The foreign earned income exclusion (FEIE) lets qualifying U.S. citizens and resident aliens living abroad exclude a portion of their foreign earnings from U.S. income tax. For the 2026 tax year, the maximum is $132,900 per person. To claim it, you need a tax home in a foreign country and you must pass either the bona fide residence test or the physical presence test. Then you file Form 2555 with your return.
This guide explains each requirement in plain terms, shows which income counts, and points out where remote workers and digital nomads most often go wrong.
Key Takeaways
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The exclusion limit is $130,000 for tax year 2025 and $132,900 for tax year 2026, per person.
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You need a foreign tax home plus either the bona fide residence test or the 330-day physical presence test.
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Only earned income counts. Dividends, interest and capital gains do not.
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The exclusion does not reduce self-employment tax.
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You claim it on Form 2555, attached to a timely filed return, and the choice stays in effect until revoked.
What the Foreign Earned Income Exclusion Does
The FEIE applies to U.S. citizens and resident aliens who live abroad and meet the requirements. It lets them exclude foreign earnings up to an inflation-adjusted amount from their U.S. taxable income. The U.S. taxes citizens on worldwide income, so living abroad does not remove the filing obligation. The exclusion reduces what you owe. It does not cancel the need to file.
The limit is adjusted each year:
| Tax year | Maximum exclusion per person |
|---|---|
| 2025 | $130,000 |
| 2026 | $132,900 |
You can exclude the lesser of that cap or your actual foreign earned income for the year. Older articles still show figures such as $105,900 or $107,600. Those belong to earlier years, so always check the amount for the year you are filing.
The Three Requirements
The IRS sets out three conditions: a foreign tax home, and either the bona fide residence test or the physical presence test.
Tax home in a foreign country
Your tax home is your regular or principal place of business, employment or post of duty. If you have no such place, it is your regular place of abode. This is where many nomads run into trouble. If you hop between countries and have no fixed base, you may struggle to show that your tax home is abroad. Keep records of where you work and live, such as leases, coworking contracts and utility bills.
Bona fide residence test
This test requires you to reside in a foreign country for an uninterrupted period that includes an entire tax year, meaning January 1 to December 31. The IRS stresses that residency depends on your intention about the length and nature of your stay. A long-term lease, local registration and family ties suggest settled residence. A series of short visits does not.
This test suits people who settle in one country, for example on a residence permit or a digital nomad visa. If you are weighing destinations, our guide to the best countries for digital nomads covers the practical side.
Physical presence test
This test is purely a day count. You must be physically present in a foreign country for at least 330 full days during any 12-month period. The 12-month period can start on any day, so you can choose the window that works best for you.
The 330 days can be spread across several foreign countries. This makes the test the usual choice for people who move often. The catch is that time in the U.S. is limited to roughly 35 days in the window. Days on a flight over international waters do not count as days in a foreign country. A single long visit home can break the test, so plan trips with a calendar.
The IRS can waive the minimum time requirements if you must leave a foreign country because of war, civil unrest or similar adverse conditions.
Which test fits you?
| Bona fide residence | Physical presence | |
|---|---|---|
| Core requirement | Foreign residence covering a full calendar year | 330 full days in any 12-month period |
| Depends on | Your intent and ties to the country | Counting days |
| Best for | People who settle in one country | People who travel between countries |
| Risk | Short stays do not show residence | Too many days in the U.S. |
What Income Qualifies
The FEIE covers earned income only. According to the IRS, foreign earned income includes wages, salaries, professional fees, noncash income such as a home or car, and allowances or reimbursements for personal services performed abroad. Freelance fees and self-employment income from work done abroad qualify too.
The following do not qualify, per the IRS: U.S. government pay, pensions, social security benefits, dividends, interest, capital gains, and payments received more than one year after the tax year in which the services were performed. If you also hold digital assets, gains from them stay taxable, and a guide to U.S. crypto tax reporting can help you organize those records separately.
Where you work decides what is “foreign”
For remote workers this is the key rule. The place where you perform the services determines whether income is foreign-sourced. It is not the location of the employer or the bank account where the paycheck is deposited. A U.S. employer paying you while you work from Lisbon can still produce foreign earned income. Work you perform while physically in the U.S. does not.
Business owners
If your business relies on both personal services and capital, the rules limit what counts as earned income. Under federal regulations, it is limited to a reasonable allowance for services, which cannot exceed 30% of your share of net profits. Corporate distributions of earnings and profits do not count unless they are reasonable compensation for your work. If you run a company, talk to a CPA or enrolled agent who handles expat returns before you rely on the exclusion.
How to Claim It on Form 2555
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Confirm your tests. Decide whether you meet bona fide residence or physical presence, and gather proof of days and ties.
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Complete Form 2555. Fill in the relevant parts. The IRS requires you to attach it to your Form 1040, 1040-SR or 1040-X.
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File on time. Your first choice of the exclusion generally must be made on a timely filed return, including extensions.
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Keep the choice in mind. Once made, the exclusion stays in effect for that year and all future years unless you revoke it. Revoking has consequences for re-electing later, so think before you switch.
As a U.S. expat living abroad, you must also keep an eye on foreign account reporting and local tax rules. Our overview of digital nomad taxes for U.S. citizens covers the wider picture. If a treaty country wants proof you are a U.S. taxpayer, see our guide to the tax residency certificate.
Self-Employment Tax Still Applies
Many freelancers assume the exclusion wipes out all U.S. tax. It does not. The FEIE lowers regular income tax, but it does not reduce self-employment tax. If you are self-employed, budget for it. Some countries have totalization agreements with the U.S. that can change which country collects social contributions. Confirm this with a tax professional for your specific country.
Separating business and personal money also makes your records cleaner. Our page on international banking for digital nomads explains how to set that up.
FAQ
Can I use the foreign earned income exclusion if I work remotely for a U.S. company?
Yes, if you meet the requirements. The IRS looks at where you perform the services, not where your employer or bank is. You still need a foreign tax home and must pass one of the two tests.
What is the maximum I can exclude?
The cap is $132,900 per person for 2026 and $130,000 for 2025. You exclude the lesser of the cap or your foreign earned income.
Do I still have to file a U.S. tax return?
Yes. The exclusion is claimed on a return, using Form 2555 attached to Form 1040. It lowers your taxable income but does not remove the filing requirement.
Does the exclusion cover investment income?
No. Dividends, interest and capital gains are not foreign earned income, so they remain taxable in the normal way.