2023 Foreign Earned Income and Housing Exclusions: Rules and Limits

U.S. citizens and resident aliens living outside the United States must report their worldwide income. Many, however, can remove a large portion of their pay earned overseas from U.S. tax by using the Foreign Earned Income Exclusion and the foreign housing exclusion (or, for certain self‑employed people, a housing deduction). For the 2023 tax year, the top exclusion for foreign earned income is $120,000. If both spouses qualify, each spouse can claim up to $120,000 on separate forms.

Who Qualifies — the Three Required Elements

To claim the Foreign Earned Income Exclusion and the foreign housing exclusion or deduction, a taxpayer must meet all three of the following:

• Tax home is in a foreign country.
• There is foreign earned income (wages or self‑employment income for services performed in a foreign country).
• The taxpayer meets either the Bona Fide Residence Test or the Physical Presence Test.

If any one of these is missing, the claim will fail.

Key 2023 Limits and Definitions

• Maximum exclusion: $120,000 for 2023 (up to $120,000 per qualifying spouse when both qualify).
• The exclusion cannot exceed the smaller of:
  • $120,000, or
  • Foreign earned income for the year minus any foreign housing exclusion or housing deduction.
• Foreign housing exclusion/deduction: You may exclude or deduct certain housing costs. The amount is limited to the lower of:
  • Foreign housing costs paid with employer‑provided amounts, or
  • The amount of foreign earned income.
• Cap on housing expenses: Generally 30% of the maximum exclusion, though it may vary by location.
• Self‑employed note: The housing deduction (not the exclusion) is available only to self-employed taxpayers.

Understanding “Tax Home” and “Abode”

• Tax home: The place where you work permanently or for an indefinite time as an employee or as self‑employed.
• Abode: Your home or place of dwelling. Your tax home is not in a foreign country during any period when your abode is in the United States.

If your family, home, and daily life remain in the U.S., you generally won’t have a foreign tax home even if you work abroad part of the year. This is a common trouble spot: you may work abroad but keep your main home and daily life in the U.S.; in that case, you likely don’t meet the tax home rule and can’t use the exclusions.

Bona Fide Residence Test

This test focuses on the nature of your stay—whether you truly established residence in another country for an uninterrupted period that includes a full tax year.

Who can meet it:
– A U.S. citizen who is a bona fide resident of a foreign country (or countries) for an uninterrupted period that includes an entire tax year, or
– A U.S. resident alien who is a citizen or national of a country with which the U.S. has an income tax treaty, and who is a bona fide resident for an uninterrupted period that includes an entire tax year.

What it is not:
– Simply being in a country for one year is not enough by itself.
– A short or fixed assignment (for example, a single construction project with a set end date) typically won’t qualify as bona fide residence.

Practical examples:
– You could keep your domicile in Cleveland and become a bona fide resident in Edinburgh if you move there for an indefinite or extended period and set up permanent quarters for yourself (and your family, if applicable). A short business trip or vacation does not create bona fide residence.

Longer example:
– You arrive with your family in Lisbon on November 1, 20X1 for an indefinite post and set up residence immediately. You attend a U.S. business conference in April 20X2 but return right after. On January 1, 20X3, you’ve completed an uninterrupted period that includes all of 20X2. You meet the bona fide residence test.
– Change one fact: if you move back to the U.S. on December 13, 20X2, you do not meet this test because your stay did not include a full tax year. You may still qualify under the Physical Presence Test.

Physical Presence Test

This test is strictly about time physically present in foreign countries—not about intention or the nature of your job.

• Requirement: Be physically present in a foreign country or countries for at least 330 full days during any 12 consecutive months.
• It depends only on days abroad. Where you live, your plans to return, and the purpose of your trip don’t affect this test.

Practical examples:
– On‑and‑off work abroad over 20 months: You may reach 330 full days only in a 12‑month period in the middle, because the early and late months include long trips back to the U.S.
– New Zealand example: You work in New Zealand from January 1, 20X1 through August 31, 20X2, with 28 days in the U.S. in February 20X1 and 28 days in the U.S. in February 20X2. You have at least 330 full days abroad in each of these 12‑month windows (January 1, 20X1–December 31, 20X1 and September 1, 20X1–August 31, 20X2). By overlapping the periods, you meet the test for the full 20 months.

