For many US citizens living abroad, the Foreign Earned Income Exclusion (FEIE) offers a valuable opportunity to reduce their US taxable income. However, understanding how to fully benefit from this exclusion can be complex, especially with the stacking rule. This rule is a key component in how your income is taxed, and it can significantly impact your tax savings.
What is the Foreign Earned Income Exclusion (FEIE)?
The Foreign Earned Income Exclusion (FEIE) allows US citizens living abroad to exclude a certain amount of their foreign-earned income from US taxation. As of 2025, the maximum exclusion for the 2024 tax year is $126,500 per year, but this figure is adjusted annually for inflation.
In addition to the FEIE, expatriates may also benefit from the Foreign Housing Exclusion, which excludes certain housing expenses from taxable income, provided those expenses meet the IRS guidelines.
While the FEIE can be a great tool for reducing your taxable income, it is essential to understand the “stacking rule” in order to fully optimize the exclusion and avoid unnecessary taxes.
What is the Stacking Rule?
The “stacking rule” refers to the way that the IRS calculates your taxable income when you use the FEIE. It applies specifically to the portion of your income that exceeds the FEIE limit. The basic idea behind the stacking rule is that the excluded income is still counted when determining your tax rate for the remaining taxable income.
In other words, even though the FEIE excludes a portion of your foreign-earned income from being taxed, the excluded amount will still be treated as if it were included when calculating the rate for the remaining income that is taxable. This can result in a higher tax rate being applied to your remaining income, since it effectively “stacks” the excluded income on top of the income that is taxable.
How the Stacking Rule Works
The stacking rule ensures that any taxable income after applying the FEIE is taxed at the correct marginal tax rate as if the excluded income were still included. This prevents taxpayers from artificially lowering their tax bracket by using the FEIE. Here’s how the rule works in practice:
- Step 1: Calculate total worldwide income, which includes all foreign and US-sourced income before applying any exclusions or deductions.
- Step 2: Apply the FEIE to exclude up to $126,500 (for 2024) of foreign-earned income from taxation.
- Step 3: Determine the tax bracket based on the total income before applying the FEIE. Even though the excluded income is not taxed, it still pushes the remaining taxable income into a higher tax bracket.
- Step 4: Calculate the tax owed on the remaining taxable income using the tax rate determined in Step 3. The result is that the taxpayer does not benefit from artificially placing their taxable income in a lower bracket.
This rule prevents high-income earners from unfairly benefiting by artificially lowering their tax bracket and ensures tax fairness across different income levels.
2024 US Tax Brackets
To better understand how this works, here are the 2024 federal tax brackets:
| Tax Rate | Single Filers | Married Filing Jointly | Head of Household |
| 10% | Up to $11,600 | Up to $23,200 | Up to $16,550 |
| 12% | $11,601 to $47,150 | $23,201 to $94,300 | $16,551 to $63,100 |
| 22% | $47,151 to $100,525 | $94,301 to $201,050 | $63,101 to $100,500 |
| 24% | $100,526 to $191,950 | $201,051 to $383,900 | $100,501 to $191,950 |
| 32% | $191,951 to $243,725 | $383,901 to $487,450 | $191,951 to $243,700 |
| 35% | $243,726 to $609,350 | $487,451 to $731,200 | $243,701 to $609,350 |
| 37% | Over $609,350 | Over $731,200 | Over $609,350 |
Example Calculation with the Stacking Rule
Single Filer with Foreign Earned and US Income
- Foreign earned income: $150,000
- US income (rental/business/etc.): $30,000
- FEIE limit for 2024: $126,500
Step 1: Total Income Before FEIE
Total worldwide income = $150,000 + $30,000 = $180,000
Step 2: Apply FEIE
Excluded income = $126,500
Remaining taxable income before deductions: $180,000 – $126,500 = $53,500
Step 3: Determine Tax Rate
Although the taxable income is $53,500, tax is calculated as if the taxpayer’s income is $180,000.
- Using the 2024 tax brackets, $180,000 falls in the 24% bracket.
- The remaining taxable income $53,500 is taxed at this higher rate instead of a lower bracket.
Step 4: Compute Tax Owed
Without stacking, $53,500 would be taxed at 12% and 22% brackets. With stacking, it is taxed at 22% and 24% instead, leading to a higher tax bill.
Strategies to Optimize FEIE and Reduce Taxes
- Use the Foreign Tax Credit (FTC): If you pay taxes to a foreign country, you may be able to offset US taxes on non-excluded income using the FTC. This can be especially useful if your foreign tax rate is higher than US tax rates.
- Income Splitting: If married, consider splitting foreign income between spouses to maximize the FEIE. Since each spouse can claim the exclusion separately, this can effectively double the exclusion amount if both earn foreign income.
- Contribute to a Retirement Plan: Some retirement contributions, such as to a US IRA or a qualifying foreign pension, can reduce taxable income. Ensure the plan is recognized for US tax purposes.
- Lower US Income: If possible, defer or restructure US-sourced income to stay in lower tax brackets. For example, shifting investment income to tax-advantaged accounts can help.
- Utilize Housing Exclusion or Deduction: In addition to FEIE, expats may qualify for the Foreign Housing Exclusion/Deduction, which allows for additional tax savings on housing expenses incurred while living abroad.
- Plan for Self-Employment Taxes: If self-employed, consider structuring your business in a way that minimizes US self-employment tax exposure, such as through an offshore corporation or proper classification of income.
- Monitor Currency Exchange Rates: Since foreign income is reported in US dollars, strategically timing income recognition when exchange rates are favorable may help reduce taxable income.
- Work with a Tax Professional: Given the complexity of the stacking rule, FEIE, and tax treaties, working with a tax professional experienced in US expat taxes can help you implement the best strategies for your situation.
The stacking rule prevents expats from artificially lowering their tax brackets by using FEIE. Understanding how it applies to your taxable income can help you better plan your tax strategy. By combining the FEIE, Foreign Tax Credit, and other deductions, you can optimize your tax savings and reduce your US tax liability while living abroad.
