US Expat Tax Exemption—FEIE & Other Foreign Income Exclusions

In this comprehensive guide, we provide a clear overview of the expat tax exemption and other exclusions available to US expats, helping you determine your eligibility and avoid common pitfalls in the application process. By understanding the rules governing these exemptions, you can ensure compliance while potentially minimising your overall tax liability.

What Is the Foreign Earned Income Exclusion (FEIE)?

The Foreign Earned Income Exclusion (FEIE) is one of the most common expat tax benefits allowing eligible US citizens and resident aliens living abroad to exclude a portion of their foreign-earned income from US federal income tax.

The maximum excludable income under the FEIE is adjusted annually for inflation. For 2024, the exclusion limit is $126,500 per qualifying taxpayer.

What Foreign Income Can I Exclude With the FEIE?

The FEIE applies only to income earned from employment or self-employment while residing abroad. This includes:

• Salaries
• Wages
• Commissions
• Bonuses
• Self-employment income

However, certain types of income do not qualify for the FEIE, including:

• Capital gains
• Dividends
• Interest
• Rental income
• Retirement income

For tax purposes, foreign-earned income is defined as income earned while living and working outside the US, regardless of whether it is paid by a US or foreign employer. The opposite is also true—any income earned while physically present in the United States is considered US-source income, even if paid by a foreign company.

Who Is Eligible for the Foreign Earned Income Expat Tax Exclusion?

The FEIE typically applies to US expats who:

• Have lived abroad for a certain period during a tax year.
• Work overseas for a US or foreign employer.
• Are self-employed in a foreign country.

However, US government employees do not qualify for this expatriate tax exemption. That said, individuals working for a private company under contract with the US government may still be eligible.

To determine whether your foreign-earned income qualifies for the exclusion, you must meet one of two IRS tests:

1. The physical presence test.
2. The bona fide residence test.

The Physical Presence Test

According to the IRS, to pass the physical presence test, you must be physically present in a foreign country for 330 days within a 12-month period. These don’t have to be consecutive days, but they must be full days—24 consecutive hours beginning and ending at midnight.

You may travel between foreign countries, but days spent in transit that are not within a foreign country (such as on international waters or layovers in the US) do not count toward the 330-day requirement.

You must have a tax home in a foreign country, meaning your principal place of business or employment is located abroad, and you must earn foreign income. Only wages and self-employment income earned outside the US qualify.

The Bona Fide Residence Test

To qualify under the bona fide residence test, you must:

• Be a resident of a foreign country for an entire tax year (January 1 – December 31 for calendar-year filers) without significant interruptions.
• Demonstrate intent to establish a long-term presence in the foreign country.
• Have a tax home abroad and earn foreign income.
• Be a US citizen or a resident alien of a country with a US tax treaty.

While temporary trips to the US or other countries (for business or vacation) are allowed, you must intend to return to your foreign country of residence or establish a new bona fide residence elsewhere.

Once established, bona fide residency begins on the date you start living abroad and ends when you permanently leave that foreign country. This means you may qualify as a bona fide resident for parts of one or two other tax years in addition to the full tax year.

Which Test Should You Use?

Choosing between the Physical Presence Test and the Bona Fide Residence Test depends on your individual circumstances:

• If you frequently travel to the US but have a long-term home abroad, the Bona Fide Residence Test is often preferable, as short trips do not affect your residency status.
• If you have a foreign work assignment lasting at least 330 full days with a defined end date, the Physical Presence Test may be more suitable.

Understanding these requirements ensures you make the right choice when claiming expat tax benefits while maintaining compliance with US tax laws.

Which Form Should I Use for the FEIE?

You should file Form 2555 to claim the FEIE. The form will require the following things:

If you’re filing the form with your spouse, you must do so separately, even if you typically file a joint tax return.

What if I Don’t Qualify for FEIE?

If you haven’t lived abroad long enough to qualify for the FEIE, you can still file Form 2350 and request a tax filing extension. This can be helpful if, for example, you lived overseas for 250 days. In this case, you can request an extension until you’ve spent at least 330 days in a foreign country, which is enough to meet the FEIE requirements.