Important distinction:
– The Physical Presence Test is different from the Substantial Presence Test, which counts days in the U.S. to determine U.S. residency for tax. Taxpayers often confuse the two.

How Married Couples Claim

• If both spouses qualify, each spouse figures the exclusion separately using Part VII on separate Form 2555 filings.
• You cannot combine figures on one form. Each spouse must meet the three rules and qualify under either the bona fide residence or physical presence test to claim up to $120,000 each for 2023.

Form and Official Link

• All taxpayers use Form 2555 to claim the Foreign Earned Income Exclusion and the foreign housing exclusion or deduction.
• Official resource and form: IRS Form 2555 (About Form 2555) at https://www.irs.gov/forms-pubs/about-form-2555

Review the form before you start. It will guide you to report foreign earned income amounts, select the test you meet, and enter housing figures subject to the limits.

Step-by-Step Claim Process

1. Confirm your tax home is in a foreign country for the period you want to claim.
2. Check that your income is foreign earned income (wages or self‑employment pay for services performed in a foreign country).
3. Decide which test you meet:
   • Bona Fide Residence Test (uninterrupted period including a full tax year), or
   • Physical Presence Test (330 full days in any 12 consecutive months).
4. Calculate your maximum exclusion for 2023:
   • The smaller of $120,000 or your foreign earned income minus any housing exclusion/deduction.
5. If you have qualifying housing costs paid with employer‑provided amounts, compute your foreign housing exclusion (subject to the general 30% cap and any location‑specific limits). If you’re self‑employed, consider the housing deduction instead.
6. Complete Form 2555. If married and both qualify, each spouse completes a separate Form 2555 and uses Part VII to figure their own exclusion.

Practical Tips and Common Pitfalls

• Short trips to the U.S. can break your day count. The 330 full days rule counts only full days abroad. Travel days that are not full 24‑hour days abroad usually do not count.
• The bona fide residence test requires an uninterrupted period that includes a full tax year. Moving back in December, even after more than 12 months abroad, can cause you to fail the test.
• Keep your abode in mind. If your home life remains in the U.S., your tax home likely isn’t in a foreign country, which blocks both the income and housing exclusions.
• The housing limit is tied to the maximum exclusion (generally 30%) and may vary by city. Do not count housing costs above the allowed limit.
• If both spouses qualify, remember each files their own Form 2555—do not try to split a single form.

Important: Many expat taxpayers mix up the Physical Presence Test with the Substantial Presence Test and miscount travel days. Careful planning of travel dates and clear records can help avoid those mistakes.

(Analysis by VisaVerge.com indicates confusion on the tests and day counting is a common issue.)

Real‑World Scenarios

• Construction project with gaps in the U.S.: You might meet the Physical Presence Test only for a 12‑month window in the middle of a longer stretch. Overlapping 12‑month periods can help cover the full time abroad if trips home are short enough.
• Long‑term posting with a U.S. conference: A short business visit to the U.S. during the year does not break an uninterrupted period as long as your residence abroad continues and your family and home remain in the foreign country.
• Fixed‑term job: A set project with a specified end date normally won’t qualify as bona fide residence, even if you’re there more than one tax year. You may still qualify under the Physical Presence Test if you reach 330 full days in the appropriate 12‑month period.

Documentation and Recordkeeping

• Use Form 2555 to make your claim. The form focuses on foreign earned income, which test you meet, dates abroad, and housing amounts within the limits.
• Keep clear records of:
  • Dates abroad (entry and exit dates),
  • Travel itineraries and tickets,
  • Housing costs and employer reimbursements or allowances.
• Dates matter — partial days can cause you to fall short of 330 full days.

Who Benefits and When to Recheck

• Employees paid by a foreign or U.S. employer for services performed outside the U.S. can benefit from the exclusion and possibly the housing exclusion.
• Self‑employed taxpayers may qualify for the exclusion and, if applicable, the housing deduction.
• If your location or housing costs change, review the general 30% cap and any location‑based limits for the period you’re claiming.
• If your family or home base shifts back to the U.S., recheck your tax home status before claiming.

The Foreign Earned Income Exclusion and the foreign housing exclusion can significantly reduce U.S. tax for many Americans living abroad. However, each taxpayer must meet the three core rules: foreign tax home, foreign earned income, and either the Bona Fide Residence Test or the Physical Presence Test. Careful planning, accurate day counts, and solid records are often the difference between a successful claim and a denied one.