If you’re still handing 30-50% of your income to the government and wondering if moving overseas is worth the hassle, this little-known gift from the IRS might change everything.

This powerful rule can legally wipe out US$20,000 or more in taxes each year. And the only requirement is simple and something you might already be doing.

It’s called the Foreign Earned Income Exclusion 2025 (FEIE). And this year, it allows you to exclude up to US$130,000 in foreign-earned income from your U.S. federal taxes – per person. 

Married and filing jointly? That’s US$260,000, tax-free.

If you understand how to qualify for the FEIE and how much it saves you, it could mean the difference between working another decade or retiring tomorrow. 

Here’s your ultimate guide to the current version of the Foreign Earned Income Exclusion 2025:

What is the Foreign Earned Income Exclusion 2025 (FEIE)?

The FEIE lets US citizens living abroad exclude a significant portion of their earned income from federal taxes. For 2025, that number is US$130,000 per person. In 2024, it was US$126,500. Thus, each year, the Foreign Earned Income Exclusion indexes to inflation and increases.

Let’s say you earn US$125,000 working remotely in Costa Rica or Portugal. If you qualify under the FEIE, that income could be completely tax-free at the federal level.

It doesn’t matter whether you’re self-employed, working for a foreign company, or running a US business remotely – if the income is earned while you’re physically outside the United States, it may qualify.

But here’s what most people don’t realize: You don’t get this exclusion just for hopping on a plane. One slip-up can cost you tens of thousands of dollars. 

Ugh, that’d be a horrible surprise.

Who Qualifies for the FEIE in 2025?

To claim the FEIE, you need to meet three core requirements: 1) you must earn income from working abroad, 2) your tax home must be in a foreign country, and 3) you must pass either the Physical Presence Test or the Bona Fide Residence Test.

Let’s break each of these rules down:

1. Earn Foreign Income

The Foreign Earned Income Exclusion only applies to earned income, which means money you actively work for. Think consulting, freelancing, employment wages, or income from running your own business. It unfortunately does not apply to dividends, retirement distributions, or passive investments.

For example, if you’re a remote software engineer working from Thailand and getting paid by a US company, you’re eligible – as long as you’re doing the work outside the US.

But if you live in Argentina on your monthly pension payments, that income is sadly still taxable in the United States.

2. Make a Foreign Country or Countries Your Tax Home

To qualify, your primary place of business and residence needs to be outside of the country. If you still have strong ties to America – like a house, voter registration, or dependent children attending school – you may still qualify but it becomes far less of a certainty.

Your foreign tax home is where you live and work the majority of the year. For many digital nomads or early retirees, this could be anywhere from Lisbon to Medellín to Kuala Lumpur. You don’t necessarily need a single tax home and tax residence abroad; you simply need to show the IRS that you are not dependent on the United States for your income.

3. Pass One of Two IRS Tests

Don’t worry – These tests are relatively simple. 

Ideal for slow travelers or nomads, the “Physical Presence Test” is more flexible. You must be physically present outside the US for at least 330 full days in any 12-month period. That gives you fewer than 35 days – total, not “at a time” – back home per 365 days.

You don’t need to be in just one country. You can bounce around Europe, Southeast Asia, or South America, as long as you remain outside the US for the requisite number of days. 

Just be sure to track it religiously. Miss the mark by a day? Even by a few hours? You lose the US$130,000 exclusion.

On the other hand, the “Bona Fide Residence Test” requires you to establish tax residency in a single foreign country and stay there for an entire calendar year. You’ll need to show proof of residency – like a visa, long-term lease, local tax payments, utility bills, or gym memberships.

This is a better fit for early retirees or families planting roots in a single jurisdiction abroad. Allowing for travel in and out of the US as long as you maintain your tax residency abroad, the Bona Fide Residence Test also gives you more day-to-day stability than the travel-heavy lifestyle needed for the Physical Presence Test.

How Much Can You Actually Save?

All right, you know how to qualify for the Foreign Earned Income Exclusion 2025. Now, let’s run some numbers.

Suppose you’re a solo freelancer living in Panama and earning US$125,000 annually. If you qualify for the FEIE and live in a US state with zero state income tax, your total state and federal tax bills could drop to zero.

