A Complete Guide to the Foreign Earned Income Exclusion (FEIE) in 2025

Introduction

For U.S. citizens and Green Card holders living abroad, one of the most valuable tax provisions available is the Foreign Earned Income Exclusion (FEIE). This provision helps reduce or eliminate double taxation by allowing eligible expatriates to exclude a significant portion of their foreign-earned income from U.S. taxation.

In 2025, the FEIE limit has been set at $126,500, meaning qualifying individuals can exclude this amount from their U.S. taxable income, potentially reducing their overall tax burden significantly. However, not all income qualifies for this exclusion, and meeting the eligibility requirements is crucial.

This guide will cover everything U.S. expats need to know about the Foreign Earned Income Exclusion, including who qualifies, how to apply, and key tax deadlines.

What is the Foreign Earned Income Exclusion (FEIE)?

The Foreign Earned Income Exclusion (FEIE) is a provision in the U.S. tax code that allows eligible expatriates to exclude a specific amount of foreign-earned income from U.S. taxation.

For 2025, the exclusion limit is $126,500 per qualifying taxpayer.

However, FEIE only applies to earned income, such as wages, salaries, and self-employment income.

It does not apply to the following types of income:

• Investment income, including stocks, dividends, and interest
• Capital gains
• Social Security benefits
• Pension distributions
• Income from U.S. sources

Since unearned income does not qualify, U.S. expats with passive income streams may need to explore alternative tax-saving strategies, such as the Foreign Tax Credit (FTC).

Who Qualifies for the Foreign Earned Income Exclusion?

To claim the Foreign Earned Income Exclusion, a taxpayer must meet the following three key requirements.

1. Tax Home Must Be in a Foreign Country

Your tax home is defined as your main place of work or business. To qualify for the FEIE, your tax home must be outside the U.S. and established in a foreign country.

If your employment or business is based in the U.S., you will not qualify for the FEIE, even if you spend most of your time abroad.

2. You Must Be a U.S. Citizen or Green Card Holder

The FEIE is available to:

• U.S. citizens living and working abroad
• U.S. Green Card holders (lawful permanent residents) who meet the residency criteria

Even if you do not reside permanently in a foreign country, you may still qualify based on the Bona Fide Residence Test or Physical Presence Test.

3. You Must Pass Either the Bona Fide Residence or Physical Presence Test

To qualify for the Foreign Earned Income Exclusion, you must meet one of the following two tests.

Bona Fide Residence Test:

• You must be a registered resident in a foreign country for at least one full tax year.
• You must pay taxes in that country.
• Your residency must be continuous, with no intention of returning to the U.S. permanently.

Physical Presence Test:

• You must be physically present in a foreign country for 330 full days within a consecutive 12-month period.
• Travel to the U.S. must be limited to 35 days within that period.

If you frequently travel between countries, the Physical Presence Test may be more flexible for you. However, if you have established residency abroad, the Bona Fide Residence Test is often a stronger qualification method.

How to File for the Foreign Earned Income Exclusion

To claim the Foreign Earned Income Exclusion, U.S. expats must file IRS Form 2555 along with their U.S. tax return (Form 1040).

1. Key Deadlines for Filing

• Standard Tax Deadline: April 15, 2025
• Automatic Expat Extension: June 15, 2025 (for U.S. citizens living abroad)
• Extended Deadline (if needed): October 15, 2025 (requires Form 4868)

Even if you do not owe taxes, filing your tax return on time is mandatory to maintain compliance.

2. Steps to File IRS Form 2555

To complete IRS Form 2555, you will need to provide:

• Personal Information (Name, Social Security Number, Foreign Address)
• Employer’s Information (Company Name, Address, Type of Work)
• Residency Status (Bona Fide Residence or Physical Presence Test)
• Foreign Earned Income Amount (Salary, Wages, or Self-Employment Income)

Once completed, Form 2555 must be attached to Form 1040 and filed electronically or by mail.

Foreign Earned Income Exclusion Example

Let’s look at an example to understand how FEIE reduces U.S. tax liability.

Monica is a U.S. citizen working in Switzerland. She earns $127,800 in foreign wages in 2024.
She qualifies for FEIE and can exclude $126,500 from her taxable income.
This leaves her with $1,300 taxable by the IRS.

However, Monica may also claim the Foreign Tax Credit (FTC) to further eliminate or reduce her remaining tax liability.

This example shows how FEIE can significantly reduce taxable income, making it one of the most beneficial tax provisions for U.S. expats.

Foreign Earned Income Exclusion vs. Foreign Tax Credit (FTC)

Many expats wonder whether to use the Foreign Earned Income Exclusion (FEIE) or the Foreign Tax Credit (FTC).

Here’s how they compare.

Foreign Earned Income Exclusion (FEIE)

• Excludes income from U.S. taxation
• Applies only to earned income (salary, wages)
• Best for expats in low-tax or tax-free countries
• Can be combined with FTC for non-excluded income

Foreign Tax Credit (FTC)

• Provides a credit for foreign taxes paid
• Applies to both earned and unearned income (wages, dividends, rental income)
• Best for expats in high-tax countries

Choosing between FEIE and FTC depends on your individual tax situation and whether your host country has high or low taxes.

Conclusion

The Foreign Earned Income Exclusion (FEIE) is a powerful tax benefit that allows U.S. expatriates to exclude up to $126,500 of foreign-earned income from U.S. taxation in 2025. By meeting the eligibility criteria and filing IRS Form 2555, expats can minimize or eliminate their U.S. tax burden.

However, FEIE does not apply to all types of income, and some expats may benefit more from the Foreign Tax Credit (FTC). For personalized guidance on tax compliance, optimizing FEIE, or exploring tax-saving strategies, Tax Partners provides expert assistance to U.S. expats worldwide.

This article is written for educational purposes.

Should you have any inquiries, please do not hesitate to contact us at (905) 836-8755, via email at [email protected], or by visiting our website at www.taxpartners.ca.

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