At Schiff Sovereign, we often discuss how lowering or eliminating your taxes is one of the best investments you can make in your life.
Nearly every investment you make carries risk. It could go up, it could go down, it could go to zero.
But an investment in cutting your taxes is essentially risk free. You take steps which follow the law– and those steps are guaranteed to save you money.
There are very few investments you can ever make which offer a substantial, guaranteed, and risk-free result. But taking legal steps to cut your taxes does exactly this.
And one of the best ways Americans can save on taxes is by moving abroad.
Although the US is the only major country that taxes its citizens on their worldwide income no matter where they live, the Foreign Earned Income Exclusion can still make moving abroad very lucrative for Americans.
By moving overseas, US citizens can take advantage of the Foreign Earned Income Exclusion (FEIE), a special provision in the US tax code that allows US citizens living abroad to exclude up to $126,500 per year from US taxation (adjusted for inflation annually).
It’s a strategy often used by the overseas staff of big US companies, but any American citizen can use it to save tens of thousands of dollars in taxes per year.
And if you qualify for the Housing Deduction or Exclusion (covered further), you can save even more.
Saving on your taxes is one of the best investments you could ever make. Tens of thousands of dollars or more, compounded over years and decades, can result in millions more saved for retirement.
To claim the benefit, you need to file Form 2555 along with your 1040 tax return.
Now, you may ask yourself: Do US citizens have to pay taxes on foreign income? Or – how do I qualify for the Foreign Earned Income Exclusion?
In this article, we’ll answer your questions about the Foreign Earned Income Exclusion and Housing Exclusion/Deduction. You’ll also learn exactly how to qualify, what income qualifies, and more.
Learn even MORE no-brainer strategies
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You’ll learn all of these and many other useful strategies such as how to obtain a valuable second passport (potentially even for free) inside this free guide.
The Foreign Earned Income Exclusion is a special provision in the US tax code that allows US citizens living abroad to exclude a certain amount of earned income from their US taxes.
For the 2024 tax year (which is filed in 2025), the amount is $126,500. Plus, you can save tens of thousands of dollars more if you also take advantage of the Foreign Housing Exclusion or Deduction.
But why does this opportunity exist?
Since 1913, the United States has had a mandatory income tax to pay every year.
Traditionally, however, income tax around the world is only levied on residents of a country – not citizens.
However, the US is one of the very few countries in the world that taxes its citizens regardless of where they live.
The citizenship-based tax law dates back to 1861 when the United States struggled to raise funds for its civil war.
At the time, the people in power argued that Americans living outside the country were evading their patriotic duty of helping pay for the war.
As a result, they should pay taxes just for being American citizens.
Although the war ended, the taxes didn’t (hint: they never do).
For a moment, Trump’s Tax Cuts and Jobs Act 2017 was the first serious attempt to remove citizenship-based taxation. But ultimately, the idea got shelved, and Americans continue paying taxes based on their citizenship.
As you can imagine, this has unique consequences for American citizens. They must pay taxes to their home country regardless of where they live.
That means that if you are American and decide to move to Chile, Costa Rica, or France – you will still have to pay taxes to the United States.
However, the Foreign Earned Income Exclusion allows you to lower the amount of taxes you pay.
The Foreign Earned Income Exclusion is a provision in the US Tax code that allows US citizens who live abroad to fill out Form 2555 each year and earn a certain amount of their income tax free.
That amount varies and is indexed to inflation. So for example, in 2020, it was $107,600. In 2022 it was $112,000. In 2024, it is $126,500.
That means that as a US citizen living abroad, you can earn a little over $126,500 each year and not pay US taxes on it.
If you qualify, you may be able to exclude even more of that income through the Foreign Housing Exclusion or Deduction (more on that below).
As usual, the IRS has strict guidelines on how to qualify, and what income qualifies.
“Foreign” refers to income that is earned outside of the United States. As such, it does not include work performed in the US, even if it is finally delivered to a foreign customer.
Instead, the work must be performed and delivered in a foreign country. But a US citizen who works for an American company could move abroad and also qualify for the Foreign Earned Income Exclusion because his work is technically performed overseas.
“Earned income” refers to active income that is earned through a salary or wage – even for self-employed people.
