If you’re an American living abroad, you already know this painful truth:
You can move your life overseas.
You can move your work online.
You can move your money into another currency.
But you can’t move away from the IRS.
The United States is one of only two countries in the world (shoutout to Eritrea) that taxes its citizens on worldwide income, no matter where they live. You could be in Lisbon, Medellín, or a tiny village in Vietnam—you’re still on the hook to file a U.S. tax return every year.
That’s the bad news.
The good news? There’s a built-in safety valve in the tax code that a lot of Americans still don’t fully understand: the Foreign Earned Income Exclusion, or FEIE.
Used correctly, the FEIE lets you exclude up to $126,500 (2025 limit) of foreign earned income from U.S. federal income tax.
That’s not a loophole.
That’s not some sketchy offshore hack.
That’s the law, written for people exactly like you—Americans who live and work abroad.
Let’s break down how it works, who qualifies, how people screw it up, and how to use it without losing your mind (or your refund).
What the FEIE Actually Covers (And What It Very Much Doesn’t)
The FEIE is powerful—but it’s also specific.
It only applies to earned income, meaning:
Wages
Salaries
Professional fees
Freelance / contractor income
Self-employment income
Key rule:
You must earn that income while you are physically outside the United States.
So if you’re a remote worker coding in Bogotá or teaching online from Lisbon, that income may qualify. If you fly back to the U.S. for three weeks and work from your parents’ kitchen table, that portion doesn’t.
What the FEIE does not cover:
Dividends
Interest
Rental income
Capital gains
Royalties
Business profits not tied to your personal labor
Those are passive or investment incomes, and the U.S. still taxes them—FEIE or not.
The Bonus: Foreign Housing Exclusion / Deduction
On top of the FEIE, there’s a Foreign Housing Exclusion/Deduction that can reduce your taxable income even further.
It can apply to reasonable housing costs such as:
Rent
Utilities (not including phone)
Certain repairs
This is especially helpful if you live somewhere expensive like Zurich, Singapore, Hong Kong, or central London, where the IRS allows higher housing limits. It won’t cover your infinity pool and champagne fridge, but it can move the needle in a meaningful way.
Who Actually Qualifies for the FEIE?
To use the FEIE, you have to clear two big hurdles:
Your tax home is in a foreign country
You pass either the:
Physical Presence Test, or
Bona Fide Residence Test
Let’s unpack that.
1. Tax Home in a Foreign Country
Your tax home is where your main place of business or work is—your regular post of duty.
If you’re:
Working remotely from Portugal,
Renting long-term in Medellín,
Running your consulting business from Chiang Mai,
…your tax home may be outside the U.S.
If you’re just bouncing in and out of the country with no real base, or you still consider the U.S. your main home and just “travel a lot,” this can get blurry. That’s when you want a tax pro to sanity-check your situation.
The Two Tests: Physical Presence vs. Bona Fide Residence
Once your tax home is abroad, you still have to prove you’re really living outside the U.S.
You can qualify through one of two tests:
Option 1: The Physical Presence Test
This one is pure math.
You must:
Spend at least 330 full days in a foreign country (or countries) during any 12-month period.
Key points:
A “full day” means 24 hours, midnight to midnight, outside the U.S.
The 12-month period doesn’t have to be the calendar year—it can run, for example, from May 1 to April 30.
Your days in any foreign country count—this test doesn’t care where, just that you’re not in the U.S.
The downside?
It’s rigid.
Emergency trip home?
Wedding, funeral, surprise visit?
Those days in the U.S. chew into your 330 days fast. One badly timed flight can break your eligibility and cost you thousands.
Option 2: The Bona Fide Residence Test
This test is less about counting days and more about your life story.
You must:
Be a bona fide resident of a foreign country (or countries) for an entire tax year (January 1–December 31).
The IRS is looking for long-term, settled intention, not just a long vacation.
Evidence that helps:
Long-term lease or home purchase abroad
Local utility bills in your name
Residency permit or visa
Family living with you overseas
Integration into local life (bank account, gym membership, etc.)
Clear indication that your main base is abroad, not in the U.S.
It’s more flexible in terms of travel—you can visit the U.S.—but the IRS wants to see that your real home is abroad, not just your Instagram feed.
Which Test Should You Use?
Here’s a simple way to think about it:
Physical Presence Test is best if:
You travel a lot between countries
You don’t yet have a stable, long-term base
You haven’t committed to a specific country, but you are clearly not in the U.S. most of the time
You’re okay living by the “330 Day Rule” and tracking every trip carefully
Bona Fide Residence Test is best if:
You’ve truly relocated abroad
You have a home lease or property in another country
You’ve got a residency visa or long-term permit
Your life (work, bank, routine) is clearly anchored outside the U.S.
A lot of newer nomads start with Physical Presence—it’s clear, objective, and easy to document.
