Everything About Foreign Earned Income Exclusion (Form 2555)

The foreign earned income exclusion, or FEIE, is one of the most valuable tax benefits offered to U.S. citizens and resident aliens who reside and work abroad. The foreign earned income exclusion (FEIE) can help expats reduce a significant amount from their U.S. tax liability. The FEIE permits qualifying individuals to exclude foreign-earned income of up to $130,000 for the 2025 tax year.

To be eligible for the foreign earned income tax exclusion, you must fulfill either the bona fide residence test or the physical presence test, and also have a tax home in a foreign country.

An expatriate must file Form 2555 with their U.S. tax return to claim the FEIE, which is used to compute the amount of exclusion and provide details regarding foreign residence and income sources. In this guide, we will walk you through the details regarding FEIE, how to claim it, common mistakes, and much more.

What is the FEIE and IRS Form 2555?

The citizens of the U.S. are taxed on their worldwide income, even if they reside abroad. The FEIE tax benefits help an expat to prevent double taxation. If you are a qualified individual, you can exclude a significant amount of your foreign income from your U.S. return.

FEIE Limit For 2025

The maximum limit of exclusion for the tax year 2025 is $130,000 (filed in 2026), up from $126,500 for the tax year 2024 (filed in 2025). For instance, if you earn $150,000 in 2025 while residing abroad and qualify for the FEIE, you will be taxed only on $20,000. 

IRS Form 2555

The Form 2555 is an IRS tax form that an individual can use to claim the foreign earned income exclusion. It permits the qualifying U.S. expats to exclude up to a certain limit of foreign-earned income from U.S. taxable income, which will be adjusted every year for inflation. 

Additionally, Form 2555 also allows for the foreign housing exclusion that permits a taxpayer to deduct specific housing expenses while staying in a foreign country. If you meet the eligibility criteria, filing Form 2555 can significantly reduce your U.S. tax burden. 

Who Qualifies for the FEIE and Deductions?

To qualify for the Foreign Earned Income Exclusion (FEIE), you must fulfill the following requirements:

• You must have foreign-earned income
• Your tax home must be in a foreign country
• You must pass either the Bona Fide Residence Test or the Physical Presence Test. You can choose the one that suits your situation the best:

What Type of Income Qualifies for the FEIE and What Doesn't?

The foreign earned income exclusion applies particularly to income earned via active work done in a foreign country. The following income types qualify for the FEIE:

• Bonuses and Commissions acquired for foreign work
• Wages and Salaries earned from working abroad
• Professional Fees for services rendered overseas
• Income earned from self-employment in a foreign country.

However, not all income qualifies for the FEIE; it doesn't apply to passive or unearned income sources. Here is what doesn't qualify:

• Rental income
• Social Security Benefits
• Pension or retirement distributions
• Wages of a US government employee
• Income earned in international waters or airspace
• Investment Income (dividends, interest, capital gains)

How Much Income Can be Excluded?

For the tax year 2025, you can exclude up to $130,000 from your foreign-earned income. If both you and your spouse work abroad and fulfill either the Bona Fide Residence or Physical Presence Tests, each of you can exclude up to $126,000.

The FEIE amount increases every year due to inflation. The limit of exclusion for recent years is as follows:

Distribute Your Exclusion

If you have moved overseas mid-year, you will have to distribute your exclusion by using this formula:

Formula: (FEIE Limit) * (Qualifying Days Abroad + Days in Year) = Your Maximum Exclusion

Example: Mr. X moved to Korea on the 1st of May, 2024, so the qualifying days left in the year are 245. Now, if we calculate this:

$126,500* (245/365) = $84,897 (maximum exclusion limit for 2024)

What is the Bona Fide Residence Test?

