Foreign earned income exclusion

The Foreign Earned Income Exclusion limit is $130,000 for the 2025 tax year and rises to $132,900 for 2026, adjusted annually for inflation. This is a per-person limit, so a married couple where both spouses have foreign earned income and separately qualify can potentially exclude up to $260,000 combined for 2025. The limit applies to earned income only — it doesn't cover investment income, rental income, or other passive earnings.

You qualify if you have a tax home in a foreign country and pass either the bona fide residence test or the physical presence test — and the income you're excluding has to be earned income, not passive income. US citizens can use either test; resident aliens generally need to use the physical presence test unless they're a citizen or national of a country with a qualifying US tax treaty. Simply living abroad or being paid in foreign currency isn't enough on its own — you need to actually satisfy one of the two residency tests and have your tax home outside the US.

The bona fide residence test looks at where you actually live — your intent, ties, and community — while the physical presence test is a pure day count: at least 330 full 24-hour days in a foreign country during any 12-month period. Bona fide residence requires an uninterrupted period that includes an entire calendar tax year and lets you take brief US trips without breaking residency, based on the overall facts and circumstances of your life abroad. The physical presence test has no intent requirement at all — it's mechanical — but it's stricter about counting days, since a full day only counts if you're outside the US for the entire 24 hours. See the full side-by-side comparison to figure out which one fits your travel pattern.

Yes, net self-employment earnings from services performed abroad count as earned income and can be excluded under the FEIE — but the exclusion only reduces regular income tax, not self-employment tax. Self-employed expats still owe the full 15.3% self-employment tax on their net foreign earnings regardless of how much income they exclude on Form 2555. The one common exception: if you live and work in one of the 30+ countries with a US totalization agreement, a Certificate of Coverage can exempt you from US self-employment tax by keeping you in the host country's social security system instead.

Yes, but it's technically a separate benefit — the Foreign Housing Exclusion — that's calculated alongside the FEIE on the same Form 2555, not part of the FEIE dollar limit itself. For 2025, you can exclude qualifying housing expenses above a base amount of $20,800 (16% of the FEIE limit), up to a standard ceiling of about $39,000 for the year, though that ceiling is significantly higher in expensive cities — Hong Kong's 2025 limit, for example, is $114,300 under the IRS's location-adjusted table. Employees use the exclusion; self-employed expats claim the equivalent benefit as a deduction instead.

Income above the FEIE limit is taxed normally — but thanks to the IRS's "stacking rule," it's taxed as if the excluded income were still on top of it, not as if the excess were your only income. In practice, that means the excluded amount still determines which tax brackets your excess income falls into on the Form 2555 rate calculation worksheet, so you don't get the benefit of the lower brackets a small amount of income would normally enjoy. If you paid foreign tax on that excess income too, the Foreign Tax Credit can typically offset the resulting US tax so it isn't taxed twice.

Only if you have taxable compensation left over after the exclusion — income you exclude under the FEIE doesn't count as compensation for IRA contribution purposes, so excluding all of your earned income generally leaves you with nothing to base a contribution on. If your earnings exceed the FEIE limit, or you only partially exclude your income (for example, by using the Foreign Tax Credit on part of it instead), the remaining taxable earned income can still support a normal IRA contribution up to the usual annual limits. This is one of the more overlooked tradeoffs of leaning fully on the FEIE — see the full picture in the IRA rules for American expatriates.

In plain terms, the FEIE lets qualifying Americans living and working abroad simply not pay US income tax on a set amount of their foreign salary or self-employment earnings each year — $130,000 for 2025. You still have to file a US tax return and report the income, and you still owe self-employment tax if that applies to you, but the excluded portion of your earned income isn't taxed by the IRS at all. To use it, you need to prove you actually live abroad, either by showing you're a genuine resident of another country or by counting up enough days physically outside the US.