits and ensure compliance.
Frequently Asked Questions
The Foreign Earned Income Exclusion (FEIE) allows qualifying U.S. citizens and resident aliens living abroad to exclude up to $132,900 of foreign-earned income from U.S. federal income tax for the 2026 tax year. This helps reduce U.S. tax liability on income earned outside the country.
To qualify for the FEIE, you must have a tax home in a foreign country, earn income from personal services performed abroad, and pass either the Bona Fide Residence Test or the Physical Presence Test. U.S. government employees are generally ineligible, but contractors may qualify.
Eligible foreign earned income includes wages, salaries, bonuses, commissions, and self-employment fees earned for services performed in a foreign country. Passive income like interest, dividends, most rentals, pensions, and Social Security benefits do not qualify.
The Bona Fide Residence Test requires you to be a genuine resident of a foreign country for an uninterrupted period that includes a full U.S. tax year, based on intent and local ties. The Physical Presence Test requires you to be physically present in a foreign country or countries for at least 330 full days within any 12 consecutive months.
Yes, married couples filing jointly can exclude up to $265,800 if both spouses qualify and each files a separate Form 2555 calculation. Each spouse must meet the eligibility requirements individually to claim their exclusion.
The exclusion amount is the lesser of your foreign earned income or the annual limit of $132,900 for 2026. If you qualify for only part of the year, the exclusion is prorated based on the number of qualifying days. Income exceeding the limit remains taxable with no carryover.
Yes, in addition to the FEIE, you may qualify for a housing exclusion or deduction for excess qualified housing costs above a base amount. This base is roughly 16% of the maximum exclusion, with specific limits depending on your location.
No, income earned in international waters or airspace does not qualify as foreign earned income because these areas are not considered a foreign country under IRS rules.
