Confused about foreign earned income exclusion rules? You’re not alone. You want to follow the IRS guidelines, minimize your tax bill, and avoid penalties, but the requirements can leave you scratching your head. Below is a clear, friendly rundown of what these rules mean for you as a U.S. expat, how to qualify, and which forms to file so you can stay on the right side of the IRS.

Understand basic qualifications

To take advantage of the foreign earned income exclusion (FEIE), you must live and work outside the United States. Your earnings must come from a foreign source, and your main place of business or “tax home” must also be abroad. For 2023, you can exclude up to $120,000 of your foreign earned income. In 2024, that amount rises to $126,500, and for 2025, it increases to $130,000.

Key qualification factors

  • You have a legitimate tax home in a foreign country.
  • You earn wages, salaries, or self-employment income from work performed abroad.
  • You meet either the bona fide residence test or the physical presence test.
  • You attach Form 2555 to your tax return to claim the exclusion.

If you’re wondering how to confirm your full range of obligations, start by reviewing our expat tax compliance checklist. It helps you track what you might need, from reporting forms to key steps in your filing.

Meet the residency tests

The IRS has two main ways for you to establish that you really live outside the U.S. and deserve the FEIE. These are the bona fide residence test and the physical presence test.

Bona fide residence approach

You must reside in a foreign country for at least one uninterrupted tax year. This usually involves demonstrating long-term ties—such as renting a home or having a local driver’s license—and an intent to stay abroad indefinitely. However, resident aliens can only use this test if their home country has an income tax treaty with the U.S.

Physical presence approach

Under this test, you need to spend at least 330 full days outside the United States over a 12-month period. These days do not have to be consecutive, but they cannot include any part of a day you spend in the U.S. If you’re counting days, it’s a good idea to keep a precise travel log and any relevant US expat tax documentation.

File the right forms

Once you know you qualify, the next step is making sure you submit all required paperwork. The main document is Form 2555, where you calculate and claim the FEIE, foreign housing exclusion, or foreign housing deduction.

Forms you may need

  • Form 2555: Attach to your federal tax return (Form 1040 or 1040X).
  • Form 673: Provide to your employer so they can refrain from withholding U.S. taxes on qualifying foreign wages.
  • Form 2350: Request an extension if you need more time to meet either residency test.
  • Foreign Earned Income Tax Worksheet: Calculate your tax on remaining income after the exclusion.

We also recommend checking out the IRS form 2555 instructions for detailed guidance.

Watch out for special rules

Foreign earned income exclusion rules can get tricky if you’re self-employed, working for the government, or moving in and out of the country mid-year.

  • Self-employed scenarios: You can exclude your foreign earned compensation from the regular income tax but still owe self-employment tax. Consider a foreign housing deduction instead of the housing exclusion if you’re self-employed.
  • Part-year qualification: If you only qualify for part of the year, prorate the maximum exclusion based on the days you qualify.
  • Married couples: If you and your spouse both qualify, each can claim a separate exclusion. That could double the benefit to $253,000 for the 2024 tax year.
  • Government employees: If you work directly for the U.S. government abroad, you generally can’t claim the FEIE.

Staying up-to-date on all these details can be stressful. Bookmark important expat tax reporting deadlines so you never miss a key date.

Tap into professional support

Navigating these exclusions doesn’t have to be overwhelming. At American Pacific Tax, we help you organize, file, and stay on top of every requirement so you can reduce your IRS risk. Whether you’re unsure about the residency tests or nervous about potential penalties, you don’t have to figure it all out alone.

Ready for a smoother filing experience? Take the first step by scheduling a compliance review or consultation. You’ll feel more confident about your filing process—and you’ll know you’re making the most of every exclusion you’re entitled to.