If you’re a US citizen earning income while living abroad, the Foreign Earned Income Exclusion (FEIE) is the biggest single tax break available to you — up to $130,000 (2026 limit) of foreign earned income excluded from US federal tax. Here’s how it actually works.
Last verified: May 26, 2026. This is general information, not tax advice — consult a cross-border CPA for your specific situation.
The 2026 number
Maximum FEIE for 2026: $130,000 per qualifying taxpayer (up from $126,500 in 2025). Married filing jointly with both spouses qualifying: $260,000 combined.
Note: this is foreign earned income only — wages, salary, self-employment income from working outside the US. Passive income (dividends, capital gains, rental, pension) is NOT covered by FEIE.
Two qualifying tests — you need ONE
Test 1: Physical Presence Test (PPT)
Spend at least 330 full days in a foreign country during any 12-month period. Days in US (even brief stops) don’t count. International airspace + waters don’t count toward your foreign days.
Test 2: Bona Fide Residence Test (BFR)
Establish a bona fide residence in a foreign country for an uninterrupted period including an entire tax year. This means you actually live there as a tax resident, pay foreign taxes, have a home base — not just travel through.
BFR is harder to qualify for initially (need an entire calendar tax year) but more flexible afterward — you can spend more time in the US once established.
Common mistakes that disqualify the exclusion
1. Treating your business income wrong. If you operate through a US LLC, only the wages you pay yourself qualify as ‘earned income.’ Distributions/profits from a US LLC are NOT FEIE-eligible. Structure: pay reasonable salary to yourself via the LLC, take rest as distribution.
2. Day-counting errors on PPT. The day you depart the US doesn’t count as a foreign day. The day you arrive back in the US doesn’t either. Travel days are bookended. Track meticulously — IRS scrutinizes this.
3. US tax home not abroad. Both tests require your ‘tax home’ to be in a foreign country. If you maintain your principal US residence (kids in US school, US-based employer, US driver’s license, etc.), IRS may reject FEIE on tax home grounds.
4. Forgetting state taxes. FEIE only excludes federal tax. Some states (CA, NM, SC) don’t recognize FEIE and tax your foreign income anyway. Establish residency in TX/FL/NV/SD/WA/AK/TN/WY (no state income tax) before moving abroad.
5. Not filing. You MUST file Form 1040 + Form 2555 every year to claim FEIE, even with zero tax owed. Failure to file disallows FEIE retroactively.
FEIE + Foreign Housing Exclusion stack
FEIE excludes earned income. The Foreign Housing Exclusion (FHE) additionally excludes housing costs above a base amount (typically $20-25K for high-cost cities) and below a cap (varies by city — Singapore, London, Hong Kong have very high caps; smaller cities lower).
Maximum combined FEIE + FHE benefit for 2026 in a high-cost city: ~$170,000-$200,000 of US-tax-excluded income.
FEIE vs Foreign Tax Credit (FTC)
US expats have a choice: FEIE (exclude foreign earnings) OR Foreign Tax Credit (credit foreign taxes paid against US tax). You generally pick one per income type. Decision rules:
- Living in HIGH-tax country (UK, Germany, France, Australia): FTC usually better — your foreign taxes already exceed US tax, FTC gives you full credit
- Living in LOW-tax country (UAE, Singapore, Portugal NHR/IFICI, Greece DN tax break, Mexico if structured right): FEIE usually better — you’re not paying significant foreign tax, so excluding from US is the win
- Mixed/moderate: run both scenarios — FTC’s unused credits carry forward 10 years, which has option value
Self-employment + FEIE — the SE tax trap
FEIE excludes income from federal INCOME tax. It does NOT exclude self-employment tax (15.3% — Social Security + Medicare). US citizens running businesses abroad still owe SE tax UNLESS the country has a Totalization Agreement with the US (30 countries do, including Portugal, Spain, UK, France, Germany, Italy, Netherlands, Switzerland, Canada, Australia, Japan, South Korea, Brazil, Chile). Country list at ssa.gov.
FAQ
Can I claim FEIE for a partial year?
Yes — both PPT and BFR can apply to partial years if you meet test conditions over a qualifying 12-month period that spans calendar years.
What if my income is $150K — do I lose anything?
You’d exclude $130K (the 2026 limit) and owe US tax on the remaining $20K (using your standard deduction etc). You’d also still owe SE tax on the full amount if self-employed and no Totalization Agreement applies.
Do I still need to file FBAR?
FBAR (FinCEN 114) is separate from FEIE. If you have foreign financial accounts with aggregate value over $10K at any point during the year, you must file FBAR. FEIE doesn’t change this — they’re independent obligations.
Related: full visa comparison · US-Portugal tax treaty.
✓ Last verified: May 26, 2026. Tax + banking content is general information, not advice. Talk to a licensed cross-border CPA or attorney for your specific situation.