Foreign Earned Income Exclusion 2027: London High Earners

The foreign earned income exclusion 2027 limit is $137,300, set by IRS Revenue Procedure 2026-35, up from $132,900 for 2026. For an American in London paying UK tax at 45%, the foreign tax credit on Form 1116 usually beats Form 2555 in 2027. The exclusion still helps in a few narrow years, such as one with UK-exempt earnings.

Only the headline figure is settled. For a London earner on a seven-figure package the choice is not really about $137,300. It is about how the exclusion interacts with the stacking rule, the foreign tax credit limitation, UK tax you cannot get back and an election that is hard to undo. This guide covers the confirmed 2027 figures and what has not yet been published. It then runs a 2027 comparison for a GBP 400,000 London earner with US dividends and ends with a decision table you can use before the 2027 return is prepared. It is written from the return-preparation side of the work that Jungle Tax does for Americans in the UK, and it looks ahead to 2027 rather than back at catch-up years.

What is the foreign earned income exclusion for 2027?

For taxable years beginning in 2027, the maximum foreign earned income exclusion under section 911(b)(2)(D)(i) is $137,300 per qualifying individual. The figure comes from Revenue Procedure 2026-35, which the IRS released with its 2027 inflation adjustments on 5 November 2026. That is a $4,400 increase on the 2026 limit of $132,900.

The 2027 limit applies to the 2027 calendar year. That return is normally due on 15 April 2028, with an automatic extension to 15 June 2028 for taxpayers whose tax home and abode are outside the US. A married couple who both work abroad and both qualify can each exclude up to $137,300 of their own foreign earned income. Neither spouse can use the other's unused allowance.

The 2027 housing figures, including what is not yet published

The foreign housing exclusion is calculated from the FEIE limit, so part of it is already known for 2027:

• Base housing amount (2027): 16% of $137,300, which is $21,968 for a full qualifying year. You get no exclusion for the first $21,968 of qualifying housing costs.
• General housing expense ceiling (2027): 30% of $137,300, which is $41,190. This applies in any location that does not have its own higher limit.
• London's 2027 location limit: not yet published. The IRS sets city limits in a separate annual notice, normally published in the spring of the year it covers. The current notice, Notice 2026-25, sets London's limit at $68,600 for 2026. The 2027 figure should appear in the equivalent notice in 2027, well before the 2027 return is due.

Based on 2026 figures, a full-year London resident can exclude up to $47,336 of housing costs ($68,600 minus the 2026 base of $21,264). If London's limit stays at $68,600 for 2027, the higher 2027 base would bring the maximum housing exclusion down to about $46,632. In prime central London, rent alone usually exceeds the cap by a wide margin, so the cap, not the actual rent, sets the figure. Only qualifying housing costs count, which means rent, utilities other than telephone, and insurance. Mortgage principal, mortgage interest, purchased furniture and domestic staff do not count.

Figure	2026	2027	Status
Maximum foreign earned income exclusion	$132,900	$137,300	2027 confirmed (Rev. Proc. 2026-35)
Base housing amount (16%)	$21,264	$21,968	2027 follows from the limit
General housing ceiling (30%)	$39,870	$41,190	2027 follows from the limit
London housing expense limit	$68,600	Not yet published	Due in the 2027 housing notice
Maximum London housing exclusion	$47,336	About $46,632 if the London cap is unchanged	Illustrative until the notice is issued

Who qualifies for the 2027 exclusion as a London resident?

Form 2555 has two gates. Your tax home must be in a foreign country, which for a London executive is normally your regular place of business. You must also pass one of two tests: the bona fide residence test, meaning residence in the UK for an uninterrupted period that includes a full calendar year, or the physical presence test, meaning at least 330 full days outside the US in any 12-month period. Most established London residents pass the bona fide residence test without difficulty. Executives who spend a lot of time in New York need to count days carefully under the physical presence test, because a US-heavy year can break it.

The exclusion applies only to earned income for services performed outside the United States, such as salary, bonus, the earned element of equity awards and self-employment profit. It never covers dividends, interest, capital gains, rental income or pension distributions. Days worked in the US produce US-source income, which cannot be excluded however long you have lived in London. Equity awards that vest over several years must be split by work location across the vesting period, and this is a common source of error in high-earner returns.

