The Foreign Earned Income Exclusion under IRC §911 allows a US citizen or resident alien working abroad to exclude up to $132,900 of foreign earned income for tax year 2026 (up from $130,000 in 2025), plus a housing cost amount that varies by location. The exclusion is elective on Form 2555 and requires meeting either the bona fide residence test or the 330-day physical presence test. It eliminates regular income tax on excluded amounts but does NOT eliminate self-employment tax or the NCTI/Subpart F inclusions on foreign corporation income. Section 911(f) stacking means excluded income still pushes the taxpayer's remaining income into higher marginal brackets. The decision between §911 FEIE and §901 foreign tax credit can swing tax owed by tens of thousands of dollars and depends heavily on the foreign jurisdiction's effective rate.
Maximum earned income exclusion: $132,900 (per qualified individual; $265,800 for married couple where both qualify).
Base housing amount (16% of FEIE): $21,264. Housing costs UP TO this base are NOT deductible.
General housing maximum (30% of FEIE): $39,870. Housing costs above the base, up to this maximum, ARE eligible for exclusion.
Location-specific housing maximum: Higher in designated high-cost cities per IRS Notice (Notice 2026-XX, April 2026). Examples: Singapore $86,700, Hong Kong, London, Geneva, Tokyo, Sydney all have specific elevated limits. Krakow added new for 2026 at $54,900.
Election: Made on Form 2555. Form 2555-EZ was retired after tax year 2018.
To exclude foreign earned income under §911(d)(1), the taxpayer must be a "qualified individual" who (a) has a tax home in a foreign country AND (b) meets either the bona fide residence test or the physical presence test.
| Bona Fide Residence Test Requirements |
|---|
| Taxpayer is a US citizen (or US resident alien who is a citizen of a country with a US tax treaty) |
| Establishes residence in a foreign country for an uninterrupted period that includes an entire taxable year (January 1 through December 31) |
| "Bona fide" - subjective intent to remain indefinitely; not a temporary assignment with definite end |
| Tax home in the foreign country (place of regular employment or business) |
| Trips back to US permitted but must not interrupt bona fide residence |
| Cannot have made a statement to foreign authorities claiming non-resident status to avoid foreign tax |
| Physical Presence Test Requirements |
|---|
| Physically present in foreign country (or countries) for at least 330 FULL days during any 12 consecutive month period |
| "Full day" - 24-hour period beginning at midnight |
| Day of departure FROM US and day of arrival IN US count as US days, not foreign |
| Time spent in international waters or international airspace generally not "in a foreign country" |
| The 12-month period need not be a calendar year - can start any day of any year |
| If the 12-month period straddles two tax years, the exclusion is prorated between them |
Facts: Client moves to Singapore on March 1, 2025. Physically present in Singapore 330+ full days during March 1, 2025 through February 28, 2026. Returns to US permanently on March 1, 2026.
Qualifying period: March 1, 2025 through February 28, 2026. Total = 365 days of which 330+ are full foreign days.
2025 exclusion: Maximum × (foreign days in 2025 / 365 days). If 306 of 330+ full foreign days were in 2025: $130,000 × (306/365) = $108,986 maximum exclusion for 2025.
2026 exclusion: $132,900 × (59/365) for the January-February 2026 portion = $21,491 maximum exclusion for 2026.
Practitioner approach: Two choices of 12-month period give two different qualifying setups. Always evaluate both and pick the one maximizing exclusion across years.
