Living and working outside the U.S. doesn’t automatically exempt you from U.S. taxes — but the Foreign Earned Income Exclusion (FEIE) can offer powerful relief. In 2025 (returns filed in 2026), this exclusion has increased, making it even more valuable for Americans abroad. This guide breaks down how FEIE works, who qualifies, and how to maximize it.

What Is Foreign Earned Income Exclusion (FEIE), what Is FEIE limit 2025 & Why FEIE for US Expats matters

The FEIE allows qualifying U.S. citizens or resident aliens to exclude up to $130,000 (for tax year 2025) of their foreign-earned income from U.S. federal taxation. 
Excluded income typically includes wages, salaries, freelance earnings — basically income you earn by active work abroad. Passive income (dividends, interest, capital gains, rental) does not qualify.

For many expats, FEIE can dramatically reduce or even eliminate their U.S. tax liability — especially when combined carefully with the Foreign Tax Credit (FTC).

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2025 Changes & Key Numbers to Know

Also note that annual inflation adjustments bumped up standard deductions, tax brackets, and limits across the board — making the FEIE even more beneficial.

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Who Qualifies & How to Qualify for FEIE for US expats

To claim FEIE, you generally must satisfy these conditions:

1. Tax home in a foreign country — your primary place of work must be abroad.

2. Foreign-earned income — earned via services performed outside the U.S.

3. Meet one of two tests:

   • Physical Presence Test: 330 full days out of 12 months in foreign country/countries

   • Bona Fide Residence Test: Being a resident in a foreign country for an uninterrupted period including a full tax year

You claim FEIE by filing Form 2555 along with your U.S. income tax return (Form 1040).

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How FEIE Works in Practice & Pitfalls

• The FEIE is the lesser of your foreign earned income or the FEIE limit. If you make $150,000 abroad, you can exclude $130,000, and the remaining $20,000 is taxed.

• Your self-employment income also qualifies, but you still owe self-employment taxes (Social Security / Medicare) on it — the FEIE only excludes income, not those taxes.

• The FEIE doesn’t apply to passive income, investment income, rental, pensions, Social Security, etc.

• If your foreign income is lower (due to partial year abroad), the exclusion is prorated.

• Be careful with record-keeping — you’ll need travel logs, housing expense records, and proof of time abroad.

• Revoking FEIE has consequences: once revoked, you generally can’t claim it again for five years.

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Combining FEIE & Foreign Tax Credit (FTC)

Often, the best strategy is a hybrid approach:

• Use FEIE to exclude your foreign-earned income up to the limit.

• For any foreign tax paid on the remainder (or income that doesn’t qualify for FEIE), use the Foreign Tax Credit (file Form 1116) to avoid double taxation.

• You can’t apply both FEIE and FTC to the same dollar of income — they must be applied carefully.

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Filing Timeline & Extensions for Expats

• U.S. taxpayers abroad automatically get until June 15 to file (for the previous tax year).

• But interest accrues from April 15 if taxes are owed.

• You can further request extension to October 15 via Form 4868 (extension of time to file, not to pay).

Always attach Form 2555 (or its updated instructions) correctly to your Form 1040.

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Tips to Maximize FEIE Benefits

1. Track your days carefully — choose the best 12-month window for 330 days.

2. Claim housing exclusion or deduction if your housing costs are high beyond base thresholds.

3. Run simulations: FEIE-only, FTC-only, and combo strategies.

4. Avoid revocation unless necessary — it limits your options for years.

5. Get advice — FEIE rules intersect with state residency, credits, and treaties — a pro helps avoid pitfalls.

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Conclusion

The FEIE remains one of the most powerful tools U.S. expats have to reduce or eliminate U.S. federal income tax on foreign-earned income. With the 2025 limit rising to $130,000, the benefit is stronger than ever — but proper documentation, test eligibility, and strategy pairing matter.

If you want help claiming FEIE in your 2025 return — especially coordinating with housing deductions, self-employment, or state filings — I’m here to guide you. Book a free 15-minute call and let’s optimize your U.S. tax return abroad.