Foreign Earned Income Exclusion (Form 2555)

U.S. citizens and resident aliens are taxed on their worldwide income, regardless of where they live or work. However, the Foreign Earned Income Exclusion (FEIE) under IRC Section 911 provides significant relief for Americans working abroad. For the 2024 tax year, qualifying taxpayers can exclude up to $126,500 of foreign earned income from U.S. taxation.

2024 Key Figures at a Glance

Note: Housing limits vary by location—high-cost cities have higher limits published annually in IRS notices.

Qualifying for the Exclusion

To claim the FEIE, taxpayers must meet three requirements:

1. Tax Home in a Foreign Country

Your tax home is your regular or principal place of business, employment, or post of duty. A taxpayer temporarily working abroad while maintaining their family home in the U.S. does not have a foreign tax home. The tax home must genuinely be in a foreign country.

Important: If you have no regular place of business, your tax home is your regular place of abode (where you regularly live). Simply traveling through foreign countries without establishing a tax home there does not qualify.

2. Foreign Earned Income

Only earned income from services performed in a foreign country qualifies:

Key Exception: U.S. Government employees (civilian or military) stationed abroad cannot claim the FEIE. Their income is considered earned in the U.S.

3. Bona Fide Residence Test OR Physical Presence Test

Taxpayers must satisfy one of these two tests:

Bona Fide Residence Test

• Must be a bona fide resident of a foreign country for an uninterrupted period that includes a complete tax year (January 1 - December 31)
• Intent to reside indefinitely is considered
• Brief trips to the U.S. don't disqualify you
• Only U.S. citizens and U.S. resident aliens who are citizens of a country with a tax treaty can use this test

Physical Presence Test

• Must be physically present in a foreign country (or countries) for at least 330 full days during any 12-month period
• The 12-month period can begin on any day
• Partial days in the U.S. count as U.S. days (not foreign days)
• Available to both U.S. citizens and U.S. resident aliens

Foreign Housing Exclusion and Deduction

Beyond the earned income exclusion, taxpayers may also exclude (employees) or deduct (self-employed) qualifying foreign housing amounts.

How It Works:

1. Calculate total housing expenses (rent, utilities, insurance, repairs, parking)
2. Subtract the base housing amount ($20,240 for 2024)
3. The excess is your housing exclusion/deduction, limited to $17,710 (or higher in designated high-cost locations)

What Counts as Housing Expenses:

• Rent or fair rental value of employer-provided housing
• Utilities (except telephone)
• Real and personal property insurance
• Parking fees
• Furniture rental

What Does NOT Count:

• Cost of purchasing a home
• Mortgage principal or interest
• Domestic labor (maids, gardeners)
• Pay TV subscriptions
• Home improvements

Form 2555 Overview

Form 2555 is used to claim both the foreign earned income exclusion and the foreign housing exclusion/deduction. Key sections include:

• Part I: General Information (address, employer, foreign country)
• Part II: Qualifying Tests (bona fide residence or physical presence)
• Part III-IV: Bona Fide Residence Test details
• Part V: Physical Presence Test details
• Part VI: Foreign Housing calculations
• Part VII: Foreign Earned Income Exclusion calculation

Note: Form 2555-EZ was discontinued after 2018. All taxpayers must now use the standard Form 2555.

The Stacking Rule: A Critical Trap

The stacking rule is one of the most misunderstood aspects of the FEIE. Here's how it works:

When you exclude foreign earned income, the IRS doesn't simply remove that income and tax you on what's left using the lowest brackets. Instead, the excluded income "stacks" at the bottom of your tax brackets, and your remaining taxable income is taxed at the higher brackets that would have applied to your total income.

Example: A single taxpayer earns $200,000 abroad in 2024.

• FEIE exclusion: $126,500
• Remaining taxable income: $73,500

Without stacking rule: $73,500 would be taxed starting at the 10% bracket, then 12%, then 22%.

With stacking rule: $73,500 is taxed as if it were income from $126,501 to $200,000—starting in the 22% bracket and moving into the 24% and 32% brackets.

This means the FEIE effectively shelters income that would have been taxed at the lowest rates, leaving remaining income to be taxed at higher marginal rates.

Foreign Tax Credit Alternative (Form 1116)

The Foreign Tax Credit (FTC) is an alternative to the FEIE. Key differences:

Critical Rule: No Double Dipping! You cannot claim both the FEIE and FTC on the same income. If you exclude $126,500 under the FEIE, you cannot claim a foreign tax credit for taxes paid on that $126,500. However, you can:

• Use the FEIE for earned income and the FTC for investment income
• Use the FTC for income exceeding the FEIE limit

Revocation: The 5-Year Lockout

Once you elect the FEIE, you can revoke it for any tax year by attaching a statement to your return. However, revocation triggers a 5-year lockout period during which you cannot re-elect the FEIE without IRS approval.

To request early reinstatement, you must apply for a Private Letter Ruling—a costly and time-consuming process with no guarantee of approval. The IRS requires demonstration of a substantial change in circumstances.

Strategic Consideration: Don't revoke the FEIE election casually. If you simply have no foreign earned income in a given year, don't file Form 2555—but also don't attach a formal revocation statement unless you specifically want to revoke the election.

Exclusion vs. Credit: Strategic Decision

Example: A taxpayer working in the UAE (no income tax) should use the FEIE—there's no foreign tax credit to claim anyway. A taxpayer in Germany (high tax rates) may benefit more from the FTC since German taxes often exceed U.S. tax liability.

EA Exam Tips

• Memorize the 2024 FEIE amount: $126,500
• Physical Presence Test: Remember "330 full days in 12 months"—partial days don't count
• Bona Fide Residence: Requires a FULL tax year (January 1 - December 31)
• Government employees: Never eligible for FEIE
• Stacking rule: Exclusion applies to income that would be taxed at LOWEST brackets
• 5-year lockout: Revocation has serious consequences
• Form 2555-EZ: Discontinued—only Form 2555 is used
• Watch for questions comparing FEIE to FTC—know the no-double-dip rule