Foreign Earned Income Exclusion (Form 2555, FEIE)

U.S. citizens and green card holders are taxed on worldwide income wherever they live, and the foreign earned income exclusion under section 911 is one of two tools that stop income earned abroad from being taxed twice. It applies only to earned income, meaning salary, wages, and self-employment earnings for services performed abroad, not to interest, dividends, rent, pensions, or capital gains. The cap is adjusted annually, and a separate housing exclusion or deduction covers reasonable housing costs above a base amount.

Qualifying requires a tax home in a foreign country plus one of two tests: bona fide residence in a foreign country for an uninterrupted period that includes a full tax year, or physical presence abroad for 330 full days in any 12-month period. Someone who moves to India in March generally qualifies under physical presence for a 12-month window that starts in March, with the exclusion prorated for the part of the tax year covered. The election is made on Form 2555 with the return and is sticky: revoking it bars re-election for five years without IRS consent.

The alternative, and often the better one in India, is the foreign tax credit on Form 1116. Indian marginal rates are high enough that the credit usually eliminates U.S. tax on Indian salary and leaves excess credit to carry forward, and because the income stays on the return the filer keeps IRA eligibility and the refundable additional child tax credit, both of which the exclusion forfeits. Both can be used together, with the credit applied only to income not excluded, but the interaction is unfavorable and the choice should be modeled over several years. The exclusion also does not reduce U.S. self-employment tax, which a self-employed American in India still owes because the U.S. and India have no totalization agreement.