This means that any investment income (dividends, capital gains, interest, etc.) is not covered by the Foreign Earned Income Exclusion, and does not qualify for exclusion from your income taxes.
(Keep in mind also that if you operate a US company as self-employed, you will generally still have to pay US self-employment tax of 15.3%.)
And finally, “exclusion” refers to the maximum amount of earned income you can deduct from your reportable taxes for the year – and that you won’t pay taxes on.
You will need to report your foreign earned income to the IRS by filing out Form 2555 along with your regular 1040 income tax form. Any income above $126,500 will be taxed at regular levels (starting in the 24% tax bracket if you are filing as single).
In order to qualify for the Foreign Earned Income Exclusion, you will need to prove to the IRS that your ‘tax home’ is in a foreign country.
The IRS uses two methods to assess whether you have a tax home abroad: the physical presence test and the bona fide residence test.
In order to qualify under the physical presence test, you must be a US citizen who is physically present in one or several foreign countries for at least 330 days over 12 consecutive months.
These must be full days. If you leave the US at 3pm on a Sunday, that day will not count towards your time abroad – it must be full 24-hour days. Instead, the count will start the next day.
This means you can only be in the US for 35 or 36 days in a year.
The purpose of your stay does not matter. You could reside in one country or tour the globe as a tourist. What matters is that you must be outside of the US for 330 days or more over a 12 month-period.
It’s important to note that the 330 days do not have to be consecutive. You can take breaks in between and go back to the US if you want.
What if you need to be in the US longer than 35 or 36 days annually?
You could still qualify for the Foreign Earned Income Exclusion through the bona fide residence test.
To qualify under the bona fide residence test, you must prove to the IRS that you really have set up a home abroad – and legitimately moved out of the US.
This is a more subjective test that will require the IRS to look at your situation in more detail. Do you rent or own a home abroad? Do you have a local bank account, phone contract, etc.?
The IRS will also check whether you maintain a home in the US (better if you don’t), and whether your family lives with you abroad.
However, if you actually live abroad and have moved your life with you, you shouldn’t have any trouble meeting the test.
Note that in order to qualify, you must meet the requirements for an entire 365- day tax year.
The main benefit here is there are no strict requirements as to how much time you can spend in the US each year – so for people wanting to go back more often, qualifying under the bona fide residence test might make more sense.
If you meet either of these two tests, you are likely eligible to qualify for the Foreign Earned Income Exclusion.
The IRS provides this interactive questionnaire that you can use to determine if you are eligible for the Foreign Earned Income Exclusion.
The Foreign Earned Income Exclusion refers specifically only to income that you actively work to earn – in other words wages and salaries (even if they come from self-employment).
Unearned income like dividends, capital gains, interest, etc. and also social security and pension benefits are NOT covered by this exclusion – you must pay full tax on those.
Note that self-employed individuals still have to pay US self-employment tax, even if you qualify for the Foreign Earned Income Exclusion.
Overall, the Foreign Earned Income Exclusion means that you can exclude $126,500 of earned income from wages from your annual tax bill this year.
For example, if you live full-time in Chile and earn $200,000 per year, you may deduct $126,500 from your reportable income in 2024. Only $73,500 will remain taxable.
On the downside, you will be taxed at the same marginal rate as if you were reporting $200,000 in income, as opposed to $73,500.
TIP: Save even more if your spouse qualifies…
If you are married, you and your spouse can BOTH qualify for the Foreign Earned Income Exclusion, meaning you’ll be able to deduct a total of $253,000 from your income tax bill if you qualify and file jointly.
However, the Foreign Earned Income Exclusion gets even better when you factor in the Housing Exclusion or Deduction.
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The Foreign Earned Income Exclusion gets even better thanks to one addition: the Foreign Housing Exclusion or Deduction.
The Housing Exclusion or Deduction are essentially the same thing, with one small distinction:
In both cases, if you live abroad, this Exclusion or Deduction lets you exclude housing costs from your taxable income. The amount you can deduct will depend on your country of residence.
For example, if you live in Amsterdam, your maximum housing exclusion can be $52,900 for the year. And if you live in London, the upper limit is $64,600. In Hong Kong, it’s a whopping $114,300.
