Foreign Earned Income Exclusion for H-1B Holders (Form 2555)

The FEIE lets qualifying taxpayers exclude up to $132,900 of foreign earned income from U.S. tax. But here is the catch: most H-1B holders do not qualify, because they live and work in the United States.

What Is the FEIE?

The Foreign Earned Income Exclusion (FEIE), claimed on Form 2555, allows U.S. citizens and resident aliens to exclude a portion of their foreign earned income from U.S. federal income tax. For tax year 2026, the maximum exclusion is $132,900 per qualifying individual.

"Foreign earned income" means wages, salaries, professional fees, or self-employment income earned for services performed in a foreign country. The key phrase is in a foreign country — the work must be physically performed outside the United States.

Income you earn while sitting at your desk in Seattle, San Jose, or New York does not qualify, regardless of who your employer is or where the employer is incorporated. Your H-1B salary from a U.S. employer for work performed in the U.S. is U.S.-source income, not foreign earned income.

Two Qualifying Tests

To claim the FEIE, you must meet one of two tests establishing that your "tax home" is in a foreign country:

Why Most H-1B Holders Do Not Qualify

The typical H-1B holder lives in the United States and works for a U.S. employer at a U.S. location. This means:

• Your tax home is in the United States (where you regularly work), not in a foreign country.
• Your income is earned for services performed in the United States, making it U.S.-source earned income — not foreign earned income.
• You are physically present in the U.S. for most of the year, failing the 330-day physical presence test abroad.
• You are not a bona fide resident of a foreign country — you are a resident of the United States (that is the entire point of your H-1B status).

When FEIE Does Apply to H-1B Holders

There are narrow scenarios where an H-1B holder may legitimately claim the FEIE:

• Working abroad on assignment: Your U.S. employer sends you to work at an office in India (or another foreign country) for an extended period. If your tax home shifts to the foreign country and you meet the 330-day or bona fide residence test, the income earned for work performed abroad may qualify. This requires the assignment to be genuinely long-term — short business trips do not count.
• Pre-arrival income: In the year you first arrive in the U.S. on your H-1B, income you earned while working in India before your arrival is foreign earned income. If you meet either qualifying test for the pre-arrival period, that income may be excludable. For example, if you worked in India from January through September and arrived in the U.S. in October, the January-September income earned in India could qualify.
• Return to India for extended work: If you leave the U.S., return to India, and work there for your employer (or a different employer) for an extended period while maintaining your H-1B status (or after it ends), the income earned in India may qualify.

The Housing Exclusion

In addition to the $132,900 income exclusion, Form 2555 allows a separate housing exclusion (or deduction, for self-employed individuals). This covers reasonable housing expenses in a foreign country that exceed a base amount (16% of the FEIE limit, or $21,264 for 2026).

The housing exclusion has a cap that varies by city. High-cost locations like London, Tokyo, or Mumbai have higher limits. Qualifying expenses include rent, utilities (excluding phone), insurance, and parking — but not mortgage payments, purchased furniture, or domestic labor.

FEIE vs. Foreign Tax Credit

You cannot claim both the FEIE and the Foreign Tax Credit on the same income. This is a critical rule. If you exclude $132,900 of foreign income under FEIE, you cannot also claim FTC for Indian taxes paid on that same $132,900.

However, if you have foreign income beyond the exclusion amount, you can claim FTC on that excess. And if you have other types of foreign income not covered by FEIE (such as investment income — interest, dividends, capital gains), you can still claim FTC on those amounts since FEIE only applies to earned income.

For the vast majority of H-1B holders working in the U.S., the Foreign Tax Credit is the correct mechanism for avoiding double taxation on Indian income. FEIE is only relevant in the narrow scenarios described above.

Common Mistakes

• Assuming H-1B salary is "foreign income": Your U.S. employer paying you to work in the U.S. generates U.S.-source income. The fact that you are a foreign national does not make your income foreign.
• Claiming FEIE for remote work from India on a short trip: A 3-week visit to India where you work remotely for your U.S. employer does not qualify. Your tax home is still in the U.S., and 3 weeks is far short of 330 days.
• Electing FEIE when FTC would be better: If your foreign country's tax rate is higher than the U.S. rate on the same income, FTC eliminates the U.S. tax entirely and gives you excess credits to carry forward. FEIE would exclude the income but you would lose the ability to use the foreign tax credits.
• Forgetting the 5-year lock-out: If you elect FEIE and later revoke it, you cannot re-elect for 5 years without IRS approval. This is a binding decision — do not elect casually.

How Our Platform Handles This

H1B TaxFile handles FEIE with appropriate guardrails:

• During the wizard flow, we ask about your work location and residency. If you worked entirely in the U.S., we do not offer the FEIE election — preventing an incorrect claim.
• If you indicate time spent working abroad, we guide you through the qualifying test (physical presence or bona fide residence) and compute the eligible exclusion amount pro-rated for the qualifying period.
• We enforce the FEIE/FTC mutual exclusivity rule: income excluded under FEIE is automatically removed from the FTC computation on Form 1116.
• The housing exclusion calculation uses IRS-published city-specific limits and applies the base amount deduction automatically.