Foreign Earned Income Exclusion: What Wealthy US-UK Clients Should Know

The foreign earned income exclusion allows qualifying Americans living in the UK to exclude up to $130,000 of foreign earned income from US tax for 2025. For wealthy clients, it is often the wrong tool because it only covers earned income and can quietly waste valuable Foreign Tax Credits.

By the Jungle Tax Cross-Border Tax Team — reviewed by a US-UK dual-qualified adviser (CPA / Enrolled Agent).

What is the foreign earned income exclusion, and how much can you exclude in 2025?

The foreign earned income exclusion (FEIE) is a provision of Internal Revenue Code Section 911 that allows a qualifying American living abroad to exclude a set amount of foreign earned income from their US federal taxable income. For the 2025 tax year, the maximum exclusion is $130,000 per qualifying person, claimed on Form 2555. A married couple who both work and both qualify can each claim their own exclusion.

The word that matters here is earned. The exclusion applies to salary, wages, bonuses, commissions, and self-employment profits for services performed abroad. It does not affect investment income, and for high earners, that distinction changes everything.

What counts as foreign earned income?

Foreign earned income is pay you receive for personal services performed while your tax home is outside the United States. That includes your UK PAYE salary, director’s fees, bonuses, and self-employment income from a UK trade. Everything below sits outside the exclusion entirely:

Dividends from UK or US shares
Interest from bank and building society accounts
Capital gains on property or investments
Rental income from a buy-to-let
Pension and annuity income, including drawdown

A partner earning £250,000 in the City who also draws £180,000 in dividends and gains would exclude only a slice of the salary. The investment income remains fully exposed to US tax. Our full breakdown in the US expat tax guide for the UK walks through how each income type is treated.

How do you qualify for the foreign earned income exclusion?

To claim the foreign earned income exclusion, you must have a tax home in a foreign country and meet one of two tests. Most UK-resident Americans satisfy both, but only one is required.

The Bona Fide Residence test

You pass the Bona Fide Residence test if you are a genuine resident of the UK for an uninterrupted period that includes a full tax year (1 January to 31 December). This is a facts-and-circumstances test: it looks at the nature and length of your stay, your family arrangements, your housing, and your intent. It suits settled expats who have made the UK their home.

The Physical Presence test

You pass the Physical Presence test if you are physically present in a foreign country or countries for at least 330 full days during any 12 months. Full days are complete 24-hour days on foreign soil, so travel days and time in US airspace do not count. This test suits people in their first year abroad or those who move mid-year. The IRS sets out both tests in its official FEIE guidance.

What is the Foreign Housing Exclusion, and is it bigger in London?

Yes. Alongside the earned income exclusion, qualifying taxpayers can claim a Foreign Housing Exclusion (or deduction, for the self-employed) for reasonable housing costs above a base amount. London carries one of the highest cost ceilings in the world, which materially increases the benefit for those living in the capital.

The housing figures are pegged to the FEIE. For 2025, the base amount you must first absorb is $20,800 (16% of $130,000), and the standard cap on qualifying expenses is $39,000 (30% of the FEIE). The IRS then publishes higher limits for high-cost cities in its annual housing notice.

Item (2025 tax year)	Standard location	London (high-cost)
Housing expense ceiling	$39,000	$73,700
Less base amount (16% of FEIE)	$20,800	$20,800
Maximum housing exclusion	$18,200	$52,900

Qualifying costs include rent, utilities (other than telephone), and residential parking. They do not include the cost of buying property, mortgage capital repayments, domestic staff, or anything the IRS treats as lavish. For a family renting in Zone 1 or 2, the London ceiling can be the more valuable half of a Form 2555 claim. We cover it in detail in our London housing exclusion guide.

Why do wealthy US-UK clients usually prefer the Foreign Tax Credit?

Because the UK taxes them more heavily than the US does, and the Foreign Tax Credit converts that UK tax into a dollar-for-dollar credit against US tax, often wiping out the US bill and leaving credits to carry forward. The exclusion cannot do that. This is the single most important planning point for high earners, and it is where many off-the-shelf returns go wrong.

The UK’s higher rate of 40% and additional rate of 45% both exceed the top US federal rate of 37%. When your effective UK rate is higher than your US rate, the Foreign Tax Credit (claimed on Form 1116) generally eliminates the US tax on that income and produces surplus credits you can carry back one year and forward ten. Those carryforwards are a genuine asset. They can shelter future income, such as US-source bonuses, Roth conversions, or a year with lower UK tax.

