U.S. citizens and resident aliens are taxed on worldwide income no matter where they live — but the Foreign Earned Income Exclusion (FEIE) lets qualifying Americans working abroad exclude a substantial amount of foreign wages or self-employment income from federal tax entirely. For 2026, the maximum exclusion is $132,900 per person, adjusted annually for inflation.
What Counts as “Earned” Income
The FEIE only applies to earned income — wages, salaries, and self-employment income from services you actually perform. It does not cover passive income: dividends, interest, rental income, capital gains, or pension distributions are all still fully taxable regardless of where you live. This trips up remote workers who assume all their foreign-sourced income qualifies.
The Two Ways to Qualify
You need to pass one of two tests. The Physical Presence Test requires being physically outside the U.S. for at least 330 full days in any 12-month period — it’s a pure day-count test, with no requirement to establish residency anywhere. The Bona Fide Residence Test instead requires establishing genuine residence in a foreign country for an entire unbroken tax year, which involves more subjective factors (intent, local ties, tax filing status abroad) but doesn’t require the strict 330-day count.
Married Couples Get Two Exclusions
If both spouses work abroad and each independently qualifies under either test, each spouse claims their own $132,900 exclusion on their own earned income — potentially sheltering up to $265,800 combined for 2026, not a shared household limit.
The Housing Exclusion Stacks on Top
Beyond the earned income exclusion, qualifying taxpayers can also exclude or deduct a portion of foreign housing costs. For 2026, the housing cost limitation is $39,870, though the actual excludable amount depends on your specific housing expenses and a base amount tied to the FEIE limit — it isn’t a flat additional exclusion for everyone.
Filing Requirements and a Common Trap
Claiming the FEIE requires filing Form 2555 with your Form 1040 — it isn’t automatic, and you have to affirmatively elect it. It also doesn’t excuse you from self-employment tax if you’re self-employed abroad: the FEIE reduces income tax, but the 15.3% self-employment tax still applies to net self-employment earnings in full, similar to how the new no-tax-on-tips and no-tax-on-overtime deductions don’t touch payroll tax either. Many self-employed expats are surprised to owe self-employment tax on income that’s otherwise fully excluded from income tax.
Foreign Tax Credit as an Alternative
For higher earners in high-tax countries, the Foreign Tax Credit sometimes beats the FEIE, since it isn’t capped the way the exclusion is — but you generally can’t double-dip and claim both benefits on the same income. Which one wins depends on your specific country’s tax rates and your income level, which is worth running by a CPA experienced with expat returns before you elect either one.
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