The exclusion

Section 911 lets US citizens and resident aliens who meet either the bona fide residence test or the physical presence test exclude foreign earned income up to an annual cap (about $126,500 for 2024). The exclusion applies to wages and self-employment income earned for services performed abroad.

Bona fide residence vs physical presence

Bona fide residence: a US citizen who is a bona fide resident of a foreign country for an uninterrupted period including a full tax year. Physical presence: present in a foreign country (or countries) at least 330 full days during any consecutive 12-month period. The 330-day test is mechanical and easier for digital nomads moving between countries.

Self-employment tax still applies

The foreign earned income exclusion eliminates regular income tax on the excluded amount but does NOT eliminate self-employment tax. A US-citizen freelancer abroad still owes 15.3% SE tax on Schedule C net earnings — unless they live in a country with a US Social Security totalization agreement and pay foreign social-security tax instead.

Foreign housing exclusion

Self-employed taxpayers can also deduct (rather than exclude) foreign housing expenses above a base amount, up to a city-specific cap. The deduction reduces income tax (similar to the FEIE) but does not reduce SE tax.

Form 2555

Form 2555 computes the FEIE and the housing exclusion or deduction. The form must be filed even when the FEIE eliminates all regular income tax — it documents the qualifying tests and supports the exclusion.

Documentation that survives an exam

An IRS examination of this deduction will request three things: proof of payment (bank or card statement), proof of the underlying transaction (invoice or receipt), and proof of business purpose (a contemporaneous note or calendar entry). The first two are usually trivial to produce; the third is where most filers fall short. Capturing business purpose at the moment of the expense — a one-line note in your bookkeeping software or a category and memo on the receipt-capture app — converts a generic charge into a documented deduction that will withstand scrutiny three to six years later when memory has faded.