The Bona Fide Residence test applies to those U.S. citizens and resident aliens who are bona fide residents of a foreign country for a continuous period that includes a whole tax year (January 1 - December 31). An individual's bona fide residence is determined based on certain facts and situations. Some main factors that are considered are as follows:

• Purpose of your trip
• Nature and duration of your stay abroad
• Your intent to stay in the foreign country

Who Qualifies Under the Bona Fide Residence Test?

To qualify under the bona fide residence test, you must demonstrate your residency in a foreign country for a continuous period that includes an entire tax year, which is from the 1st of January to the 31st of December.

Your purpose plays a major role; you may qualify if you stay abroad for an indefinite period of time. However, you won't qualify if your stay is for an accurately defined, temporary assignment, specifically one year or less. Let's understand this with two examples:

Example 1: Who Qualifies

Situation: Eric is a US citizen who moved to Japan for an open-ended position with his company on the 15th of January, 2024. He decided to stay there for an indefinite period and return to the US only for a period of 30 days throughout the year for a vacation or urgent work.

Here, Eric will qualify for the FEIE under the Bona Fide Residence Test, as his move was indefinite, and he resided abroad for the entire 2024 tax year.

Example 2: Who Doesn't Qualify

Situation: Sam moved to London on the 1st of March, 2024, for a 2-year work assignment. However, his employer ended the project early without any notice, and he had to come back to the U.S. permanently on January 25th, 2025.

In this scenario, although Sam stayed abroad for almost 11 months, his foreign residence did not last for an entire tax year, so he doesn't qualify under the Bona Fide Residence test. However, he might be eligible to claim a prorated FEIE by passing the physical presence test, based on his actual days abroad.

What is the Physical Presence Test?

The physical presence test comprises no requirement related to an individual's residency. It applies only based on the duration of your physical presence in a foreign country during a 12-month period. If you stay in a foreign country for 330 days in any consecutive 12 months, you will qualify under this test. The period of 330 days doesn't need to be a full calendar year or continuous.

Consider these things when counting the 330 days:

• A full day is a 24-hour period starting at midnight
• Any portion of a day spent in the US will be counted as a full day in the US
• Traveling days via international waters are not counted under the 330 days.

For instance:

Situation 1: From the 1st of July 2022 till the 30th of June 2023, Sarah is present in France for 345 days, during which she also visited the U.S. twice for a 10-day trip. So, here she passed the physical presence test for the year 2022-2023 because she fulfilled the requirement for staying in a foreign country for 330 days during 12 months.

Situation 2: George worked in the U.S. from the 1st of January 2023, till the 31st of December, 2024. However, during this duration, he visited the U.S. multiple times for 20-day trips in March, May, July, and November, which is a total of 80 days. Since he was in the U.S. for more than 35 days, he did not pass the physical presence test.

What are Some Common Issues to Avoid with the FEIE?

You might face some common issues when claiming the foreign earned income exclusion. The following is a list of the common pitfalls that you might face and ways to avoid them:

• Not Completing Form 2555: The most common pitfall is that people often assume that the foreign-earned income exclusion is applied automatically. However, to claim the exclusion, you need to file Form 2555 with your tax return. Failing to meet this requirement could lead to you losing the benefit for that year.
• Wrong Currency Conversion: Make sure that you convert your foreign currency to US dollars only by using the exchange rates approved by the IRS. Using the wrong rates will lead to incorrect calculations, potentially creating issues with the IRS.
• Making Assumptions About Automatic Qualifications: Many expats assume that only working abroad will qualify them for the foreign income exclusion, which is wrong. You need to fulfill either the Bona Fide Residence Test or the Physical Presence Test. There are some requirements for both tests.
• The Bona Fide Residence test requires an individual to live in a foreign country for a continuous period that includes an entire tax year. On the other hand, the physical presence test requires being present physically in a foreign country for at least 330 full days during a 12-month period.
• Revoking the FEIE: If you revoke the FEIE, you will not be able to claim it again for five years without seeking the approval of the IRS. It can have considerable long-term tax implications, so it is advisable to contact a professional before making a decision.
• Misinterpreting Eligible Income: Under the FEIE, only foreign-earned income is qualified. Unearned income, like interest, dividends, and capital gains, cannot be excluded. Moreover, income earned by a US government employee or military personnel also doesn't qualify.
• Avoiding Other Tax Benefits: Depending only on the FEIE will let you miss out on other benefits, such as the foreign tax credit or tax-deductible IRA contributions. While choosing between the FEIE and other options, ensure to consider your entire tax situation.

