2025 Foreign Earned Income Exclusion | International Tax Lawyer & Attorney
The Foreign Earned Income Exclusion (“FEIE”) is a valuable tax strategy available to US tax residents who live and work abroad. It allows US citizens to exclude a certain amount of foreign earned income from their US taxable income. The IRS adjusts the precise amount every year. In this article, I will discuss the 2025 Foreign Earned Income Exclusion.
2025 Foreign Earned Income Exclusion: Background Information
FEIE was born out of the fact that the US tax system is unique and taxes its citizens and even more broadly its residents on their worldwide income irrespective of where they reside. In many countries, such taxpayers are subject to local foreign income taxes on the same income. In order to alleviate the potential burden of double taxation, the US Congress enacted Section 911 of the Internal Revenue Code. This section codified FEIE.
Section 911 allows qualifying individuals to exclude a specified amount of foreign earned income from US taxable income. The IRS adjusts this amount every single year. A taxpayer must use Form 2555 to claim FEIE.
2025 Foreign Earned Income Exclusion: Eligibility
In order to claim FEIE, a taxpayer must meet certain requirements set forth in IRC §911. I will provide only a brief outline of these requirements in this article. They are discussed in more detail in other articles on our website.
First of all, FEIE applies only to foreign earned income, not passive income and not US-source income.
Second, the taxpayer must maintain his tax home in a foreign country. “Tax Home” is a term of art that has its specific meaning.
Third, you must pass either the physical presence test or the bona fide residence test.
2025 Foreign Earned Income Exclusion: Additional Considerations
While FEIE brings a huge benefit of income exclusion, it often is not the best option for US taxpayers who reside overseas. Let’s focus on the four most important considerations.
First, FEIE limits and in some cases completely eliminates the ability to take Foreign Tax Credit (“FTC”). If you use FEIE, you cannot use the FTC to reduce US taxes on income already excluded under the FEIE. The problem arises when FTC is actually higher than the US tax. In this case, you may be losing a very important tax strategy to reduce your US taxes not only in the current year, but also in the future.
Second, FEIE may result in ineligibility to take other tax credits normally available to a taxpayer.
Third, despite the income tax exclusion, your tax bracket will still be the same as if you were taxed on the whole amount (i.e. as if you had not claimed the foreign earned income exclusion).
Finally, while not a tax consideration, usage of FEIE by US permanent residents may result in the abandonment of their green card. In other words, FEIE may present a huge risk to the immigration goals of a taxpayer.
2025 Foreign Earned Income Exclusion: Adjustment for 2025
On October 22, 2024, the IRS announced that the foreign earned income exclusion amount under §911(b)(2)(D)(i) is going to be $130,000 for the tax year 2025. This is up from $126,500 in the tax year 2024.
Contact Sherayzen Law Office for Professional Help with Foreign Earned Income Exclusion
The Foreign Earned Income Exclusion is a vital tax tool for US taxpayers working abroad, but it must be used cautiously and after careful consideration of all circumstances. Hence, if you are a US taxpayer who lives abroad or you are planning to accept a job overseas, you need to secure the help of Sherayzen Law Office, a premier firm in US international tax compliance. We can help you navigate the complexities of FEIE, determine your eligibility for it and build a tax strategy to help you maximize the advantages offered by the Internal Revenue Code.
Contact Us Today to Schedule Your Confidential Consultation!