Excluding Foreign Income? How do I Qualify?
The foreign earned income exclusion allows for the exclusion of up to $126,500 (in 2024, $130,000 in 2025) from US federal income taxes. It is available to Americans and Green Card holders living outside the US.
The Bona Fide Residence Test and the Physical Presence Test are two different ways U.S. citizens or resident aliens living abroad can qualify for the Foreign Earned Income Exclusion, under IRS rules. Here's a breakdown of the differences, pros and cons, and which might be better in different situations:
1. The Bona Fide Residence Test
What it is: You must be a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year (January 1 – December 31).
Requirements:
Must have established residence in the foreign country with intent to stay for a while.
Usually have closer ties to the foreign country than the U.S. (like a permanent home, family, etc.)
You must be a tax resident of that country (often paying local taxes).
✅ Benefits:
Flexibility with travel: You can travel back to the U.S. for brief or vacation reasons and still qualify.
More predictable for long-term expats or those with established homes and jobs abroad.
You don't need to track your days so precisely, unlike the physical presence test.
❌ Drawbacks:
Harder to qualify if your stay is temporary or tied to a short work assignment.
You must commit to at least a full calendar year overseas.
If your foreign country has unclear tax residency laws, you might get stuck in a gray area.
✅ Best for:
Long-term expats with permanent jobs overseas.
People married to foreign nationals or raising kids abroad.
Retirees or business owners settled abroad.
2. The Physical Presence Test
What it is: You must be physically present in a foreign country (or countries) for at least 330 full days during any 12-month period.
Requirements:
Doesn’t need to be tied to a calendar year.
You can count days you spent abroad for any reason, so long as your tax home is in a foreign country.
This test does not depend on the kind of residence you establish, your intentions about returning to the United States, or the nature and purpose of your stay abroad.
✅ Benefits:
Easier for digital nomads, contractors, or those moving frequently.
Can qualify for a partial year by choosing a 12-month window strategically.
In an expatriating or repatriating year, a U.S. person may be able to extend their use of the Foreign Earned Income Exclusion (FEIE) by utilizing the 35 or fewer allowable U.S. presence days to increase the prorated exclusion amount.
❌ Drawbacks:
You must carefully track every day—330 full 24-hour days abroad is non-negotiable.
Hard to qualify if you need to return to the U.S. for extended periods.
Missing the 330-day threshold—even by a day—can make you completely ineligible.
✅ Best for:
Freelancers, remote workers, or digital nomads moving between countries.
People on back-to-back shorter term work assignments abroad.
Anyone who can keep detailed travel records and avoid long U.S. visits.