The exclusion works differently. When you exclude income under Section 911, you also give up the right to claim a Foreign Tax Credit on that same excluded income. You generally cannot do both on the same dollar. So a high earner who excludes $130,000 of salary throws away the UK tax paid on that $130,000, generating no carryforward at all. In a high-tax country like the UK, that is usually a waste.

The stacking rule catches people out.

Even the income you do exclude does not escape the US rate structure. The stacking rule in Section 911(d)(6) requires that income above the exclusion be taxed at the marginal rate that would have applied had you never excluded anything. In plain terms, the exclusion removes income from the bottom brackets, not the top. Excluding $130,000 does not drop your remaining income into the 10% and 12% bands; that remaining income is still taxed as though the excluded amount sat beneath it.

The 3.8% NIIT is never covered.

The 3.8% Net Investment Income Tax is a persistent trap for wealthy expats. Neither the foreign earned income exclusion nor the Foreign Tax Credit can offset it, because the credit under Form 1116 applies to income tax, not to the NIIT. Worse, excluded FEIE income is added back when testing whether you cross the $250,000 (married filing jointly) or $200,000 (single) NIIT threshold, so the exclusion can actually push investment income into NIIT territory. High-income households routinely pay this 3.8% on dividends, interest, and gains regardless of which foreign relief they use.

When does the foreign earned income exclusion still make sense?

The exclusion earns its place when foreign tax is low or zero, or when there is little other income to shelter. It is not obsolete, and for the right client, it remains the cleaner choice.

Consider using the FEIE if you are a US citizen posted to a low-tax jurisdiction (Dubai, Singapore in some cases, or a period of remote work in a territory with no income tax), if you are early-career with modest UK earnings and few investments, or if your only US filing driver is a single foreign salary comfortably under $130,000. In those situations, the Foreign Tax Credit generates few credits, and the exclusion delivers a clean result with a simpler return.

Beware the five-year revocation lock.

Switching between methods is not free. If you claim the foreign earned income exclusion and then revoke it, you are locked out of the exclusion for the following five tax years unless you obtain IRS consent, which typically means a private letter ruling and a fee. A common planning error is electing FEIE in the early, low-earning years, then revoking it as you move up the pay scale and losing access just when circumstances change again. The decision deserves a multi-year view, not a single-year one.

FEIE versus Foreign Tax Credit at a glance

Feature	Foreign Earned Income Exclusion	Foreign Tax Credit
Covers earned income	Yes, up to $130,000 (2025)	Yes, no cap
Covers investment income	No	Yes
Best when the foreign tax is	Low or zero	Higher than US tax (e.g., UK)
Generates carryforward credits	No	Yes (back 1, forward 10)
Offsets 3.8% NIIT	No	No
Form used	Form 2555	Form 1116
Switching penalty	5-year lock on revocation	None

Case study: the London portfolio manager

A US citizen client, whom we will call Daniel, moved to London and became a portfolio manager earning a £280,000 base salary plus a £150,000 bonus. He held a taxable investment account that threw off around £120,000 a year in dividends and realized gains. His previous US preparer had claimed the foreign earned income exclusion on autopilot every year.

The problem was twofold. First, the exclusion sheltered only $130,000 of his £430,000 earnings, and the stacking rule meant the balance was still taxed at top US rates. Second, and more costly, excluding that salary meant he was not claiming UK tax paid on it as a Foreign Tax Credit, so he built up no carryforwards despite paying 45% UK tax. His investment income, meanwhile, was fully US-taxed and hit with the 3.8% NIIT.

We revoked the FEIE (accepting the five-year lock, which suited his long-term UK plans) and moved him entirely onto the Foreign Tax Credit. UK tax at 45% comfortably exceeded his US liability on both earned and investment income, eliminating his US income tax and generating roughly $60,000 of carryforward credits in year one. The only residual US cost was the NIIT on his portfolio, which no method could remove. He also reviewed his position against our US-UK tax treaty guide to confirm pension treatment. The net result was a lower lifetime US tax bill and a bank of credits to deploy in the future.

Speak to a US-UK cross-border tax adviser.

Choosing between the foreign earned income exclusion and the Foreign Tax Credit is rarely a one-year decision, and for wealthy US-UK clients, it is rarely the exclusion. Jungle Tax specializes in getting this right for American expats across the higher and additional-rate bands. If you want a second opinion on a return that has claimed FEIE on autopilot, we would be glad to review it. Read more in our guide to common American expat tax mistakes.

Contact the Jungle Tax cross-border team: hello@jungletax.co.uk | 0333 880 7974 | jungletax.co.uk