What is FEIE (Foreign Earned Income Exclusion)?

The Foreign Earned Income Exclusion (FEIE) is the single most important tax benefit for American digital nomads and expats. It allows you to earn over six figures tax-free from the US — legally.

How It Works

If you're a US citizen or resident alien living and working abroad, you can exclude up to $126,500 (2024, adjusted annually for inflation) of earned income from US federal income tax by filing Form 2555.

Qualifying Tests (You Must Pass One)

Bona Fide Residence Test

• Be a bona fide resident of a foreign country for an entire tax year (January 1 - December 31)
• Requires genuine ties: local lease, utility bills, social connections
• A mere mailing address doesn't count

Physical Presence Test

• Be physically present in a foreign country for at least 330 full days during any 12-month period
• Days don't have to be consecutive
• Partial days in the US count as US days
• Days in transit over international waters don't count for either side

What It Covers (and Doesn't)

Excluded by FEIE:

• Salary, wages, self-employment income
• Professional fees, consulting income
• Business income earned while physically abroad

NOT Excluded by FEIE:

• Investment income (dividends, interest, capital gains)
• Rental income
• Pension or annuity payments
• Employer-provided meals and lodging (separate exclusion)
• US-sourced income earned while in the US

Important Gotchas

• Self-employment tax still applies: FEIE only excludes income from income tax, not the 15.3% self-employment tax (Social Security + Medicare)
• Stacking rule: The FEIE exclusion pushes your remaining income into higher tax brackets (it's excluded from the bottom, not the top)
• State taxes: Some US states (California, New Mexico, Virginia) still tax worldwide income regardless of FEIE
• Once elected, hard to revoke: If you revoke FEIE election, you can't re-elect it for 5 years without IRS approval
• 330 days is strict: Missing by even one day disqualifies you for that 12-month period under the Physical Presence Test

Housing Exclusion Bonus

In addition to FEIE, you may claim the Foreign Housing Exclusion for housing costs exceeding a base amount (16% of FEIE limit). This can exclude an additional $15,000-$37,000+ depending on the city (high-cost cities like Hong Kong and Tokyo have higher limits).

Who Should Use FEIE vs. Foreign Tax Credit

• FEIE: Best for nomads in low/zero-tax countries (UAE, Thailand, Panama, Georgia)
• Foreign Tax Credit (FTC): Best for expats in high-tax countries (UK, Germany, France) where foreign taxes paid exceed US tax liability
• You can use both in the same year on different types of income, but not on the same income