# Foreign Earned Income Exclusion: Overview and Example

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## What Is the Foreign Earned Income Exclusion?

The foreign earned income exclusion is an Internal Revenue Service (IRS) policy that subtracts income earned and taxed in a foreign country from U.S. taxable income. Expats are still required to file tax returns in the U.S.

In general, U.S. taxpayers are required to pay income taxes on their earnings worldwide, not just within the U.S. However, the foreign earned income exclusion prevents double taxation of Americans living and working abroad.

### Key Takeaways

*   The foreign earned income exclusion was created to avoid double taxation for Americans living and working abroad.
*   If you are living and working abroad, use IRS Form 2555 to exclude your foreign income from U.S. taxation.
*   There is also a deduction for foreign housing paid with foreign earned income.

> **Important**
>
> For the 2024 tax year, the maximum foreign earned income exclusion is $126,500. For the 2025 tax year, the maximum is $130,000.

## Understanding Foreign Earned Income Exclusion

The foreign earned income exclusion is reported on IRS tax Form 2555. The same form is used to claim the [housing exclusion or deduction](https://www.investopedia.com/terms/f/foreign-housing-exclusion-deduction.asp), which deducts from taxation amounts paid by an employer for housing in a foreign country.

You must meet certain qualifications to claim the foreign earned income exclusion:

1.  You are a U.S. citizen or [resident alien](https://www.investopedia.com/terms/r/residentalien.asp). A resident alien is a permanent resident without citizenship. To fall under this classification in the United States, the taxpayer must have a current green card or have had one during the last calendar year.
2.  You have a qualifying presence in a foreign country. Qualifying presence status is met by residing in the foreign country for a full tax year. You may also fulfill the physical presence test by being physically present there for at least 330 days within a 12-month consecutive period.
3.  You have foreign earned income. You have foreign earned income if you receive wages or earned self-employment income from work performed in a foreign country. The income you receive from foreign-source pensions, investments, alimony, or gambling is not foreign earned income.

## Foreign Housing Amount

There is a maximum exclusion amount plus a [foreign housing amount](https://www.investopedia.com/terms/f/foreign-housing-exclusion-deduction.asp) which limits the exclusion. It is prorated if the number of qualifying days in a foreign country is less than a full tax year.

The foreign housing amount is the housing costs you paid with foreign earned income in excess of a base housing amount. The base housing amount is 16% of the maximum foreign earned income exclusion computed on a daily basis.

This means that in 2024, when the maximum annual exclusion is $126,500, an individual's base housing amount is their number of qualifying days of housing expenses multiplied by $52.60 (16% of $126,500 is $20,240, and $20,240 divided by 365 days equals $55.45 per day).

The maximum annual exclusion rises to $130,000 for the 2025 tax year.

For most, excludable housing expenses are capped at 30% of the maximum exclusion amount, although there are exceptions for taxpayers living in high-cost localities.

The foreign housing amount is taken as an exclusion by employees and as a deduction by self-employed individuals.

## Example of Foreign Earned Income Exclusion

Let’s see how the foreign earned income exclusion works.

Michael is an American working in Vietnam. He lived in Hanoi for 355 days of the tax year and was absent for 10 days on a trip home for Thanksgiving. He earned a salary of $225,000 and paid $33,600 of it to lease a flat for the year. MP paid the equivalent of $75,000 in Vietnamese income tax.

Michael would also have owed $81,000 in U.S. income tax without the foreign earned income exclusion, the foreign housing amount, and the nonrefundable foreign tax credit available to American taxpayers paying taxes abroad.

Since Michael is a U.S. citizen who paid foreign taxes on income earned over 355 qualifying days, he can exclude $126,500 of the foreign earned income from his U.S. [taxable income](https://www.investopedia.com/terms/t/taxableincome.asp) for the 2024 tax year. Moreover, he can deduct a foreign housing amount of $15,040 ($33,600 in housing costs – $16,944 base amount).

