What the FEIE is (and isn’t)
The Foreign Earned Income Exclusion (FEIE) is a set of rules under Internal Revenue Code § 911 that lets qualifying U.S. taxpayers exclude a portion of foreign earned wages or self-employment income from U.S. federal income tax. It is elected on Form 2555 and coordinated with a related foreign housing exclusion or deduction. For tax year 2025, the maximum exclusion is $130,000 (it was $126,500 for 2024), and the amount is prorated by qualifying days in the year. The exclusion is computed on a daily basis and cannot exceed your foreign earned income.
You qualify for FEIE only if (i) you have foreign earned income, (ii) your tax home is in a foreign country, and (iii) you meet either the bona fide residence test (generally, uninterrupted residence including a full tax year) or the physical presence test (at least 330 full days in foreign countries during any 12-month period). Wages paid by the U.S. government (or its agencies) don’t qualify, and income that isn’t “earned” (for example, pensions, interest, dividends, capital gains) is never excludable under § 911.
FEIE is separate from the Foreign Tax Credit (FTC). You may use both in the same year, but not on the same dollar of income: once income is excluded under FEIE (or housing), you cannot claim a credit or deduction for foreign taxes paid on that excluded income. Additionally, if you elect FEIE, you figure U.S. tax on your non-excluded income using the rates that would apply as if the excluded amount were included (often called the “stacking rule”).
Who Actually Qualifies (Tests, Definitions, and Common Disqualifiers)
Foreign earned income means compensation for services performed in foreign countries during a period when your tax home is there and you meet one of the two tests. The physical presence test is purely day-count-driven (330 full 24-hour days within any 12-month period); short U.S. transits under 24 hours don’t break days, but days in a foreign country in violation of U.S. law don’t count. Your tax home generally shifts abroad only for an indefinite assignment when your abode is not in the United States; temporary U.S. assignments or an abode in the U.S. will fail the test even if you spend time overseas.
The FEIE doesn’t touch self-employment tax (Social Security/Medicare) — self-employed individuals must still compute SE tax on all net earnings unless protected by a totalization certificate. Employees of the U.S. government posted abroad can’t use FEIE for those wages. And if you file Form 2555, you are not eligible for the federal Earned Income Tax Credit (EITC).
Timing also matters. If you won’t meet a test by the normal deadline, you can request more time specifically to qualify for FEIE by filing Form 2350 (different from the routine Form 4868 extension). Separately, U.S. citizens and resident aliens abroad on April deadline day receive an automatic 2-month filing extension (generally to mid-June), with further time available by 4868 — interest still accrues on unpaid balances.
How the Numbers Really Work (Limits, Housing, and “Stacking”)
The FEIE cap is indexed annually and prorated based on days you satisfy the residence or presence test. Form 2555 applies the daily-rate limitation set by § 911(b), then subtracts the allowed foreign housing amount. The base housing amount equals 16% of the FEIE annual cap, computed per day; the general housing expense limit equals 30% of the cap (both prorated), with higher caps available for specified high-cost localities by annual IRS notice. For 2024, the IRS set the base housing at $20,240 (16% of $126,500) and reiterated the general 30% cap; for 2025, the FEIE cap increased to $130,000, so the full-year base and general cap compute to $20,800 and $39,000, respectively (before high-cost adjustments).
When you elect FEIE/housing, the IRS requires you to compute the tax on your remaining income using the Foreign Earned Income Tax Worksheet (i.e., the stacking rule). This preserves your marginal rate as if the excluded income were included, then removes the exclusion — a design that often makes FEIE less attractive in high-tax countries where an FTC can fully offset U.S. tax and generate carryovers. Choosing FEIE also blocks FTC on the excluded income itself (but you may still claim FTC on excess foreign earned income above the FEIE/housing amounts or on non-earned foreign income).
Two subtle but important timing rules: (1) FEIE is elected on a timely filed original or amended return, and (2) foreign earned amounts attributable to service in another year are excludable in the year received only to the extent the exclusion would have applied in that earlier year (e.g., year-end bonuses or back pay).
Planning Realities, Pitfalls, and State Tax Traps
Practical Tradeoffs
FEIE can be powerful for moderate earnings or low-tax jurisdictions. But for taxpayers in high-tax countries, taking an FTC instead (and skipping or limiting FEIE) can yield better long-term results because FEIE reduces the foreign-source income available to absorb credits and may forfeit carryovers. Run the numbers both ways before you elect.
Self-Employment & Benefits
FEIE does not reduce SE tax. A U.S. self-employed person abroad typically owes SE tax unless covered by a totalization agreement with a certificate of coverage from the foreign system. Employees may also have foreign social security obligations independent of U.S. income tax computations.
Extensions Keyed to FEIE
If you need time to qualify for the physical-presence or residence test, use Form 2350. Separately, most taxpayers abroad get the automatic 2-month filing extension, and can tack on a 4868 extension — but interest runs from April’s due date.
State Nonconformity (Especially California)
Some states do not follow federal § 911. California, for example, requires adding back the federal FEIE and housing exclusion on the state adjustment schedule; residents are taxed on worldwide income unless they establish nonresidency (e.g., via California’s “safe harbor” rules for certain long-term assignments abroad). FEIE decisions can therefore reduce federal tax while not reducing (or even increasing) state tax. Coordinating residency and sourcing is essential.
Audit Posture
FEIE elections are civil, not criminal, but expat returns can evolve into high-risk eggshell situations if day counts are overstated, tax home/abode facts are weak, or housing costs are inflated. If issues arise, avoid unguarded statements to your original preparer (communications with non-lawyer preparers are generally not privileged). An attorney-led team can engage accountants under a Kovel arrangement to extend privilege to essential consulting work while correcting course.
Contact the Tax Law Offices of David W. Klasing if You Need to Claim, Optimize, or Defend the Foreign Earned Income Exclusion
At the Tax Law Offices of David W. Klasing, our dual-Licensed civil and criminal Tax Defense Attorneys & CPAs start by pressure-testing your FEIE eligibility under Form 2555: do you truly have a foreign tax home and either bona fide residence or 330-day physical presence? We then model FEIE versus Foreign Tax Credit outcomes — with the IRS’s own math in mind (daily proration, stacking worksheet, and housing base/limits) — so you’re choosing the lane that actually fits your facts and minimizes your global effective tax rate. From there, we handle the filings end-to-end (including Form 2350 when needed) and align your documentation to what an examiner will expect.
If you’re already under exam, or worried about a prior year, we pivot to attorney-led damage control under privilege. We insulate communications, bring in forensic accounting via Kovel where appropriate, and address day-count, tax-home/abode, and housing-cost substantiation with the goal of keeping matters civil and avoiding unnecessary interviews that can escalate risk. For California state clients, we simultaneously plan for state nonconformity — including add-back mechanics and residency strategies — so a federal fix doesn’t create a state problem.
In short, we manage both the numbers and the narrative: computing FEIE and housing precisely, drafting supportable positions (or FTC strategies) that withstand scrutiny, and coordinating timing/extension decisions so you qualify cleanly. To discuss your situation confidentially, call (800) 681-1295, or book a reduced-rate consultation online HERE with the Tax Law Offices of David W. Klasing today.