Why do most London high earners file Form 1116 instead of Form 2555?

The reason is the rate gap. On UK employment income above GBP 125,140, where the personal allowance has been fully withdrawn, the additional rate is 45% (Scottish taxpayers face different bands), plus employee National Insurance. The top US federal rate is 37%, and much of a London earner's income falls in the 32% and 35% brackets. When the foreign tax already exceeds the US tax on the same income, the foreign tax credit removes the US tax on that income in full and leaves surplus credit to carry over.

The exclusion does not remove that tax as cleanly. It shelters only the first $137,300 plus the capped housing amount, which is a fraction of the earnings of someone on GBP 400,000. Electing it also has three costs at this income level:

• The stacking rule means the income you do not exclude is taxed at the rates that would have applied if the excluded income were still included, so the exclusion only takes out the lowest-taxed slice of income.
• Disallowed foreign tax. UK tax attributable to excluded income cannot be credited. Every pound of UK tax on the excluded slice is lost permanently instead of becoming a carryover.
• The election lock. Once the election is made it continues each year until revoked, and after revocation you generally cannot elect again for five tax years without IRS consent.

The Form 1116 route has no ceiling. It lets you claim UK tax against US tax on UK-source earnings without limit and carries unused credit back one year and forward ten years. For an earner whose UK rate stays above the US rate, those carryovers accumulate. They become valuable in a later year when the position changes, for example a year with heavy US-source workdays or a year in which most of the income is in the passive basket.

How does the stacking rule work in 2027?

Under section 911(f), if you exclude income, the tax on your remaining taxable income is worked out as if the excluded amount had not been excluded. The excluded slice is treated as the bottom of your income, so all the remaining income falls in your higher brackets. In practice the return preparer works out the tax on taxable income plus the excluded amount, then subtracts the tax on the excluded amount alone. The same stacking applies to the capital gains and qualified dividend rates.

For a high earner the effect is significant. The $183,932 or so of exclusion available to a London resident in 2027 (wages plus housing) removes income that would otherwise be taxed at 10% to 24%. The remaining salary is still taxed at 32%, 35% and 37%. The exclusion saves tax at your lowest rates, while the UK tax you give up on that slice was charged at 45%.

Worked 2027 comparison: a GBP 400,000 London earner with US dividends

The illustration below shows how the decision works out in practice. Every figure is an estimate on stated assumptions. It is not a return computation, and an actual 2027 return will use real exchange rates, the published 2027 London housing limit and your own facts.

Assumptions

• US citizen, single, a UK resident with a tax home in London for all of 2027, and all workdays performed outside the US.
• UK salary of GBP 400,000, converted at an illustrative $1.30, giving $520,000 of foreign earned income.
• $40,000 of qualified dividends from a US brokerage account.
• London rent of GBP 60,000 ($78,000), so qualifying housing costs exceed the cap.
• London housing cap assumed unchanged at $68,600 for 2027, with the US standard deduction of $16,600 (2027, single).
• UK income tax on the salary at current rates and frozen thresholds: about GBP 166,203, or $216,064. National Insurance is ignored for credit purposes.

Route A: foreign tax credit only (Form 1116)

Taxable income is about $543,400, of which $40,000 is qualified dividends taxed at 15%. US tax before credits is about $149,947. The general-category foreign tax credit limitation, after apportioning the deduction and making the qualified dividend rate-differential adjustment, is about $145,609. UK tax paid far exceeds that, so US tax on the salary falls to zero. A small residual of about $4,337 remains, attributable to the US-source dividends, plus about $1,520 of net investment income tax. Unused UK credit of about $70,455 carries forward.

Route B: FEIE plus London housing exclusion, with FTC on the remainder

The exclusions remove about $183,932 ($137,300 plus a housing exclusion of $68,600 minus $21,968). Because of the stacking rule, the US tax before credits is the full-income tax of about $149,947 less the tax on the excluded $183,932 (about $36,503), which is about $113,444. About 35% of the UK tax, roughly $76,425, is attributable to the excluded income and is disallowed for credit purposes. The remaining creditable UK tax of about $139,639 exceeds the reduced limitation of about $108,560. Residual US tax is about $4,883, plus the same $1,520 of net investment income tax, and the carryforward falls to about $31,078.