Because his income is over the maximum for the year, Michael must take an additional nonrefundable foreign tax credit against the U.S. taxes owed.

As long as he files Form 2555 to elect the foreign earned income exclusion and Form 1116 claiming the [foreign tax credit](https://www.investopedia.com/terms/f/foreign-tax-credit.asp), he will not owe U.S. taxes on the foreign income.

## Who Qualifies for the Foreign Earned Income Exclusion?

In general, any person who lives, works, and pays taxes in a foreign country but is obligated to file U.S. taxes qualifies for the foreign earned income exclusion. That includes:

*   A U.S. citizen or U.S. resident alien who is physically present in another country for 330 days or more during 12 consecutive months;
*   A U.S. citizen who is a legal resident of a foreign country for an uninterrupted period that includes an entire tax year;
*   A U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty who is a legal resident of a foreign country for an uninterrupted period that includes an entire tax year.

## What Is the Foreign Earned Income Exclusion for 2024?

For the 2024 tax year, the foreign earned income exclusion is $126,500. For 2025, the maximum will rise to $130,000. Any earned income below these amounts for an individual will not be taxed.

## Do I Have to File U.S. Taxes If I Live and Work Abroad?

Yes, as a U.S. citizen or U.S. resident alien, you must file a tax return that includes all of your income anywhere in the world. However, you may qualify for foreign earned income exclusions or foreign income tax credits to reduce or eliminate your U.S. taxes owed.

## The Bottom Line

If you're a U.S. citizen or a resident alien, you have to file income tax forms with the IRS. There is, however, an exclusion applied to the foreign income of Americans living and working abroad that avoids the perils of double taxation.  

> **Article Sources**
>
> 1.  Internal Revenue Service. "[Foreign Earned Income Exclusion](https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion)."
>     
> 2.  Internal Revenue Service. "[Foreign Housing Exclusion or Deduction](https://www.irs.gov/individuals/international-taxpayers/foreign-housing-exclusion-or-deduction)."
>     
> 3.  Internal Revenue Service. "[Form 2555, Foreign Earned Income](https://www.irs.gov/pub/irs-pdf/f2555.pdf)."
>     
> 4.  Internal Revenue Service. "[Instructions for Form 2555](https://www.irs.gov/pub/irs-pdf/i2555.pdf)," Pages 2–3.
>     
> 5.  Internal Revenue Service. "[Topic No. 851 Resident and Nonresident Aliens](https://www.irs.gov/taxtopics/tc851)."
>     
> 6.  Internal Revenue Service. "[Foreign Earned Income Exclusion - Bona Fide Residence Test](https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion-bona-fide-residence-test)."
>     
> 7.  Internal Revenue Service. "[Foreign Earned Income Exclusion - Physical Presence Test](https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion-physical-presence-test)."
>     
> 8.  Internal Revenue Service. "[Foreign Earned Income Exclusion - What Is Foreign Earned Income](https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion-what-is-foreign-earned-income)."
>     
> 9.  Internal Revenue Service. "[Figuring the Foreign Earned Income Exclusion](https://www.irs.gov/individuals/international-taxpayers/figuring-the-foreign-earned-income-exclusion)."
>     
> 10.  Internal Revenue Service. "[Figuring the Foreign Earned Income Exclusion](https://www.irs.gov/individuals/international-taxpayers/figuring-the-foreign-earned-income-exclusion#:~:text=In%202019%2C%20you%20were%20paid,from%20your%20income%20in%202020.)."
>      
> 11.  Internal Revenue Service. "[Form 1116, Foreign Tax Credit (Individual, Estate, or Trust)](https://www.irs.gov/pub/irs-pdf/f1116.pdf)."
>      
> 12.  Internal Revenue Service. "[IRS releases tax inflation adjustments for 2025](https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2025)."
>      
> 13.  Internal Revenue Service. "[Frequently Asked Questions (FAQs) About International Individual Tax Matters](https://www.irs.gov/individuals/international-taxpayers/frequently-asked-questions-about-international-individual-tax-matters)."