| Type of Income | Foreign Earned Income? |
|---|---|
| Salary, wages, or fees for services performed in a foreign country | YES |
| Self-employment net earnings from foreign services | YES (excludable for income tax but NOT for SE tax) |
| Bonuses, commissions for foreign services | YES |
| Value of meals, lodging, or other in-kind compensation for foreign services | YES (unless excluded under another provision like §119) |
| Pension and annuity payments | NO - retirement income is not earned income |
| Social Security benefits | NO |
| Investment income (interest, dividends, capital gains) | NO - investment is not earned income |
| Rental income from foreign real estate | NO - rental is not earned income (use Schedule E) |
| Royalties from intellectual property | NO unless deemed compensation for services |
| Income earned while physically in the US (even if paid by foreign employer) | NO - source determined by where services performed |
| NCTI / Subpart F inclusions from a foreign corporation owned by the taxpayer | NO - these are deemed dividends, not earned income |
Section 911(f) modifies the original FEIE: the exclusion no longer drops the taxpayer into lower brackets. Instead, taxable income is computed as if the excluded amount had been received, then tax is computed on the smaller remaining base using the brackets as if pushed up by the excluded amount.
| Pre-2006 Treatment (Stacking NOT Applied) | Post-2006 Treatment (Stacking) |
|---|---|
| Excluded income removed; remaining income taxed in lowest available brackets | Remaining income taxed at the marginal rates that would have applied if excluded income had been received |
| Single filer with $200K total ($130K excluded, $70K remaining) - $70K taxed entirely in 12%-22% bands | Same scenario - $70K stacked above $130K base, so taxed at 24%-32% marginal brackets |
Facts: Single Client, 2026. Total taxable income before §911 exclusion: $250,000. Excluded under §911: $132,900. Net non-excluded income: $117,100.
Stacking computation: Step 1 - tentative tax on $250,000 using 2026 single brackets = $54,879. Step 2 - tentative tax on $132,900 (the excluded amount) using same brackets = $24,495. Step 3 - actual tax = $54,879 - $24,495 = $30,384.
Without stacking (counterfactual): Tax on $117,100 directly using brackets would be $19,853. The stacking rule cost roughly $10,531 in additional tax.
Effective rate on the $117,100 of non-excluded income: $30,384 / $117,100 = 26%. Without stacking, would have been 17%.
For US persons abroad with both foreign earned income and foreign tax paid, choosing §911 FEIE versus §901 foreign tax credit (Form 1116) requires modeling both alternatives. The §911 election once revoked cannot be reclaimed without IRS consent for 6 years.
| Factor | FEIE Advantage | FTC Advantage |
|---|---|---|
| Foreign country has very low or zero income tax | Strong advantage - eliminates US tax without offset | No advantage - little FTC available |
| Foreign country has high income tax (above US effective rate) | Wastes foreign tax already paid | FTC fully offsets US tax; potential FTC carryforward 10 years |
| Total earned income at or below $132,900 | Full exclusion - simple | Equivalent result with foreign tax credit if foreign rate matches US |
| Total earned income substantially above $132,900 | Excludes only first $132,900; remaining income still taxed (stacked) | FTC limits computed on full income; potentially better outcome |
| Has US-source income or investment income | FEIE does nothing for these; FTC may help via separate categories | FTC may credit foreign tax against US tax on those items if classified to that basket |
| Foreign tax credit carryforward already exists | Wastes FTC because §911 exclusion uses up the foreign income | Generates more FTC; absorbs prior-year carryforward |
| Plans to return to US permanently soon | Cleanly ends with departure | FTC carryforward survives departure for 10 years under §904(c) |
| Eligible for Roth IRA contribution | FEIE-excluded income does NOT count as compensation for IRA contribution; choosing FEIE may eliminate Roth eligibility | Income remains "earned" for IRA contribution purposes |
Section 911 excludes foreign earned income from regular INCOME tax. It does NOT exclude self-employment net earnings from SE tax under §1401. A self-employed US citizen abroad still owes 15.3% SE tax (12.4% Social Security up to wage base, 2.9% Medicare) on net SE earnings - regardless of FEIE.
