Most Americans are overpaying the IRS by $22,000 a year… and don’t even know it.

That money could buy top-shelf healthcare in Portugal or a full year of early retirement in Vietnam.

A secret yet legal hack called the FEIE exempts from taxes your first $130,000 of income per person, per year.

But if you miss even one small detail, you lose that sweet sweet, tax-free gift.

So let’s walk through exactly how the FEIE works and how you can use it to build a freer, wealthier life abroad.

What is the FEIE – And Why Should You Care?

Let’s start with the basics. What is the FEIE and why should you care?

The Foreign Earned Income Exclusion (FEIE) lets you exclude up to $130,000 in foreign-earned income from your U.S. federal tax return. If both you and your spouse qualify, that’s over $260,000 of annual income, tax-free. I’ll talk about what “foreign-earned income” means in just a second.

And yes, this is federal tax we’re talking about. The big one.

For many Americans living abroad, this exemption can reduce your tax bill to almost zero, especially if you live in a zero- or low-state income tax state.

That’s money you can put toward travel, a better healthcare plan, a beachfront property in Costa Rica – or just not working as long. So what would you do with an extra $20,000 this year? Drop a comment. I’d love to hear.

Now, here’s what the FEIE is not:

• It doesn’t apply to investment income, retirement income, or pensions. It doesn’t mean you avoid all taxes.
• And it’s not automatic – you have to qualify and file.

But once you do, it’s a major key to keeping more of what you earn, which is the ultimate goal. Right?

So, How Do You Qualify for the FEIE?

There are three boxes you need to check to legally exclude this income:

1. You must earn income from working abroad. This means you’re:
   1. Self-employed and living overseas
   2. Working for a foreign employer
   3. Or running a U.S. company remotely – as long as the work is done abroad

Note: This is for earned income, not retirement distributions or investment gains.

1. This is where you work and live most of the time.
   1. If you’re working remotely from Portugal or Thailand – and not maintaining a base in the U.S. – that becomes your tax home.
2. You must pass one of the following two IRS tests. This is where most people get tripped up.

1. The Physical Presence Test

You must be physically present outside the U.S. for 330 full days in any 365-day period.

So you can’t just bounce back and forth every couple weeks. Fewer than 35 days in the U.S. a year means commitment.

But here’s the beauty: You don’t have to be in just one country. You can slow travel, nomad your way across continents, or live in multiple countries. But if you do spend your time in just one country abroad, this next test is for you.

2. The Bona Fide Residence Test

This one’s generally trickier. You have to:

• Establish residency in a foreign country
• Show you’ve been there for a full calendar year
• And prove your ties to that place – a lease, visa, bills, even joining the local gym helps

This is ideal for people who want to live abroad in a single place – think early retirees, slowmads, or digital nomads who’ve picked their base.

So the Big Question – How Much Can You Actually Save?

So, in addition to the Foreign Earned Income Exclusion, add in these other benefits of living abroad:

• The Foreign Housing Exclusion (which lets you deduct part of your rent or housing costs overseas – in expensive cities, that can be another $50,000 or more) (I’ll do a separate video on this soon)
• Double tax treaties with many countries
• Tax residency in a country that does not tax foreign income (like Panama, Paraguay, or Malaysia)

If you earn $125,000 a year as an employee while living abroad, have residence in a zero state income tax U.S. state, and qualify for the FEIE, you could owe the IRS … nothing. 

Suddenly, you’re earning more, keeping more, and living better than you ever could’ve back home. This is the thrill of living outside America’s borders. 

If you want a few more reasons to move abroad, I wrote a 162-page E-book about why, how, and where to move abroad. Download it for free at the link in the description.

Okay let’s summarize this quickly. To qualify for FEIE, you must:

1. Earn income while abroad
2. Have a tax base outside of the United States
3. Pass either the physical presence test or the bonafide residence test

Don’t forget that U.S. citizens are subject to citizenship-based taxation. Which means that even if you live abroad 365 days a year forever, you still have to file a U.S. tax return annually.

Sound like a headache? Well… That’s why we always recommend working with an international tax pro before making any mistakes.

So Who Is the FEIE Perfect For?

• Remote employees
• Freelancers and consultants
• Business owners living abroad
• Part-time contractors with location freedom

With the right setup, retirees can take advantage of FEIE in this last category.

Just note: if you’re self-employed, you’ll still owe Social Security and Medicare. (I’m in that boat too – I get it.)

If you’re making above the exclusion cap, you can still benefit. You’ll pay tax only on what’s left over after the exemption. And with the right structure, you may still owe very little.

Mistakes That Can Cost You Thousands

Okay, here are the top FEIE mistakes I’ve seen U.S. expats make:

• Spending too many days in the U.S. if qualifying for the physical presence test
• Maintaining residency in high-tax states like California or New York that don’t recognize the FEIE
• Forgetting to file altogether (yes, you still have to file)
• Using the FEIE when the Foreign Tax Credit would’ve saved more (we’ll talk more about this in a second)

This is a really sad story – An American from Tennessee (zero state income tax!) came to us last week after he lost $25,000 in tax savings because he returned to the U.S. for his friend’s birthday party – and didn’t account for his total days spent in the country.

You need to track your travel days like your retirement depends on it – because it very well may.

This is a question we get often – Should You Use the FEIE or the Foreign Tax Credit (which is a credit for all the tax you pay in a foreign country)?

You cannot use both for the same income. It’s either-or. So here’s a quick rule of thumb for those who become tax residents in another country abroad: 

• If you live in a low- or no-tax country overseas, use the FEIE.
• If you live, god forbid, in a high-tax country (like France or Germany) abroad, the Foreign Tax Credit is probably better.

Most people spend their best years working for money they’ll never get to fully enjoy. This is where working with experts like the Freedom Files pays off. We help you structure your life and income so you keep more of what you rightfully earned and live better.

If you’re earning income abroad, the FEIE could save you tens of thousands of dollars – every single year. That’s money you keep. Compounding. Years you gain back. And freedom you feel now, not someday.

Want help figuring it out?

Book a Freedom Consult and let’s map out your lower- or even zero-tax life overseas. Or take advantage of our free 162-page “Retire Earlier and Live Better Abroad” e-book on the website. It’s the roadmap to a healthier, wealthier, longer life abroad and really should not be free.

If you’re ready to stop overpaying and start living — hit subscribe. You’re just getting started.