How to Qualify and Maximize Your Foreign Earned Income Exclusion

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Understanding the Foreign Earned Income Exclusion

When you live and work abroad, the IRS still expects you to pay taxes in the U.S. Unless you exclude your foreign income using the Foreign Earned Income Exclusion (FEIE) or another IRS provision, you’ll pay U.S. taxes on your worldwide income—even if you paid taxes on it already in another country.

The FEIE allows you to exclude up to $126,500 of your foreign income plus up to $37,950 in qualifying housing expenses on your U.S. tax return in 2024. Here’s how the FEIE works and how to claim it.

What Is the Foreign Earned Income Exclusion?

The FEIE allows you to exclude income you’ve earned and paid taxes on in a foreign country from your U.S. taxable income. Excluding this income on your U.S. federal tax return lets you avoid paying taxes on it twice—once in the country where you earned it and again in the U.S.

The FEIE applies only to earned income such as wages, salaries, and self-employment income. Passive income, including interest, dividends, capital gains, and rental income, don’t qualify for this tax benefit.

Who Qualifies for the Foreign Earned Income Exclusion?

To qualify for the FEIE, you must be a U.S. citizen or resident alien living abroad. According to the IRS, your tax home must be in a foreign country and you must meet one of the following requirements:

• You are a U.S. citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year.
• You are a U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect, and you are a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year.
• You are a U.S. citizen or resident alien who has been physically present in a foreign country or countries for at least 330 full days during any 12 consecutive months.

What Is the Maximum Foreign Earned Income Exclusion?

For the 2024 tax year, the maximum exclusion for the FEIE is $126,500. If you’re married and both you and your spouse are eligible to claim the FEIE, you can each claim it for a combined exclusion of $253,000. The FEIE maximum adjusts each year for inflation.

In addition to the FEIE, you may be eligible to claim the foreign housing exclusion. The foreign housing exclusion has the same residency requirements as the FEIE. You can use it to exclude eligible housing expenses that exceed 16% of the maximum FEIE. In 2024, that baseline is $20,240 (or 16% of $126,500).

Foreign Earned Income Exclusion vs. Foreign Tax Credit

The Foreign Tax Credit (FTC) is an IRS provision that allows U.S. citizens and resident aliens to offset their U.S. tax liability by the amount of foreign income tax they’ve paid. Both the FEIE and the FTC can save you money on federal income taxes, but they operate in different ways. The FEIE excludes foreign-earned income from your taxable income, similar to a tax deduction. The FTC lowers your tax bill dollar-for-dollar by the amount of eligible foreign tax you’ve paid.

Here’s a simplified example: Suppose you earned $50,000 working in another country and paid $10,000 in foreign income taxes. Claiming the FEIE would allow you to reduce your U.S. taxable income by excluding your $50,000 of foreign income. Alternatively, you could claim the FTC and reduce your tax bill by $10,000, the amount of tax you paid in the country where you live. In either case, you’re avoiding double taxation by either excluding your foreign income or claiming a tax credit.

How to Claim the Foreign Earned Income Exclusion

To claim the FEIE, you must file a U.S. tax return (Form 1040), and complete and file Form 2555 with your federal tax return. If you are not claiming the foreign housing exclusion or deduction, file Form 2555-EZ.

Be prepared to provide information about your employer, foreign-earned income, residence, and dates of travel to and from the U.S. If you’re claiming the foreign housing exclusion (or foreign housing deduction if you’re self-employed), you’ll also need information on your documented expenses for housing, utilities, parking rental, and other qualified expenses.

The Bottom Line

If you’re an expat living and working outside the U.S., avoiding double taxation is key. The FEIE and the foreign housing exclusion give foreign-based citizens and resident aliens a workaround, though understanding these provisions isn’t always easy. Your best options may vary depending on where you live, how long you’ve lived there, the foreign tax rate you paid, your eligibility for foreign tax credits, and more. Working with a trusted tax advisor may save you confusion and help you implement the best option for your individual situation.

For any mortgage service needs, call O1ne Mortgage at 213-732-3074. We are here to assist you with the best mortgage solutions tailored to your needs.

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