| Mitigation | Mechanism |
|---|---|
| Totalization Agreement coverage | 26 countries have totalization agreements with US. If the Client is covered by the foreign country's social security system under the agreement, US SE tax may not apply. |
| Certificate of coverage | Obtained from the foreign country's social security agency. Documents totalization treatment - attach to Form 1040 or keep on file. |
| Foreign corporation structure | Operating through a foreign corporation can shift income away from SE classification - but creates NCTI/Subpart F exposure and §6038 reporting |
| Family employment via employee vs contractor | Different SE treatment depending on classification |
In addition to the basic earned income exclusion, qualified individuals may exclude (or deduct, if self-employed) certain housing costs above a base amount. For 2026:
| Housing Computation | 2026 Amount |
|---|---|
| Base housing amount (16% of FEIE) | $21,264 |
| Default maximum housing amount (30% of FEIE) | $39,870 |
| Eligible housing exclusion (employer-provided housing) | (Actual housing costs - $21,264 base), capped at $39,870 or location-specific limit |
| Self-employed: housing DEDUCTION (not exclusion) | Same computation; claimed via Form 2555 then Form 1040 |
| Location-specific limits (high-cost cities) | Per IRS Notice 2026-XX. Examples: Singapore $86,700, Krakow $54,900 (new for 2026), London $73,400, Vancouver $73,400, Grand Cayman $64,193 |
| Includable | NOT Includable |
|---|---|
| Rent | Cost of buying property |
| Reasonable utilities (other than telephone) | Domestic labor (cleaning services, gardeners) |
| Real and personal property insurance | Mortgage principal payments |
| Non-deductible occupancy taxes | Improvements / additions to property |
| Furniture rental | Purchase of furniture or appliances |
| Residential parking | Television service |
| Required residential repairs (small) | Pay-TV, internet streaming services beyond basic |
| Reasonable refundable security deposits if forfeited | Deductible interest and taxes (these go on Schedule A as itemized) |
| Part | Content |
|---|---|
| Part I - General Information | Name, address, tax home, qualifying period |
| Part II - Bona Fide Residence Test | Date arrived; nature of foreign residency; family present; trips back to US |
| Part III - Physical Presence Test | 12-month qualifying period; days in/out by country |
| Part IV - All Filers | Type of foreign earned income; whether employer-provided housing |
| Part V - All Filers | Foreign earned income reported on Form 1040 - the amount being claimed for exclusion |
| Part VI - Housing Exclusion or Deduction | Actual qualified expenses; computation of housing exclusion / deduction |
| Part VII - Earned Income Exclusion | $132,900 (2026) prorated for qualifying days; combined with housing |
| Part VIII - Housing Deduction (self-employed only) | Self-employed housing amount carried to Form 1040 Schedule 1 |
| Part IX - Optional Election | Election to revoke; election validity |
| Election Mechanic | Detail |
|---|---|
| How to elect | Attach Form 2555 to a timely-filed Form 1040. Election is effective for that year and all subsequent years until revoked |
| Late election | Permitted if (a) return is filed within 1 year of original due date OR (b) under Rev. Proc. 2003-19 with reasonable cause |
| Revocation | Attach a written statement to a timely-filed return for the year of revocation |
| The 6-year lock-out | Once revoked, the taxpayer cannot re-elect §911 for 6 years unless IRS consents (Rev. Proc. 81-69 or successor) |
| Why this matters | A taxpayer who revokes to use FTC in a high-tax year, then moves to a low-tax year, may face 5 years of being unable to use FEIE - cost can be significant |
The tax home test is separate from and additional to the residency test. Tax home is the regular place of business or post of duty under §162(a) and Rev. Rul. 93-86. A traveling consultant with no regular foreign post fails the tax home test even if physically present abroad 330+ days. Practitioner inquiry: "Where do you regularly perform your services and where is your employer?"
Days of departure from the US and days of arrival in the US count as US days for the physical presence test, not foreign days. A weekend trip with departure Friday and return Sunday produces zero foreign days, not one or two. Plan trips with intermediate stopovers (Europe-to-US via Iceland with overnight in Reykjavik) carefully - overnight in Iceland may add a foreign day if the full 24-hour period is in Iceland.
