The Foreign Earned Income Exclusion (FEIE) is a critical tax benefit for U.S. citizens and resident aliens living and working abroad. It allows eligible individuals to exclude a portion of their foreign earned income from U.S. taxation, reducing or even eliminating their U.S. tax liability. For the tax year 2025, the IRS has increased the FEIE threshold to $130,000, up from $120,000 in 2023. This adjustment reflects inflation and aims to align tax relief with rising global living costs.
This blog provides a comprehensive overview of the FEIE for the 2025 tax year, including eligibility criteria, calculation methods, filing requirements, and practical planning tips for expatriates and international workers.
What is the Foreign Earned Income Exclusion (FEIE)?
The FEIE allows qualifying individuals to exclude a certain amount of foreign earned income from their gross income for U.S. federal income tax purposes. This exclusion applies only to income earned for services performed in a foreign country during a period of bona fide residency or physical presence abroad.
For 2025, the maximum exclusion has been set at $130,000 per qualifying individual. Married couples who both qualify individually can each exclude up to $130,000, for a combined exclusion of $260,000.
Who Qualifies for the FEIE?
To claim the FEIE, a taxpayer must:
- Have foreign earned income (salary, wages, or self-employment income earned in a foreign country)
- Have a tax home in a foreign country
- Meet either the Bona Fide Residence Test or the Physical Presence Test
Bona Fide Residence Test
To pass this test, you must reside in a foreign country for an uninterrupted period that includes a full calendar year and demonstrate that you intend to live there permanently or for an extended period.
Physical Presence Test
Alternatively, this test requires that you be physically present in one or more foreign countries for at least 330 full days during any 12-month period.
What Counts as Foreign Earned Income?
Foreign earned income includes wages, salaries, and self-employment income for services performed in a foreign country. However, the following types of income are not considered foreign earned income for FEIE purposes:
- Pensions and annuities
- Social Security benefits
- Interest, dividends, and capital gains
- Pay for services conducted in international waters or outside any country
Self-employed individuals may also use the FEIE, but the exclusion only applies to the income itself, not to self-employment tax obligations (Social Security and Medicare), which must still be paid.
FEIE Limit for 2025: $130,000
The IRS adjusts the FEIE annually for inflation. For the 2025 tax year, the exclusion increases to $130,000, up from $120,000 in 2023 and $126,500 in 2024. This increase provides greater relief to expatriates working in countries with higher living costs.
Housing Exclusion and Deduction
In addition to the FEIE, qualifying individuals may also claim a housing exclusion or deduction for housing costs incurred while living abroad. This benefit covers rent, utilities (excluding telephone), and certain occupancy-related expenses.
- Housing Exclusion: For employees and those with employer-provided housing
- Housing Deduction: For self-employed individuals
The standard base housing amount is set at 16% of the FEIE limit, or $20,800 for 2025. Any qualified housing expenses above this base may be eligible for exclusion or deduction, subject to location-specific caps published by the IRS.
How to Claim the FEIE
To claim the Foreign Earned Income Exclusion, use the following steps:
- File IRS Form 2555 (Foreign Earned Income)
- Attach Form 2555 to your Form 1040 or Form 1040-SR
- Complete Part II of Form 2555 to indicate which residency test you meet
- Report total foreign earned income and calculate the exclusion
Note: Taxpayers who revoke the FEIE cannot re-claim it for the next five tax years without IRS approval.
FEIE vs. Foreign Tax Credit (FTC)
Taxpayers living abroad may also be eligible for the Foreign Tax Credit (FTC), which provides a dollar-for-dollar reduction of U.S. tax liability based on foreign taxes paid. In some situations, it may be more beneficial to claim the FTC instead of the FEIE, especially if the foreign country has high income tax rates.
You cannot use the same income for both the FEIE and the FTC. However, you can split income between the two if it’s not fully excluded or taxed.
Deadlines and Extensions
U.S. taxpayers abroad are automatically granted a two-month extension to file their tax returns, extending the deadline to June 16, 2025 for most filers (since June 15 is a Sunday). However, any taxes owed must still be paid by April 15 to avoid interest charges.
If more time is needed, expats can file Form 4868 to request an extension until October 15, 2025. Note that the extension only applies to filing, not payment.
Common FEIE Mistakes to Avoid
- Misunderstanding the physical presence rule: Missing even a single day can disqualify the exclusion.
- Failing to track travel days: Keep detailed records of entry and exit for accurate calculation.
- Claiming the exclusion without foreign earned income: Investment income and pensions don’t count.
- Not meeting the tax home requirement: Your principal place of business must be abroad.
Planning Tips for Maximizing the FEIE
- Time your foreign assignment to meet the 330-day physical presence test within a 12-month period
- Consider the housing exclusion if your foreign living expenses are high
- Evaluate whether using the FEIE or FTC provides better tax results
- Coordinate with tax advisors in both countries to avoid double taxation
- Use IRS-approved tools or a CPA familiar with expatriate tax issues
Conclusion
The 2025 increase in the Foreign Earned Income Exclusion to $130,000 is a welcome adjustment for Americans working overseas. It reflects the IRS’s acknowledgment of rising living costs and supports U.S. citizens who continue to earn and contribute abroad.
While the FEIE can significantly reduce your U.S. tax liability, it comes with strict eligibility and documentation requirements. Failing to meet the rules can lead to audits or disqualification. Therefore, it’s essential to plan carefully, maintain records, and consult a tax professional with expertise in international compliance.
With proper planning and accurate reporting, the FEIE remains one of the most valuable tools for U.S. expats to manage their tax obligations efficiently.