What is the Filing Process for Claiming the FEIE?

To claim the Foreign Earned Income Exclusion (FEIE), you need to file IRS Form 2555 with your annual US federal income tax return (Form 1040). Form 2555 comprises comprehensive questions regarding your foreign-earned income, housing, and travel.

Steps to File Form 2555

Follow the steps mentioned below to file Form 2555:

• Give your personal information and answer a few background questions about your foreign employment and residence.
• Compute your foreign-earned income and convert the amount to US dollars using IRS-approved exchange rates
• Mention any employer-provided housing amounts
• Fulfill either the Bona Fide Residence or Physical Presence test
• Calculate your standard FEIE amount by deducting any employer housing
• Transfer the FEIE amount to Form 1040 to exclude it from federal taxable income.

What are the Deadlines and Extensions for Filing Abroad?

US citizens abroad are granted an automatic extension of 2 months until June 15th to file their taxes. However, any overdue tax must be paid by the 15th of April to avoid interest and penalties. Furthermore, you can request an additional extension untill the 15th of October by filing IRS Form 4868 in case you need some more time.

What are the Other Tax Benefits Offered to Expats?

There are several other tax benefits offered to expats, of which the FEIE is just one of them, which helps to reduce your US expat taxes. Below are some other benefits to consider:

• Tax Treaties: The United States has signed a tax treaty with over 70 countries that helps in avoiding double taxation on certain income types. Such treaties can offer additional benefits or exemptions for expats, based on the specific agreement between the US and the country of residence.
• Child Tax Credit: American expats staying abroad may qualify for the Child Tax Credit. Generally, you can claim a credit of up to $2,000 for each qualifying child for the 2025 tax year.
• Foreign Tax Credit (FTC): The Foreign Tax credit allows you to claim a dollar-for-dollar credit on your US taxes for income taxes that you have paid to a foreign country. You get the option to claim the foreign tax credit on foreign income that is not excluded under the foreign income tax exclusion (FEIE).
• Many expats can reduce a significant amount of their US tax liability or even avoid it entirely by combining the FEIE, foreign housing exclusion or deduction, and foreign tax credit.
• Foreign Bank Account Reporting (FBAR): Although it is not a tax benefit but expats need to understand the requirements of FBAR. If you have foreign financial accounts with a combined value that exceeds $10,000 at any time during the calendar year, you are required to report them to the Financial Crimes Enforcement Network (FinCEN).
• State Tax Considerations: Even if you are residing abroad, some states may ask you to file a tax return. However, several states have provisions that permit you to break tax residency when you relocate overseas. It is crucial to research the rules regarding expatriate tax obligations in your specific state.
• Foreign Housing Exclusion or Deduction: In addition to the FEIE, you might get the option to exclude or deduct the amounts paid for foreign housing. The foreign housing exclusion is applicable to amounts paid by an employer, while the housing deduction applies to amounts paid and received from self-employment.

To Conclude

If you earn any income abroad, filing Form 2555 can considerably help you in excluding foreign-earned income and reducing your overall U.S. tax liability. However, the decision of choosing between FEIE and any other tax benefit depends completely on your tax situation, income level, and foreign tax obligations.

At Savetaxs, our team of experts can provide professional tax advice and can guide you throughout filing Form 2555 to ensure that your foreign-earned income is excluded accurately. Our team actively works 24*7 across all time zones so you can contact us anytime and ensure that you are making the most out of your expat tax benefits.