You can find the list of countries and cities with their respective maximum housing exclusions in the instruction document for filling out Form 2555.
However, you can only claim the housing exclusion on housing expenses that you actually incur – and not automatically the limit amount in each city.
On top of that, you must also subtract from that amount 16% of the Foreign Earned Income Exclusion (or $20,240 in 2024) – that’s what the IRS estimates you would have spent on your housing if you had lived in the US.
Suppose you rent a house in Amsterdam and pay $4,000 out of your pocket each month. You start by multiplying $4,000*12 = 48,000.
But you still need to deduct 16% of the FEIE from that sum, bringing your total to $27,760 ($4,000*12 – $20,240) – that’s how much you can exclude from your income tax.
Combine it with the $126,500 of the Foreign Earned Income Exclusion, and the total amount of money you can exclude annually from taxation exceeds $150,000.
And that amount can go up by another $126,500 if your spouse also works overseas.
If your city is not listed on the Form’s instructions, the maximum housing exclusion is 30% of the current Foreign Earned Income Exclusion limit, or $37,950 this year. And again, you must deduct $20,240 from that amount, bringing your maximum exclusion or deduction to $17,710.
(To see how the calculations actually work, head to Part VI of Form 2555.)
Here are the qualifying housing expenses you are allowed to deduct:
At the same time, you cannot deduct expenses such as:
Furthermore, all qualifying housing expenses must come from qualifying earned income and not from unearned income like dividends.
Note that if your employer reimburses you or pays outright for some of your housing expenses, you must report those expenses as income on your tax return for the year as well.
For example, if you earned $100,000, and your employer paid you $3,000/month for rent, you must report your Foreign Earned Income as $136,000. ($100,000 + $3,000 x 12).
You would then exclude your qualified housing expenses from that $136,000.
Claiming the Foreign Earned Income Exclusion and the Housing Exclusion/Deduction is straightforward.
Along with your annual tax return (Form 1040), you must file Form 2555.
In the form, you will detail how much income you earned abroad and the housing expenses you want to deduct.
The form is not extremely difficult to file independently, but we recommend you speak with a trusted tax advisor to ensure this is done correctly.
Until recently, Americans had to move away from the United States to receive preferential tax treatment.
But a few years ago, Puerto Rico, an American territory, introduced some of the most attractive tax incentives in the world.
In short, any investor who moves to the island can slash the tax they pay on dividends and capital gains to 0%.
And entrepreneurs can qualify for a corporate tax rate of just 4%.
That’s an unbelievable deal – and US citizens don’t even need a passport to take advantage of it. Moving to Puerto Rico is just like moving from New York to Florida.
Right now, Puerto Rico’s tax incentives are one of the best opportunities I’ve come across in the world.
In fact, I even moved here myself to take advantage of them. And now I live on an island in paradise and pay 0% tax.
My team recently spent months putting together the most comprehensive report on Puerto Rico’s tax incentives available out there.
This information is usually only available to premium members of Sovereign Confidential, our flagship international diversification service.
However, this information is so important that we put together a free article that you access here.
If you are sitting on unrealized capital gains – stocks, real estate, art, crypto… – Opportunity Zones may offer amazing tax benefits.
It’s a brand-new program that was buried inside President Trump’s 2018 tax reform legislation.
Through the program, you can sell your appreciated assets, defer capital gains tax, and invest the proceeds into one of 9,000 designated distressed communities across America.
Most of Detroit and Baltimore is an Opportunity Zone… and even parts of Manhattan.
Your investment in real estate, an existing business, a new business, etc. located in an Opportunity Zone can grow completely tax-free for decades.
The program is still new, but it is already a huge success with billions of dollars pouring into America’s distressed communities.
You can learn more about Opportunity Zones and my personal experience with it in this in-depth article.
Taxes are an enormous benefit of living overseas. Your life can be MUCH richer. In addition to having more freedom and greater lifestyle opportunities, you can save a boatload of money.
It’s definitely something to consider.
But it’s not the only way to save taxes and I invite you to explore our other resources…
Learn even MORE no-brainer strategies
to legally reduce your taxes...
You’ll learn all of these and many other useful strategies such as how to obtain a valuable second passport (potentially even for free) inside this free guide.
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