The FEIE is claimed on Form 2555. You must have foreign earned income and meet the physical presence test (330 full days in a 12-month period) or the bona fide residence test (though green-card holders require a US tax treaty).
FEIE vs Foreign Tax Credit
The Foreign Earned Income Exclusion (FEIE), authorized by IRC §911, lets qualifying U.S. citizens and green-card holders exclude a substantial portion of foreign earned income from U.S. taxable income. For tax year 2025, the maximum exclusion is $130,000 (this limit is inflation-adjusted annually; the 2025 amount was established by IRS Rev. Proc. 2024-40). You must have foreign earned income, compensation for personal services performed in a foreign country, and your tax home must be in a foreign country. The exclusion applies only to earned income, not passive items such as dividends, interest, or pensions.
You cannot double-benefit the same dollar of income. Preparers model which approach, or a combination, fits your country and income types. If foreign tax rates are low, the FEIE is often more valuable than the Foreign Tax Credit (FTC); when foreign tax rates are high, the FTC may produce a larger benefit or a carryover. Many taxpayers use the FEIE for the first portion of income and the FTC for the remainder. You cannot freely switch strategies year-to-year. Choosing the FTC over the FEIE on earned income revokes the FEIE, which is a binding long-term commitment locking you out of claiming it again for five years without IRS consent.
Housing exclusion
Eligible taxpayers may also claim a foreign housing exclusion or deduction where limits apply. The housing exclusion covers reasonable housing expenses (subject to a location-specific cap, often $30,000–$50,000+ in high-cost cities) that exceed a base amount (generally 16% of the maximum FEIE limit). The exclusion is claimed on the same Form 2555 as the FEIE and reduces the amount of income subject to U.S. tax. Self-employed individuals may claim a housing deduction instead of an exclusion. A critical caveat is that the FEIE and foreign housing deduction only reduce income tax, not self-employment tax. Self-employed expats must still pay self-employment tax unless exempted by a Totalization Agreement.
Common qualifying costs include rent, utilities, and certain insurance, but not mortgage principal, purchased furniture, or domestic help. Keep detailed records; the IRS scrutinizes housing claims, especially in expensive postings.
How to claim the FEIE
File Form 2555 with your Form 1040 (or 1040-SR). You must attach the form even if the exclusion reduces your taxable income to zero. Once chosen, the exclusion remains in effect for that year and all subsequent years unless revoked; if you revoke it, you generally cannot re-elect the exclusion for the next five tax years without IRS consent. Many expats also file Form 1116 for the FTC on non-excluded income or for carryovers.