Now add the Foreign Housing Exclusion – which allows you to deduct reasonable housing expenses abroad. In high-cost cities like Buenos Aires or Paris, that could mean another US$15,000-US$30,000 off your taxable income. (We’ll cover this in a separate article.)

Seriously.

Combine the Foreign Earned Income Exclusion with establishing tax residency in a country that doesn’t tax foreign-sourced income – like Georgia, Malaysia, Panama, Paraguay, or the UAE – and your global tax liability can shrink to almost nothing.

That’s over US$20,000 a year saved. Invested at 8%, that’s more than US$289,731 in 10 years. And that’s before we consider the increase in FEIE exemptions every year.

US$89,731 for living a better, healthier, more budget-friendly life outside the country? I’ll take that.

What the FEIE Doesn’t Cover

Now, of course, it’s important to know the limits of the Foreign Earned Income Exclusion 2025. The FEIE only applies to earned income – money you make by working. It does not cover:

• Dividends, capital gains, or rental income
• Retirement distributions like 401(k)s or IRAs
• Social Security payments

Additionally, those who are self-employed still owe Self-Employment Tax, which covers Social Security and Medicare. But even then, your total tax liability could be a fraction of what it was stateside.

Also, the FEIE is not automatic. You have to claim the exclusion by filing Form 2555 with your tax return. Don’t just assume your accountant knows you’re eligible for such a large tax-break. Shockingly, some tax professionals still can’t fathom why US citizens love living overseas.

If you need help with your US taxes while living abroad or want to map out your future, book a Freedom Consult with our global relocation and tax planning experts. We’ll help you keep more of what’s yours while living abroad.

FEIE vs. Foreign Tax Credit: Which Should You Use?

The Foreign Tax Credit is another powerful tool for reducing your U.S. tax bill while living abroad, especially if you’re paying significant taxes in your new country. 

Instead of excluding income, it gives you a dollar-for-dollar credit for foreign taxes paid. While you can use both the Foreign Earned Income Exclusion and the Foreign Tax Credit in the same year, you cannot, however, use both on the same income.

If you live in a high-tax country like Germany, France, or Greece, the Foreign Tax Credit might be better for your individual tax situation than the Foreign Earned Income Exclusion. 

But if you live in a low-tax or no-tax country like Malaysia, Paraguay, or Dubai, the FEIE is almost always the better option.

Common Mistakes That Kill the Exclusion

Too many Americans lose access to the FEIE by accident. Some of the most common errors include:

• Spending too many days in the US — Qualifying for the FEIE via the Physical Presence Test and you accidentally spend 36 days instead of 35 in America? Disqualified.
• Keeping ties to high-tax US states — If you still have residency in California or New York, they may not even recognize the FEIE as a valid tax credit.
• Failing to file Form 2555 — You must file the correct form every year you want to claim the FEIE.
• Choosing the wrong benefit — Sometimes the Foreign Tax Credit saves more, especially if you pay high taxes abroad.

Who the FEIE Is Best For

This exclusion works exceptionally well for:

• Remote workers with US or foreign employers
• Freelancers and consultants billing US clients
• Business owners living abroad
• Semi-retired professionals doing part-time remote work

Even if your income exceeds the exclusion cap, only the excess is taxable. And with the right legal structure – like a foreign corporation or an offshore trust – you can reduce even more of your tax burden. Remember, the Freedom Files can help you optimize your global tax situation.

Don’t Just Work More: Keep More

If you’re earning income abroad, the Foreign Earned Income Exclusion 2025 could save you tens of thousands of dollars – this year and every year that follows.

That’s money that compounds. What would you do with an extra US$20,000 per year? That buys you better healthcare. More years of freedom. And for many, the Foreign Earned Income Exclusion is the fuel to retire abroad now, not 10 years from now.

Want to know if you qualify? Book a Freedom Consult with our global relocation and tax planning experts. We’ll help you keep more of what’s yours while living abroad.And while you’re at it, grab your free 162-page “Retire Earlier & Live Better Abroad” e-book to learn why moving abroad can save 5-10 years of your life and where to retire to maximize your happiness, health, finances, and freedom.