The foreign earned income exclusion, chosen with eyes open.
Form 2555 lets qualifying Americans abroad exclude a six-figure amount of earned income from US tax — the cap is inflation-adjusted each year — plus a housing amount on top. It is the best-known expat break, and the most habitually misused.
Figures relate to tax year 2025 (US) · 2025-26 (UK)
Qualifying is a test of facts
You qualify through one of two tests: bona fide residence — a genuine, settled residence abroad for a full tax year — or physical presence, 330 full days outside the US in any twelve-month window. Day counting is unforgiving; travel-heavy years fail by accident.
Only earned income qualifies: salary and self-employment profit. Dividends, interest, rents and pensions are never excludable — a distinction that surprises more people than it should.
- Bona fide residence or 330-day physical presence
- Inflation-adjusted exclusion cap, claimed per person
- Housing exclusion above a base amount
- Earned income only — investment income never qualifies
The five-year lock behind the choice
The exclusion is elective, and leaving it carries a tail: once revoked, it's unavailable for five years without IRS consent. Software defaults that grab the FEIE in year one can cost real money in years two through six.
In the UK, foreign tax credits frequently beat the exclusion outright. We run both before the election is made — while it's still a free choice.
Primary sources
Official guidance from the IRS, FinCEN and GOV.UK. Thresholds and rates on those pages are updated annually — check the current tax year before relying on a figure.
Questions, Answered.
What clients ask about foreign earned income exclusion
Does the exclusion mean I don't need to file?
No — the opposite. The exclusion only exists on a filed return with Form 2555 attached. Skip the filing and the income is simply taxable, with the exclusion arguable only through late-filing procedures.
Can I combine the FEIE with foreign tax credits?
Yes, but not on the same income — credits attaching to excluded income are scaled away. The combination can work for high earners above the cap; done carelessly it strands credits. It's exactly the kind of interaction worth modelling.
Does the FEIE reduce self-employment tax?
No. The exclusion removes income tax, not self-employment tax — that's the totalization agreement's job. A UK-resident freelancer paying National Insurance can generally be exempted from US self-employment tax with a coverage certificate, which matters more than the FEIE does.
How much is the foreign earned income exclusion?
The cap is inflation-adjusted every year and currently sits in the low six figures per person — married couples who both work abroad each get their own. The housing exclusion can add more on top for higher rents.
Can self-employed people claim the FEIE?
Yes, against income tax — but it doesn't touch self-employment tax, which is governed by the US-UK totalization agreement instead. A UK-based freelancer usually needs both: the income-tax answer and a National Insurance coverage certificate.
Next Step.
Tell us what you hold — the scope and a fixed fee follow in writing.