Expat Tax Break: How the Foreign Earned Income Exclusion and Foreign Housing Exclusion/Deduction May Help Reduce Your Tax Bill

At a glance 

• The main takeaway: The Foreign Earned Income Exclusion (FEIE) and Foreign Housing Exclusion/Deduction is a tax benefit that enables mobile employees to save on taxes while working or living abroad.
• Who is eligible:
  • A U.S. citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year.
  • A U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect, and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year.
  • A U.S. citizen or a U.S. resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.
• Next steps: Reach out to Aprio’s Global Mobility Services team to see if you qualify for the FEIE.

Schedule a consultation

The full story: 

The Foreign Earned Income Exclusion (FEIE) is a tax benefit for U.S. expats living and working abroad. Employees who take formal assignments with companies for a year or more, or individuals who relocate outside of the U.S., may benefit from the FEIE. The provision can significantly reduce the employee’s tax burden as it allows you to exclude up to $126,500 (for 2024 tax year) of income earned overseas. Additionally, mobile employees can also take advantage of the foreign housing exclusion or deduction benefits if they qualify. Companies with employees working abroad should consider the eligibility, requirements, exclusion amounts, common misconceptions, and limitations on the FEIE.

Foreign housing exclusion or deduction: what’s the difference?

The foreign housing exclusion applies only to amounts considered paid for with employer-provided amounts, which includes any amounts paid to you or paid or incurred on your behalf by your employer that are taxable foreign earned income to you for the year (without regard to the foreign earned income exclusion). The housing deduction applies only to amounts paid for with self-employment earnings.

Are there any changes to the foreign housing exclusion or deduction for the tax year 2024?

There is a slight increase in the foreign housing exclusion or deduction for tax year 2024, based on inflation and cost of rent/mortgage. For 2023, it was $36,000, and for 2024, it is $37,950. According to the IRS, 30% is typically the limitation of housing expenses of the maximum foreign earned income exclusion, but the limit is subject to change depending on the location of your foreign tax residence and the number of qualifying days in the tax year. The Form 2555 provides a more detailed explanation of qualifications.

Eligibility

To qualify for the exclusion, mobile employees must be bona fide residents of a foreign country or live outside of the U.S. for 330 of 365 days. Check if you or your employees qualify under either the bona fide residence test or the physical presence test. The IRS explains the difference between the two:

• Bona fide residence test – Individuals can use this test to qualify for the foreign earned income exclusion if they are either a U.S. citizen, or a U.S. resident within the meaning of Internal Revenue Code (IRC) section 7701(b)(1)(A), which means they are a citizen or national of a country with which the United States has an income tax treaty in effect.

It is worth noting that individuals do not automatically qualify for the bona fide residence test simply by living abroad for one year.

• Physical presence test – Criteria is similar to the bona fide residence test but is based on the duration of an individual’s residence abroad. The test is met if the employee is physically present and has been living abroad for 330 out of 365 days.

There is a special extension, form 2350, that may be filed on top of a six-month extension for employees who must wait later in the year to meet qualification periods. That extension is based on the day the employee left the U.S. Aprio’s experienced global mobility tax team is available to help file such extensions.

Common misconceptions

Some employers think that if an employee works overseas for six months, they qualify for the exclusion/deduction. For mobile employees or U.S. expats, the minimum is one year or 330 out of 365 days. In addition, countries and even cities within countries, have differing amounts for the amount of foreign housing exclusion/deduction.

However, not all U.S. expats are able to take advantage of the Foreign Earned Income Exclusion. If you are a U.S. Government employee and are paid by the U.S. Government, then you will not be able to use the Foreign Earned Income Exclusion to minimize your U.S. expat taxes.

The bottom line 

Mobile employees can get the most benefit of the Foreign Earning Income Exclusion the earlier in the year they take it. If you have employees planning to work abroad in 2025, the best time to do it is in January as opposed to in April or May.

Aprio’s Global Mobility Services team helps employers maximize the tax efficiency of employees working abroad. Fluent in 60+ languages, our team of agile, approachable, and adaptable seasoned leaders understand the complexities of international tax planning. Contact us today to start planning your strategy.

Related Resources/Assets/Aprio.com articles/pages 

International Business Services for Multinational Companies

Global Mobility Consultants

Foreign Housing Exclusion or Deduction

About Form 2555, Foreign Earned Income

Figuring the foreign earned income exclusion

Foreign earned income exclusion – bona fide residence test

Foreign Earned Income Exclusion – Physical Presence Test