For U.S. citizens working abroad, the Foreign Earned Income Exclusion (FEIE) is a powerful tool for reducing federal tax liability. By qualifying, you can exclude a significant portion of your foreign-earned income, making international work more financially rewarding.
How to Qualify:
Residency Test: You must establish a tax home in a foreign country and meet the residency requirements for a full tax year. This involves demonstrating strong ties to the foreign country, such as maintaining a home, securing local healthcare, and integrating into the community.
Physical Presence Test: Alternatively, you can qualify by spending at least 330 full days outside the United States within a 12-month period. The days do not have to be consecutive but must add up to meet the threshold.
For 2024, you can exclude up to $120,000 of foreign-earned income, with additional exclusions available for housing expenses. This can save you tens of thousands in federal taxes annually.
Real-Life Scenario
John, a software engineer, relocated to Germany for a three-year work assignment. By qualifying for the FEIE and claiming the foreign housing exclusion, he reduced his federal tax liability by $25,000 annually.
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