Foreign Earned Income Exclusion (FEIE) 2026: Complete Guide for US Expats

The Foreign Earned Income Exclusion (FEIE) is one of the most powerful tax benefits available to US citizens and green card holders living and working abroad. For the 2025 tax year (filed in 2026), qualifying expats can exclude up to $130,000 of foreign-earned income from US federal income tax — potentially eliminating thousands of dollars in tax liability.

But the FEIE comes with strict qualification rules, key limitations, and important trade-offs veRSUs the Foreign Tax Credit. This guide explains everything US expats in the UK need to know about claiming FEIE in 2026.

What Is the Foreign Earned Income Exclusion?

Under IRC Section 911, the FEIE allows qualifying US persons to exclude a defined amount of foreign-earned income from their US taxable income. The exclusion amount is indexed to inflation and increases each year. Key figures for 2026 filing (2025 tax year):

• FEIE exclusion limit (2025 tax year): $130,000
• Housing exclusion base amount (2025): $18,200 (14% of $130,000)
• Foreign housing exclusion / deduction: available on top of the income exclusion for qualifying housing costs above the base amount

Who Qualifies for the FEIE?

To claim the FEIE, you must meet all three of the following requirements:

1. Tax Home Test

Your tax home must be in a foreign country. Your tax home is generally the location of your regular or principal place of business. If you have no regular place of business, it is your regular abode. Importantly, if you maintain a permanent home in the US and simply work abroad, you may not satisfy the tax home test.

2. Bona Fide Residence Test or Physical Presence Test

You must meet either of these two tests:

Bona Fide Residence Test

You have been a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year. A bona fide resident is someone who has established a genuine, long-term residence in a foreign country — not merely a temporary or transient presence. Most US expats in the UK who live there full-time as residents satisfy this test.

Physical Presence Test

You were physically present in a foreign country or countries for at least 330 full days out of any consecutive 12-month period. Days in the US do not count. This test is purely mechanical — it counts days regardless of your residency status or intentions.

What Counts as “Foreign Earned Income”?

Not all income qualifies for the FEIE. Only foreign earned income — compensation for personal services performed in a foreign country — can be excluded. This includes:

• Wages and salaries from a foreign employer
• Self-employment income from work performed abroad
• Bonuses, commissions and tips earned abroad
• Noncash compensation (housing, car allowances) may partially qualify

Income that does NOT qualify:

• Investment income (dividends, interest, capital gains)
• Rental income (unless you are a real estate professional)
• Pension and annuity income
• Social Security benefits
• Income paid by the US government to its employees
• Amounts received as a result of work performed in the US

FEIE vs. Foreign Tax Credit: Which Should UK Expats Choose?

For most US expats living in the UK, the Foreign Tax Credit (FTC) is often more beneficial than the FEIE — and in many cases, the combination of both is optimal. Here’s why:

• UK tax rates are often equal to or higher than US rates. If you pay 40–45% UK income tax, the Foreign Tax Credit can completely offset your US tax liability on the same income — with excess credits carried forward.
• FEIE eliminates the “tax stack” benefit. When you exclude income via FEIE, your remaining US income is taxed at the rates that would have applied had the excluded income been included (the “stacking rule”), potentially pushing remaining income into higher brackets.
• FEIE and self-employment tax: The FEIE does NOT reduce US self-employment tax (Social Security/Medicare). You must separately reduce net self-employment income by the FEIE amount but still owe SE tax.
• Net Investment Income Tax (NIIT): The FEIE does not reduce your modified AGI for NIIT purposes.

The optimal strategy depends on your income level, UK tax burden, investment income, retirement contributions and future plans. Book a consultation with our US-UK tax specialists to model both scenarios for your specific situation.