§911 does NOT apply to deemed dividend inclusions from a foreign corporation. A US person operating through a CFC must still recognize NCTI and Subpart F income at full US rates (subject to §962 election and §960 FTC). FEIE only excludes salary the CFC pays to the owner-employee. Practitioners must separate W-2-equivalent compensation from the CFC's profit inclusions.
FEIE-excluded self-employment income remains subject to 15.3% SE tax. Annual SE tax owed by a self-employed expat with $130,000 foreign net SE earnings: roughly $18,400 (computed on 92.35% of net SE earnings, capped by Social Security wage base for 12.4% portion). Practitioners should set quarterly estimates based on this figure - many expat Clients are surprised by the SE bill.
The post-2006 §911(f) stacking rule means a $132,900 exclusion does not drop the Client into the lowest brackets. Tax software handles this automatically but Clients often expect the historical "drop-down" effect. Set expectations early: stacking can produce a 24-32% marginal rate on the unexcluded portion of income for higher-income expats.
Once §911 is revoked, the taxpayer is locked out of re-electing for 6 years absent IRS consent. A Client who revokes in 2026 because they had a high-tax foreign assignment, then moves to a lower-tax country in 2027, cannot re-elect §911 until 2032. Practitioner action: model revocation impact across the realistic time horizon of likely future moves before revoking.
Excluded earned income is NOT considered "compensation" for IRA contribution purposes. A Client who excludes $132,900 of earned income and has no other earnings cannot contribute to a Roth or Traditional IRA. Solution: claim only enough §911 exclusion to leave $7,000 (2026 IRA contribution limit) of foreign earned income TAXABLE so the Client preserves IRA eligibility. The decision involves marginal rate analysis - sometimes worth paying small income tax to keep retirement contributions open.
Bona fide residence does NOT require permanent residence. It requires an "uninterrupted period that includes an entire taxable year" coupled with bona fide intent to remain indefinitely. A two-year assignment qualifies if the Client genuinely intended to stay through the assignment period - return tickets and US-based family do not necessarily defeat the test. Sochurek v. Commissioner, 300 F.2d 34 (7th Cir. 1962) and successor cases establish the facts-and-circumstances framework.
Primary authority: IRC §911 (citizens or residents of the United States living abroad), §911(a) (exclusion from gross income), §911(b)(1) (foreign earned income exclusion - $132,900 indexed for 2026), §911(b)(2) (inflation adjustment), §911(c) (housing cost amount), §911(c)(1) (housing cost amount = housing expenses minus base housing amount), §911(c)(1)(B) (base = 16% of FEIE = $21,264 for 2026), §911(c)(2) (limit on housing expenses = 30% of FEIE = $39,870 default; higher for designated locations), §911(d)(1) (qualified individual - bona fide residence or physical presence), §911(d)(1)(A) (bona fide residence test), §911(d)(1)(B) (physical presence test - 330 days in 12 consecutive months), §911(d)(3) (tax home - place of regular employment), §911(d)(7) (US abode rule), §911(e) (election - revocation requires 6-year lockout unless IRS consents), §911(f) (stacking rule - excluded amount considered for bracket determination), §912 (cost of living allowances for federal employees), §913 (deduction for foreign housing for self-employed). Treasury Regulations §1.911-1 through §1.911-8. IRS Form 2555 and Instructions (Form 2555-EZ retired after 2018). IRS Notice 2026-XX (location-specific housing limits for 2026), Notice 2024-31 / Notice 2025-26 (prior year housing limits). Rev. Proc. 2003-19 (late election procedures). Rev. Proc. 81-69 (IRS consent for re-election after revocation). Rev. Rul. 93-86 (tax home determination). Sochurek v. Commissioner, 300 F.2d 34 (7th Cir. 1962) (bona fide residence facts and circumstances). IRC §1401(b) (Medicare SE tax - not excluded by §911). Totalization agreements - 26 countries (full list at SSA.gov).