Foreign Earned Income Exclusion (FEIE) for US Expats in Canada

The foreign earned income exclusion (FEIE) lets US citizens and resident aliens living abroad exclude up to $130,000 (2025) of foreign earned income from US taxable income. It sounds like a gift for Americans in Canada, but for most cross-border filers, the FEIE is the wrong choice. The foreign tax credit (FTC) under IRC 901 usually produces a better result because Canadian tax rates exceed US rates at most income levels, and the FTC uses that excess Canadian tax to offset US tax on all income types, not just earned income. The FEIE eliminates income from the numerator, which also eliminates the FTC on that income, and the excluded income still counts for rate purposes (it pushes your remaining income into higher US brackets). For Americans in Canada specifically, the FEIE is almost never optimal, but understanding how it works matters because the IRS still expects you to know which election you are making and because revoking the FEIE after claiming it triggers a five-year lockout.

What is the FEIE?

The FEIE is an election under IRC 911 that allows a qualifying US citizen or resident alien living abroad to exclude a portion of their foreign earned income from US federal income tax. For 2025, the maximum exclusion is $130,000. The amount is indexed for inflation and increases each year.

• Earned income only. The exclusion applies to wages, salaries, professional fees, and self-employment income earned abroad. It does not apply to investment income (dividends, interest, capital gains), pension income (RRSP withdrawals, CPP, OAS), Social Security benefits, or passive income.
• Foreign source only. The income must be earned while performing services in a foreign country. Income earned while working in the US (even if you live abroad) is US-source and cannot be excluded.
• Election on Form 2555. The FEIE is claimed by filing Form 2555 with your 1040. Once elected, it remains in effect until revoked. Revoking triggers a five-year lockout: you cannot re-elect the FEIE for five tax years without IRS approval.

How do you qualify for the FEIE?

You must meet one of two tests:

1. Bona fide residence test. You must be a US citizen (or a US resident alien who is a citizen or national of a country with which the US has an income tax treaty) who has been a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year (January 1 to December 31). “Bona fide resident” means you established genuine residence in the foreign country, with intent to remain, not just physical presence. The IRS looks at the nature and duration of your stay, your purpose, your assimilation into the foreign community, and whether you maintained a home abroad.

For Americans in Canada, the bona fide residence test is usually straightforward: if you live in Canada, work in Canada, have a home in Canada, and are a Canadian tax resident, you are a bona fide resident of Canada for this purpose.

2. Physical presence test. You must be physically present in a foreign country for at least 330 full days during any 12-month period. The 12-month period does not have to align with the tax year. A “full day” means 24 hours, midnight to midnight. Days in transit over international waters or airspace count as neither US nor foreign days. Short trips to the US (for work, family, or holidays) reduce your qualifying days.

The physical presence test is mechanical and date-driven. The bona fide residence test is factual and subjective. Most Americans living full-time in Canada meet both tests, but the bona fide residence test is more forgiving for people who travel frequently.

What income can be excluded?

Only earned income from services performed in a foreign country qualifies. The categories:

• Wages and salaries from a Canadian employer (or a US employer for work performed in Canada)
• Self-employment income from a business or profession conducted in Canada
• Bonuses and commissions attributable to services performed in Canada
• Housing allowances and cost-of-living adjustments paid by an employer for living abroad

Income that does not qualify:

• Dividends, interest, capital gains, and rental income (investment income)
• RRSP withdrawals, CPP, OAS, and pension income
• US Social Security benefits
• Income earned for services performed in the US (even if you live in Canada)
• Income paid by the US government or its agencies (military pay, federal civilian pay)

What is the foreign housing exclusion?

In addition to the earned income exclusion, IRC 911(a)(2) provides a foreign housing exclusion (for employees) or foreign housing deduction (for self-employed individuals). This allows you to exclude or deduct certain housing expenses that exceed a base amount.

