What is the Foreign Earned Income Exclusion?

Okay, let’s break down the Foreign Earned Income Exclusion (FEIE). As a US CPA specializing in freelance/1099 taxes, I get this question a lot!

**What it is:** The FEIE lets US citizens & Resident Aliens working *abroad* exclude a certain amount of their foreign-earned income from US federal income taxes. Essentially, you don't pay US tax on that income, even though you're an American.

**Key Requirements (all must be met):**

* **Bona Fide Residence Test *OR* Physical Presence Test:**

* **Residence Test:** You are a bona fide resident of a foreign country for the entire tax year. This means you intend to live there indefinitely.

* **Physical Presence Test:** You are physically present in a foreign country for at least 330 full days during any 12-month period within the tax year. (Doesn’t have to be consecutive days).

* **Earned Income:** Income must be earned from a *personal service*. This includes wages, salaries, commissions, professional fees, and other taxable compensation. Investment income doesn’t qualify.

* **US Citizen or Resident Alien:** You must be a US citizen or a Resident Alien for the entire tax year.

**Exclusion Amount (2024):**

* **$126,500**. If you earned over this amount, you only exclude $126,500. Earnings above that *are* taxable.

**Example:**

Let's say you’re a freelance graphic designer living in Berlin, Germany. In 2024, you earned $150,000 from US clients while living in Germany and meet *either* the bona fide residence or physical presence test. You can exclude $126,500 from your US taxable income. That leaves $23,500 subject to US income tax (plus self-employment tax, if applicable).

**How to Claim:**

* **Form 2555:** *Foreign Earned Income Exclusion* – file this with your Form 1040.

* **Proper Documentation:** Keep records proving your foreign residency/physical presence (e.g., visa stamps, rental agreements, utility bills).

⚠️ Disclaimer: This is for educational purposes only. Always consult a licensed CPA for personalized advice.