For the 2025 tax year, Americans living abroad can exclude up to $130,000 of foreign-earned income from US tax under the Foreign Earned Income Exclusion (FEIE).
Married couples where both spouses qualify can exclude up to $260,000. You must still file a US tax return to claim the benefit.
The US taxes its citizens on worldwide income, but it also provides tools to prevent double taxation for those living abroad.
The Foreign Earned Income Exclusion is the most powerful of these, but it comes with strict eligibility rules, income limits, and filing requirements that catch many expats off guard.
This article covers how the exclusion works, what else you can stack on top of it, and what happens if your income exceeds the limit.
Key Summary – Tax-Free Foreign Income for Americans Living Abroad
-
For the 2025 tax year, eligible Americans living abroad can exclude up to $130,000 in foreign earned income from US tax under the Foreign Earned Income Exclusion (FEIE). Married couples who both qualify can exclude up to $260,000.
-
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).
-
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).
-
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.
Tax-Free Foreign Income for US Expats
| Topic | Key Rule |
| 2025 FEIE limit | Up to $130,000 per qualifying person |
| Married couples (both qualify) | Up to $260,000 combined |
| Eligibility tests | Physical Presence Test (330 days) or Bona Fide Residence Test |
| Income types that qualify | Earned income only — wages and self-employment; not dividends, rental income, or capital gains |
| Additional relief | Foreign Housing Exclusion + Foreign Tax Credit (Form 1116) for remaining income |
| Self-employment tax | FEIE does not eliminate self-employment tax (~15.3%); totalization agreements may help |
| Filing still required | Yes — Form 1040 + Form 2555 must be filed even if you owe $0 |
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.
The exclusion adjusts annually for inflation. Below is a five-year history:
| Tax Year | FEIE Exclusion Limit |
| 2021 | $108,700 |
| 2022 | $112,000 |
| 2023 | $120,000 |
| 2024 | $126,500 |
| 2025 | $130,000 |
How Much Foreign Income is Tax Free in the US Under FEIE?
As of the 2025 tax year, the maximum exclusion is $130,000 per qualifying person. This means if you qualify, you can earn up to $130,000 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 $260,000 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 $130,000 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.
Foreign Self-Employment Income
Digital nomads, remote freelancers, and self-employed expats can still qualify for the FEIE on their net self-employment income.
However, there is an important caveat: the FEIE reduces your income tax liability but does not eliminate self-employment tax, which runs approximately 15.3%.
If you live in a country that has a totalization agreement with the US — such as the UK, Germany, France, Australia, or most of Western Europe — you may be exempt from paying into both countries’ social security systems simultaneously, which can significantly reduce your overall burden.
Discover How Much of Your Foreign Income Is Tax-Free
Get expert help understanding FEIE, housing exclusions, and foreign tax credits to maximize your savings while living abroad.
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
Can Foreign Income Be Completely Tax-Free?
Yes — in many cases. If your earned income falls within the FEIE limit, your housing costs are covered by the Foreign Housing Exclusion, and any remaining income is offset by the Foreign Tax Credit, you may end up owing zero US income tax on your foreign earnings.
This outcome is common for expats living in moderate- to high-tax countries whose total income does not exceed $130,000.
However, it is not automatic — it requires filing the correct forms and meeting all eligibility criteria. Expats who assume they owe nothing and skip filing often face penalties down the line.