• Base amount. 16% of the FEIE maximum, calculated daily. For 2025: 16% of $130,000 = $20,800.
• Reasonable expenses. Rent, utilities (not including telephone), real and personal property insurance, occupancy taxes, nonrefundable security deposits, furniture rental, and residential parking. Mortgage payments and equity acquisition costs do not qualify.
• Cap. The housing amount cannot exceed a percentage of the FEIE maximum (varies by location; the IRS publishes a table of high-cost localities with higher caps).
• Claimed on Form 2555. The housing exclusion/deduction is calculated on the same form as the FEIE.

For most Americans in Canada, the housing exclusion adds relatively modest value compared to the earned income exclusion itself. Canadian housing costs in most cities do not push the exclusion materially above the base amount unless you live in Vancouver or Toronto at high rent levels.

Why is the FTC usually better for Americans in Canada?

The FTC vs FEIE comparison is the critical decision for every American in Canada. The short version: the FTC is almost always better because of how Canadian and US tax rates interact.

The math. Canadian combined federal-provincial marginal tax rates exceed US federal rates at most income levels. An American earning $100,000 CAD in Ontario pays approximately $23,000 CAD in Canadian income tax. The US tax on the same income (converted to USD) is approximately $14,000 USD. The FTC credits the Canadian tax against the US tax, eliminating all US tax and generating approximately $9,000 in excess credits. Those excess credits can offset US tax on investment income (dividends, interest, capital gains) that the FEIE would not touch.

The FEIE penalty. When you claim the FEIE, the excluded income is removed from your US taxable income, but it still enters the rate calculation. This is the “stacking” rule under IRC 911(d)(7): your remaining income is taxed at the rate that would apply if the excluded income were included. If you earn $130,000 and exclude all of it, any additional income (investment income, self-employment income above the exclusion) is taxed starting at the bracket that $130,000 would have reached, not at the bottom. You also lose the FTC on the excluded income, because you cannot claim a credit for foreign tax on income you excluded.

The lost credits. If you claim the FEIE on your Canadian employment income, you cannot use the Canadian tax paid on that income as a foreign tax credit. The Canadian tax is “wasted” (you paid it, but you get no US benefit from it). If instead you had claimed the FTC, the Canadian tax would have eliminated US tax on the earned income and created excess credits that offset US tax on investment income.

When the FEIE works. The FEIE can be better than the FTC in low-tax countries where the foreign tax rate is below the US rate (Middle East, Hong Kong, Singapore). In those countries, the foreign tax credit does not fully offset US tax, and excluding the income produces a better result. Canada is not a low-tax country for this purpose.

What is the five-year lockout?

If you elect the FEIE and later revoke it (by filing without Form 2555), you cannot re-elect the FEIE for the next five tax years without IRS approval under IRC 911(e)(2). The approval is not automatic; the IRS considers whether your circumstances changed significantly.

This matters for Americans in Canada because:

• If you claim the FEIE in your first year in Canada (before you understand the FTC comparison) and then switch to the FTC, you are locked out of the FEIE for five years.
• If you move from Canada to a low-tax country within that five-year period, you cannot re-elect the FEIE.
• The practical advice: if you are moving to Canada, start with the FTC. You can always switch to the FEIE later if your circumstances change, but switching back from the FEIE is restricted.

Can I use both the FEIE and the FTC?

Yes, but not on the same income. You can claim the FEIE on your earned income and the FTC on your non-excluded income (investment income, income above the exclusion limit). However, you cannot claim the FTC for foreign tax attributable to the excluded income. This split is almost never optimal for Americans in Canada, because the FTC on the full income (without the FEIE) eliminates all US tax and generates excess credits that the FEIE approach wastes.

What should I do next?

For most Americans in Canada, the FTC is the right choice, and the FEIE should be avoided. If you have already claimed the FEIE, evaluate whether switching to the FTC would save tax (it usually does). If you are moving to Canada for the first time, start with the FTC from year one.

• FEIE vs FTC: which is better for Canada?, the detailed comparison
• Physical presence test: 330 days, the mechanical qualification test
• Bona fide residence test, the factual qualification test
• Form 1116 and the foreign tax credit, the FTC mechanics
• FTC carryforward and carryback, what happens to excess credits
• Tax home definition for expats, the threshold concept behind both the FEIE and the FTC

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.