2027 illustration (USD, approximate)	Route A: FTC only	Route B: FEIE + housing + FTC
Earned income excluded	$0	$183,932
US tax before credits	$149,947	$113,444
Foreign tax credit allowed (general basket)	$145,609	$108,560
UK tax permanently disallowed	$0	$76,425
Residual regular US tax (dividend-driven)	$4,337	$4,883
Net investment income tax (3.8%)	$1,520	$1,520
Foreign tax credit carryforward created	$70,455	$31,078
Election lock-in	None	Continuing election; five-year bar if revoked

What the numbers show

The exclusion does not cut the 2027 bill. Route B costs slightly more this year and gives up about $39,000 of carryforward credit, because UK tax charged at 45% is wasted on income the US would only have taxed at 10% to 24%. The residual US liability is the same size under both routes because it comes from the dividends, not the salary. Under the US-UK treaty, the US keeps a limited right to tax US-source dividends of a citizen resident in the UK, and the UK generally gives credit for US tax up to the treaty rate. That residual is usually set against UK tax on the same dividends (about GBP 11,911 at the 39.35% additional dividend rate here), so it is not an extra cost. Neither the FEIE nor Form 1116 removes the net investment income tax. The IRS position is that foreign tax credits cannot reduce it, which our guide to net investment income tax for US-UK dual filers explains.

How does electing the FEIE in 2027 lock you in?

The FEIE is an election, and it carries forward. Once made, it applies to every later year until you revoke it. A revocation applies to that year and later years, and you then generally cannot elect again for five tax years unless the IRS consents. Electing in 2027 because one year's figures happened to favour it can mean being unable to use it in a later year when it would have helped, such as a year with UK-exempt earnings. We set out the revocation mechanics, the consent process and the drafting of the revocation statement in our dedicated guide to revoking the foreign earned income exclusion and the five-year bar, so we do not repeat them here. For 2027 preparation, the practical rule is to model several years before electing and never to elect by default because return software suggests it.

Timing also needs care. The election is normally made on a timely filed return, including extensions. Late elections are possible in limited circumstances, for example within one year of the original due date, or later if the IRS has not yet discovered the omission. A return prepared on Form 1116 that deliberately omits Form 2555 is a considered position, not an oversight. The working papers should show that the choice was intentional.

When does the 2027 exclusion still help a wealthy filer?

The cases are narrow but real. In each one, earned income attracts little or no UK tax, so there is nothing to credit and the exclusion becomes the only way to shelter it from US tax.

A year with UK-exempt earnings

The clearest example is overseas workday relief under the UK's foreign income and gains regime for new residents. For the first three tax years of UK residence, earnings for duties performed outside the UK can be relieved from UK tax, subject to an annual cap and a percentage-of-earnings limit, provided a claim is made. Those earnings are still foreign earned income for US purposes if the work was done outside the US. Because they are UK-exempt, the foreign tax credit has no UK tax to work with, and the exclusion may then be worth more than the credit. This is the year in which modelling the FEIE is most worthwhile, and also the year in which the five-year lock should be considered in advance.

Arrival and departure years

Under split-year treatment, earnings before arrival in or after departure from the UK may fall outside UK tax altogether. If those earnings were for work performed in a low-tax third country, a partial-year exclusion, prorated by qualifying days, can shelter income that no foreign tax credit would reach.

UK-exempt components of a package

Some payments are wholly or partly exempt from UK tax yet still count as earned income for US purposes. Whether a specific item is foreign earned income, and whether it is excludable, must be decided item by item. Where it qualifies and the UK charges nothing, the exclusion may cover it.

Low-tax years generally

A year with large UK pension contributions, UK-relieved losses or other items that reduce UK tax without a matching US reduction can bring the UK effective rate below the US rate. If that is a single year inside a long run of 45% years, the lock-in cost usually outweighs the gain. If it marks the start of a lasting change in your position, the FEIE becomes a serious option.

2027 decision table: Form 1116 or Form 2555?

