What income qualifies for FEIE?

The Foreign Earned Income Exclusion applies only to foreign earned income — compensation received for personal services performed in a foreign country. Understanding which income qualifies is critical for correctly claiming this exclusion.

Qualifying earned income includes: wages and salaries paid by any employer (foreign or US) for work performed abroad; self-employment income from a trade or business conducted in a foreign country; professional fees for services rendered abroad; commissions earned for work performed abroad; bonuses and tips related to foreign work; housing and cost-of-living allowances (which may also qualify for the housing exclusion); and the fair market value of employer-provided meals and lodging.

Income that does NOT qualify for FEIE includes: investment income (dividends, interest, capital gains); rental income (even from foreign property); pension and annuity income; Social Security benefits; alimony; gambling winnings; income earned for services performed in the United States; income received as an employee of the US government (military pay, federal civilian pay); amounts received after the end of the year following the year in which the services were performed; and income earned during periods when you do not qualify under the Physical Presence or Bona Fide Residence Test.

For self-employed individuals, the earned income eligible for FEIE is net earnings from self-employment — gross income minus deductible business expenses. However, even if you exclude this income from US income tax, you still owe self-employment tax (15.3%) on it. There is no self-employment tax exclusion.

If you have income from multiple sources, some foreign and some domestic, you must carefully allocate your income between qualifying and non-qualifying categories. Income from US clients for work performed abroad qualifies for FEIE — the location where the work is performed, not the source of payment, determines eligibility.

At Zenith Financial, we carefully analyze your income to maximize your FEIE benefit while ensuring accurate classification of all income types.