What is the Foreign Earned Income Exclusion (FEIE) for expats?

Under IRS Code Section 911, the Foreign Earned Income Exclusion (FEIE) allows qualifying U.S. citizens and resident aliens living abroad to exclude up to $126,500 (adjusted annually for inflation) of foreign earned wages or self-employment income from U.S. federal income tax. To qualify, you must have foreign earned income and satisfy one of two rigorous tests: (1) The Physical Presence Test: You must be physically present in a foreign country for at least 330 full days (midnight-to-midnight) during any consecutive 12-month period; or (2) The Bona Fide Residence Test: You must be a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year. Passive income (capital gains, dividends, rental income, pensions) cannot be excluded under the FEIE.