For Americans living or working abroad, one of the most common questions is: How much foreign income is tax free in the USA? As of the 2024 tax year, qualifying US expats can exclude up to $126,500 of foreign earned income under the Foreign Earned Income Exclusion (FEIE). Married couples filing jointly, if both qualify, may exclude up to $253,000.
This expat tax exemption helps reduce or eliminate US taxes on foreign income, though additional factors such as the Foreign Housing Exclusion and the Foreign Tax Credit (FTC) may apply.
Understanding how the IRS treats US taxes on foreign income is essential if you want to avoid overpaying or facing penalties. Here’s what you need to know if you’re earning income outside the US in your first year abroad or beyond.
Key Summary – Tax-Free Foreign Income for Americans Living Abroad
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For the 2024 tax year, eligible Americans living abroad can exclude up to $126,500 in foreign earned income from US tax under the Foreign Earned Income Exclusion (FEIE). Married couples who both qualify can exclude up to $253,000.
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To benefit from the FEIE, Americans living abroad must meet either the Physical Presence Test (330 days overseas in 12 months) or the Bona Fide Residence Test (proving full-year residence abroad).
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US expats can further increase their tax-free foreign income benefits through the Foreign Housing Exclusion and reduce remaining US tax using the Foreign Tax Credit (FTC).
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Even if your income is tax-free under FEIE, you still need to file a US tax return and forms like Form 2555, Form 1116, and FBAR to report foreign income and assets.
What Counts as Foreign Income?
Before we dive into how much foreign income is tax free in the US, let’s first define what the IRS considers foreign income. This can include:
- Wages or salary earned from a foreign employer
- Self-employment income from clients or businesses abroad
- Foreign pensions or retirement income
- Rental income from overseas property
- Dividends or interest from non-US investments
The key is that the income was earned outside the US, regardless of where it was paid or in which currency.
The Foreign Earned Income Exclusion (FEIE)
The main tool Americans use to exclude foreign income from US taxes is the Foreign Earned Income Exclusion, also known as FEIE. This allows qualifying expats to exclude up to a certain amount of earned income from US taxation each year.
How Much Foreign Income is Tax Free in the US Under FEIE?
As of the 2024 tax year, the maximum exclusion is $126,500 per qualifying person. This means if you qualify, you can earn up to $126,500 in foreign earned income and not pay US income tax on it.
If both spouses work abroad and meet the eligibility rules, each spouse can claim the exclusion separately, potentially excluding up to $253,000 of combined foreign income.
Keep in mind that the FEIE only applies to earned income. Passive income like dividends, interest, and rental income, does not qualify.
How to Qualify for the Foreign Earned Income Exclusion
To take advantage of the FEIE, you need to meet one of two IRS tests:
1. The Physical Presence Test
You must be physically present in a foreign country or countries for at least 330 full days in any 12-month period. This does not have to align with the calendar year.
2. The Bona Fide Residence Test
You must establish that you are a bona fide resident of a foreign country for an entire tax year. This test is more subjective and is often more difficult to prove, especially in your first year abroad.
Because of the complexity of both tests, working with an expat tax accountant is strongly recommended. They can help you determine which test you qualify for and how to document it correctly.
Foreign Housing Exclusion
In addition to the main foreign income exclusion, you may also be eligible for the foreign housing exclusion or deduction. This lets you exclude some housing costs such as rent, utilities, and certain maintenance costs from your taxable income.
This is particularly helpful for expats living in high-cost cities like London, Paris, or Tokyo. The allowable amount depends on the city you live in and your total expenses.
What Happens If You Earn More Than the Exclusion Limit?
If your foreign earned income exceeds the $126,500 limit, the excess income is still subject to US tax. However, you may be able to reduce your tax liability further by claiming the Foreign Tax Credit (FTC).
The FTC gives you a dollar-for-dollar credit for foreign taxes paid on that income. It can be used in addition to or instead of the FEIE, depending on your specific circumstances.
Discover How Much of Your Foreign Income Is Tax-Free
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Reporting Requirements for Foreign Income and Accounts
Even if you do not owe any US taxes thanks to exclusions or credits, you may still have to report your foreign income and assets to the IRS and other US agencies
Common Reporting Requirements Include:
- Form 2555 – To claim the Foreign Earned Income Exclusion
- Form 1116 – To claim the Foreign Tax Credit
- FBAR (FinCEN Form 114) – Required if you have foreign financial accounts that total over $10,000
- Form 8938 (FATCA) – Required if your foreign financial assets exceed certain thresholds
Failure to file these forms can result in steep penalties, even if no tax is due
Is Foreign Income Ever Completely Tax-Free?
If you qualify for the FEIE and the foreign housing exclusion and also claim the FTC on any remaining income, you may end up owing no US taxes on your foreign income. However, this is not automatic.
You must file your US tax return and the proper forms to claim these benefits. Skipping your tax return because you believe your income is tax free can lead to issues down the line, including IRS penalties and loss of future eligibility for exclusions and credits.
What About Foreign Self-Employment Income?
Many digital nomads and remote freelancers earn foreign income through self-employment. While you can still qualify for the Foreign Earned Income Exclusion, you may also owe self-employment tax on your income, which is about 15.3 percent.
The FEIE does not exclude self-employment tax. However, if your foreign country has a totalization agreement with the US, you may be exempt from paying into both countries’ social security systems
So how much foreign income is tax free in the US? As of 2024, up to $126,500 can be excluded if you qualify under FEIE rules, and additional relief may be available through the foreign housing exclusion and foreign tax credit. But to actually benefit from these rules, you need to file the correct forms and meet the strict criteria. Partnering with a knowledgeable expat tax accountant ensures you’re on the right track, especially in your first year abroad.
