Foreign Earned Income Exclusion (FEIE): how it works for Americans in the UK

The Foreign Earned Income Exclusion under Internal Revenue Code section 911 lets qualifying US citizens and green card holders exclude a set amount of earned income from US federal income tax. For the 2025 tax year the limit is US$130,000, indexed each year. It is valuable, but it has strict conditions and some long-term consequences, and in the UK it is often not the best choice.

The three requirements

1. Tax home in a foreign country

Your tax home is your regular or principal place of business, or, if you have none, your regular place of abode. Keeping a permanent home in the US while working abroad can mean you fail this test.

2. Bona fide residence test or physical presence test

Bona fide residence: you have been a genuine resident of a foreign country for an uninterrupted period that includes a full US tax year. Most Americans settled in the UK meet this test. It looks at intention and circumstances rather than counting days.

Physical presence: you were physically present in a foreign country or countries for at least 330 full days in any period of 12 consecutive months. A full day is a 24-hour period starting at midnight; days of travel to or from the US generally do not count as days abroad. The period can start on any day, which matters in the year you move. Use the physical presence checker to count.

3. Foreign earned income

Only compensation for personal services performed in a foreign country qualifies: wages and salary, self-employment income, bonuses and commissions, and some non-cash benefits. Investment income, rental income, pensions, Social Security and income for work physically performed in the US do not qualify.

The 2025 figures

• Exclusion limit: US$130,000
• Housing exclusion base amount: US$20,800 (16% of the limit, computed daily)
• Housing costs above the base amount may be excluded (employees) or deducted (self-employed) up to a location-specific cap. London has a higher cap than the standard limit; the figure is published each year in the Form 2555 instructions.

If you qualify for only part of the year, the limit is pro-rated by the number of qualifying days.

FEIE or Foreign Tax Credit?

For most people living and working in the UK, the Foreign Tax Credit produces an equal or better result, because UK income tax is usually at least as high as the US tax on the same income. The points that decide it:

• Stacking rule. Excluded income is still used to work out the rate on your remaining income, so other income is taxed as if the excluded amount were there.
• Carry-forward. Excess foreign tax credits carry back one year and forward ten. The exclusion wastes credit for UK tax paid on excluded income.
• Child Tax Credit. Taking the exclusion generally removes the refundable portion of the Child Tax Credit for that year.
• IRA contributions. Contributions need taxable compensation; excluding all earned income can leave you unable to contribute.
• Self-employment tax. The exclusion does not reduce US self-employment tax. The US–UK Totalization Agreement does, with a certificate of coverage.
• Revocation lock-out. Once elected, the exclusion continues until revoked. If you revoke it, you cannot elect again for five tax years without IRS consent.

The estimator compares the two on your figures. We model both before filing and set out the choice in writing.

Claiming it: Form 2555

The exclusion is claimed on Form 2555 attached to Form 1040 (Form 2555-EZ no longer exists). It must be elected on a timely filed return, including extensions. Late elections are possible in limited circumstances under IRS procedures and need care.

Common mistakes

• Counting travel days as days abroad under the physical presence test.
• Assuming the exclusion removes FBAR or Form 8938 obligations. It does not.
• Forgetting state tax: several states do not follow the federal exclusion.
• Electing the exclusion by default in a high-tax country, then discovering the Child Tax Credit and IRA consequences.
• Miscalculating the London housing cap.

Frequently asked questions

Can I use the exclusion and the Foreign Tax Credit together?

Yes, on different income. You cannot claim a credit for UK tax paid on income you have excluded, but you can credit UK tax on income above the exclusion limit and on income that does not qualify for the exclusion.

Does the exclusion apply to my UK pension?

No. Pension income is not earned income. The US–UK treaty governs how UK pensions are taxed in the US.

I moved back to the US in the year. What happens?

The exclusion is pro-rated to the qualifying days, and your physical presence period can straddle two US tax years. The year of a move usually needs both returns planned together.