A U.S. citizen or resident alien is taxed on worldwide income, even while living abroad. However, qualifying taxpayers may exclude foreign earned income and certain foreign housing amounts.
For 2025, the foreign earned income exclusion is limited to the smaller of:
- $130,000 (per qualifying spouse if both meet requirements), or
- Foreign earned income minus foreign housing exclusion/deduction
Foreign housing amounts may also be excluded or deducted, but only up to:
- The lesser of employer‑provided housing costs or foreign earned income
- Subject to a housing expense cap, generally 30% of the FEIE limit (with higher limits for certain high‑cost cities)
All taxpayers use Form 2555 to claim these exclusions.
Requirements to Claim FEIE or Housing Exclusion
A taxpayer must meet all three:
- Tax home must be in a foreign country
- Must have foreign earned income
- Must meet either the Bona Fide Residence Test or the Physical Presence Test
Tax Home Requirement
A tax home is the location where the taxpayer regularly works. A tax home is not considered foreign during any period the taxpayer’s abode is in the United States.
“Abode” refers to the taxpayer’s home base, not temporary lodging.
Bona Fide Residence Test
A taxpayer qualifies as a bona fide resident if:
- A U.S. citizen who is a bona fide resident of a foreign country for an uninterrupted period including an entire tax year, or
- A U.S. resident alien who is a citizen of a treaty country and meets the same requirement
Key Points
- Simply living abroad for a year does not automatically create bona fide residence
- The nature of the job, length of stay, and intent matter
- Temporary trips to the U.S. do not break the period if the taxpayer returns to the foreign residence
Example (Rewritten)
A taxpayer moves to Portugal on November 1, 20X1 for an indefinite assignment. They remain there through 20X2 except for a short U.S. business trip. They meet the test on January 1, 20X3 because they completed a full tax year abroad (20X2).
If the taxpayer returned to the U.S. on December 13, 20X2, they would not meet the test because the period did not include a full tax year.
Physical Presence Test
A taxpayer meets this test by being physically present in one or more foreign countries for:
This test depends only on days abroad—not intent, residence, or job type.
Example (Rewritten)
A taxpayer works in New Zealand from January 1, 20X1 to August 31, 20X2, with two 28‑day U.S. vacations. They can meet the test by overlapping 12‑month periods:
- Jan 1, 20X1 – Dec 31, 20X1
- Sep 1, 20X1 – Aug 31, 20X2
Both periods contain 330 full days abroad.
Important Distinction
The Physical Presence Test measures time in foreign countries. The Substantial Presence Test (residency determination) measures time in the U.S.
Foreign Housing Exclusion or Deduction
Taxpayers may exclude or deduct foreign housing costs, limited to:
- Housing expenses paid with employer‑provided amounts, and
- Not more than the housing expense cap
Self‑employed individuals may claim the housing deduction instead of the exclusion.
Married Couples
If both spouses qualify:
- Each completes a separate Form 2555
- Each may exclude up to the full FEIE amount
- Housing exclusions are computed separately