At American Pacific Tax, we know that U.S. expats in Hong Kong face complex tax rules. The FEIE maximum exclusion lets you exclude up to $130,000 of your foreign earnings for the 2025 tax year (the IRS adjusts this amount annually). Good news, that cap rose from $120,000 in 2023, so you have extra breathing room on your U.S. return.
In this guide, you’ll learn how to claim the full exemption, meet the tests, handle partial-year qualifications, and avoid common filing mistakes.
Understand the exclusion cap
Under the foreign earned income exclusion, you can shield a significant chunk of your overseas salary from U.S. tax. The IRS sets a new limit each year so it keeps pace with inflation. The table below shows recent caps and related housing limits.
| Tax year | Max exclusion | Housing cap (30%) |
|---|---|---|
| 2023 | $120,000 | $36,000 |
| 2024 | $126,500 | $37,950 |
| 2025 | $130,000 | $39,000 |
This rising maximum means more tax savings if you qualify. The housing amount limit also adjusts, letting you deduct eligible living expenses up to 30 percent of the annual cap.
Check eligibility criteria
To claim the exclusion you must have a tax home abroad and meet one of two IRS tests. Visit our FEIE eligibility criteria for the full list of requirements and special rules.
Physical presence test
- Spend at least 330 full days in a foreign country during any consecutive 12-month period
- Count only complete days (arriving and departing days don’t qualify)
- Track travel dates precisely to avoid miscounts (this test is strict)
Learn more on our FEIE physical presence test page.
Bona fide residence test
- Establish a tax home in a foreign country for an uninterrupted period that includes a full tax year
- Show clear intent to remain (for example, a long-term lease or local community ties)
- Be mindful that short trips back to the U.S. may not break your residency
Good news, once you meet either test you’re clear to claim the full cap for the qualifying period.
Calculate a prorated limit
If you qualify for only part of the year you must prorate the exclusion cap. Use this formula:
Prorated limit = (Qualifying days ÷ 365) × Annual cap
Partial-year example
Imagine you meet the physical presence test for 140 days in 2025.
Your prorated exclusion = (140 ÷ 365) × $130,000 ≈ $49,863
Apply this any year you start or end your foreign assignment mid-tax year.
Claim housing deduction
In addition to the exclusion on earnings, you can deduct certain housing expenses under the foreign housing exclusion. The ceiling is 30 percent of the annual cap (about $39,000 for 2025), though local cost-of-living limits may be lower.
- Include rent, utilities, and required services
- Exclude personal expenses like meals or furnishings
- Keep receipts and rental agreements to support your claim
These housing deductions stack on top of your income exclusion for bigger savings.
File Form 2555
Gather required information
- Employer details and income records
- Exact dates of foreign residence or travel
- Breakdown of housing expenses (rent, utilities, fees)
Submit with return
Attach Form 2555 to your U.S. tax return by the filing deadline (usually April 15). If you need extra time, file Form 4868 for an extension.
Pro tip: a well-prepared Form 2555 avoids IRS follow-ups and speeds up processing.
Avoid common mistakes
Filing oversights
- Forgetting to attach Form 2555
- Miscalculating qualifying days
- Skipping the proration step for partial years
Ineligible income items
- Passive income like interest, dividends, capital gains
- U.S. government wages (in most cases)
- Self-employment tax (FEIE only affects income tax, not social taxes)
If you’re a contractor, check our FEIE for freelancers for tailored advice.
Quick recap and next step
- Note the annual exclusion cap (it’s $130,000 for 2025)
- Check you meet the physical presence or bona fide residence test
- Prorate the limit if you qualify part year
- Track and claim qualified housing expenses
- File Form 2555 with your U.S. return
Consider scheduling a review with our team at American Pacific Tax to lock in these benefits. You’ve got this.
Frequently asked questions
Which income qualifies for the FEIE maximum exclusion?
Active work income earned abroad counts, including wages, professional fees, sick or vacation pay, and sometimes severance. Passive items like interest, dividends, and most pensions aren’t eligible.
How do I prorate my exclusion if I qualify part of the year?
Multiply the annual cap by your qualifying days, then divide by 365 (or 366 in a leap year). For 140 days in 2025 that looks like (140 ÷ 365) × $130,000 ≈ $49,863.
Can my spouse also exclude the same amount?
Yes, if each spouse independently meets one of the tests, each can claim up to $130,000 for 2025 (doubling your household exclusion to $260,000).
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