Foreign Housing Exclusion and Deduction

In addition to the income exclusion, qualifying expats can claim the Foreign Housing Exclusion (for employees) or Foreign Housing Deduction (for the self-employed) for housing costs above a base amount. Qualifying expenses include:

• Rent for your main residence abroad
• Utilities (except telephone)
• Residential parking
• Household repairs and insurance

For London-based expats, the IRS sets a specific maximum housing limit for London that is substantially higher than the standard limit, reflecting the city’s high housing costs. For 2025, the daily limit for London is among the highest of all designated high-cost locations.

How to Claim the FEIE: Form 2555

The FEIE is claimed on IRS Form 2555 (or Form 2555-EZ for simpler cases, though this form has been discontinued — all claimants now use Form 2555). Key steps:

• Complete Part I: General information and test qualification
• Complete Part II or III: Bona Fide Residence Test or Physical Presence Test
• Complete Part IV: Foreign Earned Income
• Complete Part V, VI, VII: Housing amounts (if applicable)
• Attach to Form 1040 and file with your US return

Once you make the FEIE election, it remains in effect for all subsequent years unless you revoke it. Revoking the FEIE election after making it is a serious decision — if you revoke, you cannot re-elect for the next 5 years without IRS consent.

FEIE and IRS Streamlined Filing Procedures

Many US expats who were unaware of their US filing obligations can use the IRS Streamlined Filing Compliance Procedures to catch up on missed returns — including missed FEIE elections. If you have been non-compliant, this programme allows you to file 3 years of back returns and 6 years of FBARs with reduced penalties. Our complete guide to IRS Streamlined Filing explains the process in detail.

Common FEIE Mistakes to Avoid

• Filing late and losing the FEIE election: You must make the FEIE election on a timely filed return (including extensions). Late elections require IRS Revenue Procedure compliance.
• Counting partial days in the US: For the Physical Presence Test, only full 24-hour days abroad count. Travel days require careful analysis.
• Ignoring state taxes: FEIE only applies to federal tax. Several US states do not recognise the FEIE, meaning you may owe state tax even if your federal liability is zero.
• Forgetting FBAR and FATCA: Claiming FEIE does not eliminate your FBAR filing requirement or your FATCA/Form 8938 obligation if you hold foreign financial accounts.
• Incorrect housing exclusion calculations: London’s high-cost location adjustment is frequently miscalculated, leaving money on the table.

Frequently Asked Questions About the FEIE

Can I claim both the FEIE and the Foreign Tax Credit?

Yes, but with important limitations. You can claim the Foreign Tax Credit on income that is not excluded by the FEIE. However, you cannot claim the FTC on income you have already excluded — no double-dipping. Many UK expats use a combination, applying FEIE to income that exceeds UK tax coverage and FTC to income where UK taxes are sufficient to offset US liability.

Does the FEIE apply to UK pension income?

No. UK pension income is not foreign earned income — it is a deferred compensation or retirement income. The FEIE applies only to active earned income for personal services performed. UK pension income may, however, have preferential treatment under the US-UK Tax Treaty.

What happens if I return to the US mid-year?

Your FEIE is prorated. If you qualify for only part of the year, you can only exclude income earned during the qualifying period. Careful planning around year-end moves is essential to maximise the exclusion.

Does FEIE affect my ability to contribute to an IRA?

Yes — significantly. IRA contributions require US taxable compensation. If all of your earned income is excluded via FEIE, you have no taxable compensation base and therefore cannot contribute to a Traditional or Roth IRA for that year. This is a major long-term wealth-building consideration when choosing between FEIE and FTC.

Get Expert US-UK Tax Advice on FEIE

The FEIE is powerful — but optimising it alongside the Foreign Tax Credit, housing exclusion, IRA contributions, UK pension planning, and FBAR/FATCA compliance requires expertise in both US and UK tax law. Our advisors specialise exclusively in US-UK cross-border taxation.

Related guides:

• Foreign Tax Credit (Form 1116) 2026 Guide
• FBAR Filing 2026: Who Must File FinCEN Form 114
• FATCA Reporting 2026: Form 8938 Guide
• US-UK Tax Treaty 2026 Guide
• IRS Streamlined Filing 2026: Complete Guide
• US Tax Services

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