What is the FEIE, and how can it benefit expats?
The American taxation system stands out from most other countries, as it taxes citizens and Green Card holders on a global rather than just territorial basis. Therefore, American citizens and Green Card holders living anywhere in the world are required to file taxes with the US Internal Revenue Service (IRS) annually, regardless of their current country of residence. Even Americans or Green Card holders who have been living abroad for decades and barely ever travel back to the US must do so. The only way to stop filing these taxes is by renouncing one's American citizenship or residency.
Since 2017, corporate taxation laws have changed, and US corporations no longer need to pay corporate income tax on foreign earnings. However, this has not changed for the personal income tax that concerns most expats.
Fortunately, individual American expats also benefit from certain concessions. They can deduct a substantial portion of their foreign earnings from their US taxes through the Foreign Earned Income Exclusion (FEIE) provision. The amount that can be deducted is adjusted annually for inflation. Last year, it was $120,000; this year, it has increased to $126,000. It is likely to rise by a few thousand dollars more in 2025.
For Americans or Green Card holders living in countries with a lower cost of living than the US, the FEIE offers a significant benefit. The average US salary of around US$60,000 is more than sufficient to live in a country like Indonesia or even Portugal, where US$25,000 per year is enough to live a comfortable life. If an American expat is earning above US$25,000 in these destinations, he/she/they can save a lot of money that will not be taxed by the IRS thanks to the FEIE provision.
The form that these expats need to fill for FEIE when filing their IRS taxes (in March or April of every year) is Form 2555.
What are the criteria for qualifying for FEIE?
Of course, there are specific criteria to qualify for this $126,000 tax deduction. Here they are:
- Be an American citizen or a permanent resident, i.e., a Green Card holder.
- Be a bona fide resident of a foreign country or fulfill the physical presence requirement, which entails spending 330 full days in that country within the last 12 months. The expat can take short trips back to the US, but he/she/they cannot be constantly flying in-and-out between that country and the US.
- Earn active income from employment or self-employment. Passive income such as pensions, rent, interest, dividends, and investments does not qualify for the FEIE. Active income does not need to come from a full-time job – for example, money earned from babysitting or tutoring part-time abroad counts can be deducted from your taxes. Consultancy fees also qualify.
- Income earned abroad from service in the US Armed Forces, American diplomatic missions, or any other US government agency is not eligible. Fees for services provided in international airspace or waters (i.e., outside the borders of any specific foreign country) are also ineligible.
- If you are a salaried worker abroad, allowances other than your salary cannot count toward that US$126,000. You cannot include your housing, travel, or meal allowance—only the salary and bonuses you are paid for your work.
If you are still unsure whether you qualify, use the IRS Interactive Tax Assistant tool to find out more.
Deducting the cost of housing abroad
If you qualify for the FEIE, you likely also qualify for the Foreign Housing Exclusion or Deduction. This means that you will be able to deduct part of your housing expenses abroad from your IRS taxes. You can do that on the same Form 2555 used for FEIE; no extra paperwork is needed!
The exact amount you can deduct for housing depends on a calculation involving your actual housing cost. It cannot be higher than 30% of the current FEIE cap, which would be US$37,800 in 2024. Your housing expenses must also be higher than the 16% base housing amount of the FEIE, which is US$20,240 in 2024, to qualify for a deduction. If you spend less than US$20,240 on rent abroad, you cannot deduct that from your taxes.