You typically have to claim the FEIE within one year of your tax return’s deadline or by amending a return filed on time. If you fail to do either of these two things, you may still qualify for FEIE if:

1. You don’t owe any tax after the exclusion is taken into account.
2. The IRS doesn’t recognise your failure to file a return and claim the exclusion.

Titan Wealth International offers professional tax planning services to ensure your tax returns are filed correctly and on time. Speaking to a tax expert can help you claim tax reliefs you qualify for and avoid penalties.

Which Other US Tax Deductions for Expats Can I Apply for?

If you don’t qualify for FEIE, you may still be eligible for the following IRS expat tax exclusion benefits:

1. Foreign housing exclusion.
2. Foreign tax credit.
3. Tax treaties.

Foreign Housing Exclusion

The foreign housing exclusion allows eligible expats to exclude a portion of their qualifying housing expenses abroad from their US taxable income. Qualifying expenses include:

• Rent.
• Utilities (excluding telephone services).
• Property tax.
• Insurance.
• Furniture rentals.

The expat tax exclusion amount for housing expenses depends on the country and city you live in. Living in a city with a higher cost of living usually means you can exclude larger housing amounts from US taxation.

To be eligible, you must first qualify for the FEIE, which means passing either the physical presence test or bona fide residence test. Self-employed individuals may also claim a deduction for housing costs exceeding the base housing amount, reducing their taxable income further.

Foreign Tax Credit

To avoid double taxation, American expats can claim a foreign tax credit, which allows them to offset their US tax liability by the amount of taxes paid to a foreign government.

There’s no limit on the amount of foreign tax credit you can claim. You’re allowed to claim both the foreign tax credit and FEIE during the same year, but not on the same income.

While FEIE is reserved for foreign earned income only, a foreign tax credit can be applied to various types of income such as dividends, wages, interest, and royalties.

Tax Treaties

Another way to avoid double taxation is to check whether the US has a tax treaty with your current residential country. The US maintains tax treaties with numerous countries, including the UK, Spain, Switzerland, and Australia.

If you reside in a country that has a tax treaty with America, you may be taxed at a reduced tax rate or qualify for an expat tax exemption from US taxes on certain US-sourced income.

Each tax treaty has specific terms, so it’s essential to review the agreement between the US and your country of residence to determine which exemptions, deductions, or credits may apply to your situation.

What Common Issues Do Americans Have With Expat Tax Deductions?

Many expats assume the Foreign Earned Income Exclusion (FEIE) is applied automatically. However, to claim it, you must file Form 2555 with your US tax return. Failing to do so means losing out on significant tax savings.

When claiming expat tax exemptions, many US expats encounter challenges that can lead to errors, penalties, or missed opportunities for tax relief. Here are some of the most common issues:

Navigating US expat tax laws can be challenging, and errors can lead to unexpected tax bills or penalties. To ensure you overcome these and other expat tax issues you may face when attempting to claim tax relief, it’s best to consult with a professional tax consultant.

How Titan Wealth International Can Help You

If you hold US stocks, RSUs, ESPPs, or stock options while living abroad, you may face capital gains tax, dividend withholding tax, and up to 40% estate tax – even if you’ve never lived in the US.

Without a tax-efficient structure, you could be at risk of unnecessary tax liabilities, penalties, and brokerage restrictions that limit your financial flexibility.

At Titan Wealth International, we help US expats reduce tax exposure and gain full control of their US investments by:

• Restructuring US stock holdings: Transferring assets to an expat-friendly brokerage for compliance, control, and tax efficiency.
• Minimising US tax liabilities: Reducing capital gains tax, dividend withholding tax, and estate tax risks with tailored solutions.
• Optimising tax exemptions: Ensuring you claim the right reliefs, such as FEIE, FTC, or Foreign Housing Exclusion, to avoid overpaying.
• Protecting generational wealth: Structuring US assets efficiently to avoid up to 40% estate tax on holdings over $60,000.
• Maximising equity compensation benefits: Helping you plan RSU sales, stock option exercises, and business exits tax-efficiently.

Don’t let US tax exposure erode your wealth. Book a complimentary discovery call today to safeguard your assets and optimise your financial future.