Glossary term
Foreign Earned Income Exclusion (FEIE)
The foreign earned income exclusion lets eligible U.S. taxpayers exclude certain foreign earned income from U.S. federal income tax.
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What Is the Foreign Earned Income Exclusion (FEIE)?
The foreign earned income exclusion, or FEIE, lets eligible U.S. taxpayers exclude certain foreign earned income from U.S. federal income tax. It is generally used by U.S. citizens or resident aliens who live and work abroad and meet IRS requirements.
The exclusion applies to earned income from services performed in a foreign country, not to passive income such as dividends, interest, pensions, capital gains, or rental income. It also does not automatically eliminate self-employment tax.
Key Takeaways
- FEIE can exclude eligible foreign earned income from U.S. federal income tax.
- Taxpayers must have a foreign tax home and meet either the bona fide residence test or physical presence test.
- The exclusion is claimed on Form 2555.
- It is different from the foreign tax credit and may not be the best choice in every situation.
How FEIE Works
To use FEIE, a taxpayer generally needs foreign earned income, a tax home in a foreign country, and qualification under either the bona fide residence test or the physical presence test. The IRS sets an annual maximum exclusion amount, so the glossary concept should be understood as a framework rather than a fixed dollar figure.
Taxpayers choose the exclusion by filing Form 2555 with their federal return. The choice can interact with the foreign housing exclusion or deduction and with the foreign tax credit. Once revoked, the exclusion may be harder to claim again without IRS consent for a period of time.
Income That Does and Does Not Fit
Income Type | Typical FEIE Treatment |
|---|---|
Wages for work performed abroad | May qualify if other tests are met |
Self-employment income from services abroad | May qualify for income tax exclusion, but self-employment tax may still apply |
Dividends and interest | Generally not foreign earned income |
Pensions and annuities | Generally not foreign earned income |
What to Compare Before Claiming It
FEIE is not always better than the foreign tax credit. Someone living in a high-tax country may benefit more from credits that offset U.S. tax with foreign tax paid. Someone living in a low-tax country may find the exclusion more valuable.
The choice also affects other parts of the return. Excluded income can still influence calculations, and unused foreign taxes connected with excluded income may not create the same credit benefit. This is a technical area where tax-specific guidance often matters.
The Bottom Line
The foreign earned income exclusion can reduce U.S. federal income tax for eligible taxpayers working abroad, but it is not a blanket exemption from U.S. filing or tax obligations. Eligibility, income type, and the choice between exclusion and credit all matter.