For the 2025 tax year (filed in 2026), the IRS has raised the Foreign Earned Income Exclusion (FEIE) from $126,500 to $130,000. This is a welcome update for U.S. citizens and resident aliens working abroad, allowing more of their foreign-earned income to be excluded from U.S. federal taxation:contentReference[oaicite:1]{index=1}.
What Is the FEIE?
The FEIE enables qualifying taxpayers to exclude a certain amount of foreign-earned income—like wages, salaries, or net earnings from self-employment—from U.S. taxation. It’s claimed on Form 2555 and requires meeting one of two eligibility tests: the bona fide residence test or the physical presence test:contentReference[oaicite:2]{index=2}.
2025 FEIE Limit: $130,000
This year’s increase to $130,000 means expats can exclude more income from U.S. taxes, aligning with inflation adjustments. Many will now benefit from a higher exclusion compared to prior years:contentReference[oaicite:3]{index=3}.
Eligibility Tests Explained
- Bona Fide Residence Test: You must establish that your foreign residency is uninterrupted for an entire U.S. tax year, with intent and ties abroad:contentReference[oaicite:4]{index=4}.
- Physical Presence Test: You must be physically present outside the U.S. for at least 330 full days in any consecutive 12-month period:contentReference[oaicite:5]{index=5}.
Who Can Claim the FEIE?
- U.S. citizens or resident aliens who live and work abroad
- Those with foreign-earned income from wages, self-employed services, or professional fees
- Taxpayers who maintain a tax home in a foreign country and meet one of the eligibility tests
- Each qualifying spouse filing jointly may exclude up to $130,000 individually:contentReference[oaicite:6]{index=6}.
How to Claim the $130,000 Exclusion
- Determine your eligibility using the bona fide residence or physical presence criteria
- Complete IRS Form 2555 and attach it to your Form 1040
- Report total foreign earned income and compute the exclusion based on limits and qualifying days:contentReference[oaicite:7]{index=7}
- Subtract the exclusion from gross income—this effectively makes that income tax-free under U.S. rules
- If self-employed, remember FEIE doesn’t reduce self-employment tax, only income tax
Foreign Housing Exclusion & Deduction
Alongside the FEIE, taxpayers may claim the Foreign Housing Exclusion (for employees) or Deduction (for self-employment). The base housing amount is 16% of the FEIE, now $20,800, with a cap at approximately 30% of the FEIE:contentReference[oaicite:8]{index=8}.
Key Considerations and Pitfalls
- Income timing: Only foreign-earned income counts. Passive income and U.S. wages don’t qualify.
- Pro-rata exclusions: If only part of the year is qualifying, the exclusion must be prorated based on qualifying days:contentReference[oaicite:9]{index=9}.
- Form revocation: Once FEIE is revoked, you cannot re-elect it for five years.
- SE tax: FEIE does not reduce self-employment taxes.
Is the FEIE Right for You?
Deciding between the FEIE and the Foreign Tax Credit (FTC) depends on your specific circumstances. If your foreign income is low, FEIE makes sense. If you pay high foreign taxes, the FTC may be more beneficial:contentReference[oaicite:10]{index=10}. Some expats even use both strategically to maximize tax benefit.
Plan Ahead: Make the Most of the $130,000 Limit
- Track travel and residency dates continuously
- Maintain thorough records of foreign wages, taxes, and housing expenses
- Assess whether combining FEIE with FTC yields better outcomes
- Beware of mutual exclusions: you cannot exclude the same income twice
Conclusion
The FEIE’s increase to $130,000 for 2025 offers significant tax relief for U.S. expats. Claiming it properly can vastly reduce your U.S. tax liability. Be sure to meet eligibility tests, keep accurate records, and choose the optimal combination of FEIE and FTC based on your income. With the right planning and guidance, this inflation-adjusted benefit can substantially improve your financial posture while living abroad.
Consult tax software or an expatriate tax professional to ensure you’re taking full advantage of the increased FEIE and complying with U.S. tax obligations.