Your 2027 profile	Usual preparation choice	Why
London salary taxed at 40-45%, no UK-exempt earnings	Form 1116 only	UK tax exceeds US tax; carryforwards preserved; no election lock
Salary plus large US dividends or gains	Form 1116 only	The exclusion never touches investment income; stacking keeps rates high
First years in UK with overseas workday relief claimed	Model both; FEIE often wins on the relieved slice	Exempt earnings carry no UK tax to credit
Arrival or departure year with untaxed third-country earnings	Model a partial-year FEIE	Split-year income may be outside UK tax
Significant US-source workdays	Form 1116, with careful sourcing	US-source pay is never excludable; carryovers can absorb some exposure
Already elected the FEIE in a prior year	Model before revoking	Revocation triggers the five-year bar
Behind on prior-year returns	Catch-up first, then the 2027 choice	Earlier elections and carryovers feed the 2027 computation

The UK side: what HMRC sees in 2027

Your US filing choice has no effect on your UK liability. HMRC taxes a UK resident on employment income for duties in the UK whatever the US does. Under the US-UK treaty the UK has the primary right to tax UK-source earnings, which is why the US credit route works so well. For US-source dividends, the UK generally gives credit for US tax up to the treaty rate, and claims for foreign tax relief go through Self Assessment. HMRC's guidance on tax on foreign income and the US-UK tax treaty documents set out the framework.

Issue	US (IRS)	UK (HMRC)
Tax year	Calendar year 2027	6 April to 5 April (2026/27 and 2027/28 both touch calendar 2027)
Basis of taxation	Citizenship: worldwide income	Residence: worldwide income for established residents
Top rate on employment income	37%	45% (Scottish rates differ)
Relief for the other country's tax	FEIE (Form 2555) or credit (Form 1116)	Foreign tax credit relief via Self Assessment
Filing deadline for the 2027 period	15 April 2028; 15 June 2028 automatic for those abroad; extension to 15 October	31 January after each UK tax year ends
Currency	USD, using a consistent exchange-rate method	GBP

The mismatch between tax years is one of the main sources of error in US-UK returns. UK tax for a 2027 US return comes from two UK tax years, and the foreign tax credit can be claimed on a paid or an accrued basis. Once chosen, the accrual election binds future years. For a salaried London executive, PAYE withholding during 2027 is usually a reasonable proxy, but bonuses, year-end balancing payments and payments on account can move UK tax between years and distort the credit if they are not matched carefully.

Preparing the 2027 return: a high-earner checklist

• Confirm the qualifying test (bona fide residence or physical presence) and keep a workday diary that separates US, UK and third-country days.
• Source equity awards by workday across each vesting period before any exclusion or credit modelling.
• Check whether any FEIE election from a prior year is still in force before preparing 2027 on Form 1116.
• Model the FEIE and FTC routes over at least three years, including carryforward use.
• Flag any UK-exempt earnings (overseas workday relief, split-year income) as possible FEIE candidates.
• Reconcile UK tax paid against two UK tax years and confirm the paid or accrued basis.
• Separate general and passive basket income and apply the qualified dividend adjustment.
• Compute net investment income tax separately; it is not reduced by the FEIE or the foreign tax credit.
• Meet the FBAR and Form 8938 obligations for UK bank, ISA and pension-related accounts. Our FBAR penalty calculator shows what is at stake if they are missed.

If earlier years are incomplete, with missed returns, unreported UK ISAs or missing FBARs, correct them before relying on any 2027 carryover position. The IRS streamlined filing procedures, including the Foreign Offshore Procedure for qualifying non-resident filers, are usually the cleanest way to do that. The Form 2555 instructions and IRS Publication 54 remain the primary references for exclusion mechanics, and the IRS page on the foreign housing exclusion or deduction covers the housing computation.

Bottom line for 2027

The 2027 exclusion of $137,300 is a large figure for most expats. For a London executive taxed at 45%, it is usually the wrong tool. Form 1116 typically removes US tax on UK earnings, keeps valuable carryforwards and avoids an election that is hard to reverse. Keep the FEIE for the years that justify it, such as years with UK-exempt earnings and arrival or departure years, and decide on several years' figures, not one. For broader cross-border matters, see our cross-border tax and high-net-worth services.

If you want your 2027 position modelled before the year begins, or need earlier years brought up to date first, contact our cross-border team for a confidential consultation. We prepare US and UK returns side by side so that the exclusion, the credit and the UK figures agree before anything is filed.