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The Best Tax Exclusion for Travelers and Expats

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Photo: WineDonuts (Shutterstock)

If you live overseas or travel frequently, make sure you aren’t giving more money than you have to to ol’ Uncle Sam back in the United States. The Foreign Earned Income Exclusion (FEIE) allows a U.S. taxpayer to exclude up to $112,000 in income (the 2022 figure—it’s annually adjusted for inflation) from taxation. Sounds too good to be true? It’s not. But you will have to jump through some hoops to qualify.

What is the FEIE?

Income excluded from taxes through the FEIE must be “foreign earned”—which doesn’t mean that it needs to be income paid from a non-U.S. client or company, but rather, it needs to be earned while you are physically outside of the U.S. But don’t get excited yet—you can’t go on vacation for two weeks and claim incoming payments during that time through the FEIE.

How to qualify for the FEIE

You also need to qualify for the FEIE through either the physical presence test or the bona fide residence test.

  • Physical presence test: In order to qualify for the FEIE under the physical presence test, you need to be physically present in a foreign country for at least 330 full days during any 365 day period.
  • Bona fide residence test: In order to qualify for the FEIE under the bona fide residence test, you need to be a resident of a foreign country or countries for an entire tax year.

Those who successfully qualify can exclude up to $112,000 in income from federal taxes in 2022, which could result in a tax savings of up to $17,608. Any income above the FEIE limit is taxed at the marginal tax bracket for that income level.

How to claim the FEIE

If you qualify for or plan to qualify for the FEIE, it’s a good idea to hire an accountant who specializes in taxes for digital nomads and expats. NomadTax offers individual tax returns starting at $350 and also offers consulting services for nomads and expats who have unique tax considerations.

If you want to do it yourself, you’ll have to include Form 2555 with your tax return. You’ll need to gather the following information for Form 2555:

  • Which test you use to qualify (physical presence or bona fide residence)
  • Dates of travel throughout the year (international and U.S.)
  • Prior year From 2555 (if applicable)
  • Foreign income documentation

Bottom line

Whether you’ve been a digital nomad for a while or are just now starting to explore post-pandemic remote work options, the FEIE is a great way to benefit financially from a location-independent lifestyle. Just make sure you do it right, and count your days carefully if qualifying under the physical presence test—you don’t want to end up owing taxes plus interest down the road because you accidentally spent one day too long in the U.S.

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