Working abroad: the Foreign Earned Income Exclusion

The United States is unusual: it taxes its citizens and green-card holders on their worldwide income no matter where they live. Move to Lisbon or Singapore and keep earning, and you still file a US tax return every year. That sounds punishing, but two big provisions — the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit — exist precisely to prevent double taxation. Used correctly, most Americans abroad owe little or no US tax; used carelessly, they owe on both sides.

What the FEIE does

The Foreign Earned Income Exclusion lets qualifying Americans exclude a large chunk of foreign-earned income from US taxation each year — the cap is indexed for inflation, so check the current-year figure (it's well into six figures). There's also a companion Foreign Housing Exclusion for certain housing costs. Crucially, the FEIE applies only to EARNED income — wages, salary, self-employment from work performed abroad. It does not shelter investment income, dividends, capital gains, pensions, or US-source income.

The two tests to qualify

• Physical Presence Test: physically present in a foreign country for at least 330 full days during any 12-month period — a day-counting test that's mechanical but unforgiving (travel days and US visits reduce the count).
• Bona Fide Residence Test: you're a genuine resident of a foreign country for an uninterrupted period that includes a full tax year — a facts-and-circumstances test about where your life is truly based.
• You must also have a 'tax home' in a foreign country and, of course, foreign EARNED income to exclude.

The traps that catch expats

• You still must FILE, every year, even if you owe nothing after the exclusion or credit — non-filing is the most common and costly mistake.
• The FEIE excludes income tax, not self-employment tax: a self-employed American abroad may still owe US SE tax (15.3%) unless a 'totalization agreement' between the US and that country applies.
• Foreign bank and financial accounts trigger separate reporting — the FBAR (FinCEN 114) and possibly Form 8938 — with severe penalties for non-filing, entirely independent of whether you owe tax.
• Revoking the FEIE once elected locks you out of re-electing it for five years without IRS permission — switching strategies casually can backfire.
• State taxes may still follow you if you never properly broke residency with a high-tax home state.

The bottom line

US citizens abroad file US returns forever, but the Foreign Earned Income Exclusion (for earned income, subject to the physical-presence or bona-fide-residence test) and the Foreign Tax Credit exist to stop double taxation — the exclusion shines in low-tax countries, the credit in high-tax ones. The killers aren't the tax itself but the compliance edges: still filing every year, separate foreign-account reports like the FBAR, and self-employment tax the FEIE doesn't touch. Given how the rules interlock, working abroad is the clearest case in this whole category for hiring a cross-border tax specialist.