Foreign Earned Income Exclusion (FEIE) meaning

The Foreign Earned Income Exclusion (FEIE) is a concept under U.S. tax law. It provides eligible U.S. citizens and residents with the opportunity to reduce the amount of federal tax owed on income earned abroad. However, this tax benefit is not automatic. Recipients must claim it by filling out Form 2555 or 2555-EZ on their tax return.

The Foreign Earned Income Exclusion can be a significant tax advantage for expatriates. Understanding this concept allows for maximizing tax savings and better managing financial planning while living abroad. Through the FEIE, it’s possible to exclude up to a certain amount of foreign-earned income from federal taxable income, thereby reducing the tax liability.

To become eligible for the Foreign Earned Income Exclusion, expatriates must fulfill two main conditions. They must pass the Physical Presence Test and the Bona Fide Residence Test. Regarding the first requirement, the applicant must be present in a foreign country for 330 full days over a period of 12 consecutive months. For the Bona Fide Residence Test, one must prove the establishment of a permanent residence abroad.

The limit for the Foreign Earned Income Exclusion is adjusted annually based on inflation. For example, it was set at $104,100 for the year 2018 and $108,700 for the year 2021. According to the Internal Revenue Service (IRS) guidance, the maximum limit for the year 2024 is $126,500.