Long-term expats who’ve really settled in one country often benefit more from Bona Fide Residence.
How You Actually Claim the FEIE
Here’s the part a lot of people misunderstand:
You don’t “sign up” for the FEIE in advance.
You claim it when you file your U.S. tax return by attaching Form 2555.
High-level steps:
File your regular U.S. tax return (Form 1040).
Add Form 2555, where you:
Declare whether you’re using Physical Presence or Bona Fide Residence
Provide your foreign address
List your qualifying dates abroad
Calculate your foreign earned income and the exclusion amount
If you qualify, your foreign earned income (up to the limit) is excluded from U.S. federal income tax.
It’s not overly complicated, but it does require:
Accurate travel dates
Clear income records
Understanding what is “foreign earned income” and what isn’t
Mess up those details and the exclusion can be denied or partially reduced.
Common Ways People Accidentally Break the FEIE
The FEIE is powerful—but fragile. Here are the biggest ways people blow it:
1. Failing the Time Test
You need:
330 qualified days abroad (Physical Presence), or
A full tax year as a resident abroad (Bona Fide Residence).
Now imagine this:
You’ve been abroad for almost a year.
You fly home a few extra days to see family.
Suddenly you’re under 330 days.
That one decision can cost you the entire exclusion for the period you’re claiming. That’s a five-figure mistake for some people.
Solution: track your days like your financial life depends on it—because it kind of does.
2. Mixing Earned and Passive Income
This one confuses a lot of people.
Your earned income (salary, freelance, self-employment) may be excludable.
Your passive income (dividends, interest, rental profit, etc.) is still taxable by the U.S.
FEIE ≠ “I don’t owe U.S. tax on anything.”
It’s more like:
“I don’t owe U.S. federal income tax on up to $126,500 of my earned foreign income, subject to the rules.”
You still report everything. The FEIE just wipes out a chunk of tax on the qualified portion.
3. Self-Employment Tax Surprise
If you’re self-employed, there’s another landmine:
Even if your income is excluded under FEIE, you may still owe U.S. self-employment tax (Social Security and Medicare) unless:
You’re paying into another country’s system under a totalization agreement, or
You’ve structured your business in a tax-efficient way with professional guidance.
A lot of digital nomads think FEIE zeroes out everything. Then they get a bill for self-employment tax they never saw coming.
4. Moving Mid-Year
Good news: you can still benefit from the FEIE if you only qualify for part of the year.
The catch?
Your exclusion limit is prorated based on your number of qualifying days.
For example, if you only qualify for half the year, you only get roughly half the $126,500 limit.
Still worth it—but not as generous as a full year.
Smart Ways to Maximize the FEIE
Once you understand the rules, you can start playing offense instead of just defense.
1. Time Your Move Strategically
If you know you’re going abroad, plan your departure date with the 330-day rule in mind.
Leaving in March vs. July can mean the difference between:
A fully qualifying year, or
A partial, prorated exclusion
One or two months of timing can translate into thousands of dollars in tax savings.
2. Combine FEIE with Foreign Tax Credits
If you earn more than $126,500 (2025 limit), the income above that amount may still be taxed by the U.S.
That’s where Foreign Tax Credits (FTC) come in. If you’re paying income tax in your country of residence, you may be able to use the FTC to reduce or even eliminate U.S. tax on the excess.
FEIE + FTC is often the real magic combo for higher earners.
3. Understand the Foreign Housing Exclusion Limits
If you live in an expensive city, your housing costs might be a big deal.
The Foreign Housing Exclusion can help, but it has:
A base amount you must exceed
A maximum that depends on your city
Some locations (Zurich, Singapore, Hong Kong, certain Gulf cities) get higher housing caps, which can significantly increase your overall exclusion.
4. Keep Documentation Like an Adult (Even If You Don’t Feel Like One)
Things that are worth keeping:
Passport stamps and flight records
Copies of visas, residence permits, leases
Pay stubs or invoices
Proof of foreign tax payments
When the FEIE is challenged, paper trails win.
The Big Picture: FEIE as a Tool, Not a Trick
The FEIE is not some sneaky loophole.
It exists because lawmakers recognized that:
Americans living abroad still have costs
Competing globally with local workers means you can’t always carry a full U.S. tax burden
At some point, double taxation stops being patriotic and starts being punitive
But it’s also not automatic and not bulletproof.
One careless trip home.
One misreported date.
One misunderstanding of “what counts” as foreign earned income…
…and suddenly you’re writing a check to the IRS you thought you’d legally avoided.
The FEIE is a tool. Used wisely, it’s the difference between:
A sustainable life abroad with reasonable taxes, and
A tax nightmare that follows you from country to country.
And as always, I’m not your CPA. I’m the guy waving the flag saying:
“This exists. It’s powerful. Now go talk to someone qualified to help you use it.”