Foreign Earned Income Exclusion (FEIE) for Americans in Japan

If you’re an American living and working in Japan, you may need to file a US tax return on your worldwide income. But did you know you may be able to exclude a significant portion of your Japanese earnings from US tax?

The Foreign Earned Income Exclusion (FEIE) allows qualifying US taxpayers abroad to exclude up to $130,000 (tax year 2025) or $132,900 (tax year 2026) of foreign earned income from their US federal income tax. For many Americans in Japan whose income falls under this threshold, the FEIE can reduce their US income tax on earned income to zero.

This article discusses 2025 US returns generally filed in 2026 and notes selected 2026 inflation-adjusted amounts where relevant. It is general information for US taxpayers living in Japan and is not tax, legal, or accounting advice. Consult a qualified tax professional for your situation.

What Is the Foreign Earned Income Exclusion?

The FEIE lets you exclude qualifying foreign earned income from your US taxable income. Unlike the Foreign Tax Credit (which offsets US tax with foreign taxes paid or accrued), the FEIE removes the income from your taxable income — though it remains relevant to the tax rate calculation on your nonexcluded income (see Tax Stacking below).

You claim the FEIE by filing Form 2555 with your US tax return.

Key points:

• The exclusion applies only to earned income — wages, salaries, self-employment income, and professional fees
• It does not apply to investment income (dividends, interest, capital gains, rental income)
• It does not reduce US self-employment tax
• The exclusion amount is adjusted annually for inflation

Source: IRS — Foreign Earned Income Exclusion

Exclusion Amounts

If you qualify for only part of the year (for example, you moved to Japan mid-year), the exclusion is prorated based on the number of qualifying days.

Source: IRS — Figuring the Foreign Earned Income Exclusion | IRS — 2026 Inflation Adjustments

Who Qualifies?

To claim the FEIE, you must meet all three of the following:

1. Foreign Earned Income

Your income must be earned income from work performed in a foreign country. This includes:

• Salary from a Japanese employer
• Self-employment income from services performed in Japan
• Professional fees for work done in Japan

Income from work performed in the US — even if paid by a Japanese employer — does not qualify.

2. Tax Home in a Foreign Country

Your tax home must be in Japan (or another foreign country). The IRS defines your tax home as the general area of your main place of business or employment, not where you live. If you work in Japan, your tax home is generally in Japan.

3. Bona Fide Residence Test OR Physical Presence Test

You must satisfy one of these two tests:

Bona Fide Residence Test

• You are a bona fide resident of Japan (or another foreign country) for an uninterrupted period that includes an entire tax year (January 1 – December 31)
• This is based on facts and circumstances — intent to remain, establishment of a home, community ties, visa status
• Short trips to the US do not necessarily break bona fide residence
• A US resident alien can use this test only if the person is a citizen or national of a country with which the United States has an income tax treaty in effect and otherwise satisfies the test requirements

Physical Presence Test

• You are physically present in a foreign country or countries for at least 330 full days during any 12-month period
• The 12-month period does not have to match the tax year — you choose the period that works best
• “Full day” means the entire 24-hour period, midnight to midnight. Days of travel between the US and a foreign country generally do not count
• Available to both US citizens and green card holders

Source: IRS — Tax Home in Foreign Country | IRS — Physical Presence Test | IRS — Bona Fide Residence Test

What Income Can You Exclude?

Qualifying (Earned Income)

• Salary and wages from a Japanese employer
• Self-employment income for services performed in Japan
• Bonuses tied to services performed in Japan
• Housing allowances (may qualify for the separate Foreign Housing Exclusion)

NOT Qualifying

• Dividends and interest
• Capital gains
• Rental income
• Pension or annuity payments
• Income from work performed in the United States
• Pay received as an employee of the US government or one of its agencies

Source: IRS — What Is Foreign Earned Income

Foreign Housing Exclusion

In addition to the FEIE, you may also claim the Foreign Housing Exclusion (or deduction, if self-employed) for qualifying housing expenses that exceed a base amount.

Qualifying housing expenses include:

• Rent
• Utilities (excluding telephone)
• Property insurance
• Furniture rental

The full-year base housing amount for 2025 is $20,800 (16% of the FEIE limit: $130,000 × 16%). For a partial qualifying period, the base is prorated ($20,800 ÷ 365 × qualifying days). Expenses above this base — up to a location-specific cap that can materially change the result for taxpayers in Japan — can be excluded or deducted.

The housing exclusion can be valuable for Americans in Japan given the cost of housing in cities like Tokyo and Osaka.

Source: IRS — Foreign Housing Exclusion and Deduction | IRS — Form 2555 Instructions

How to Claim the FEIE

Step 1: Determine Your Qualifying Period

Identify which test you meet (bona fide residence or physical presence) and the dates of your qualifying period.

For the physical presence test, count your days carefully. Keep records of travel dates — passport stamps, flight records, and calendar logs.

Step 2: Calculate Your Excludable Income

Your exclusion is the lesser of:

• Your foreign earned income earned during the qualifying period, minus any foreign housing exclusion claimed, or
• The maximum exclusion amount (prorated if you qualify for only part of the year)

The housing exclusion is figured before the FEIE. The maximum FEIE cannot exceed your foreign earned income minus the housing exclusion amount.

Step 3: File Form 2555

Attach Form 2555 to your Form 1040. Key information needed:

• Your foreign address and employer information
• Your qualifying test (bona fide residence or physical presence) and dates
• Your foreign earned income
• Housing expenses (if claiming the housing exclusion)

Step 4: Report Correctly on Form 1040

The excluded income still appears on your Form 1040 but is subtracted via Form 2555. Your US tax is then calculated on the remaining income — but at the tax rates that would apply if the excluded income were included (tax stacking).

Source: IRS — About Form 2555

FEIE vs. Foreign Tax Credit

Americans in Japan can use the FEIE, the Foreign Tax Credit (FTC), or both — but not on the same income. For a detailed comparison, see our Foreign Tax Credit article.

Key differences:

• The FEIE excludes income; the FTC credits foreign taxes paid or accrued against US tax
• The FEIE has a dollar cap; the FTC has no fixed ceiling (but is limited by the Form 1116 calculation)
• The FEIE covers only earned income; the FTC can cover earned and investment income
• Neither eliminates US self-employment tax

Source: IRS — Form 1116 Instructions | IRS — Publication 54

Tax Stacking: How the FEIE Affects Your Tax Rate

When you use the FEIE, the excluded income is removed from your taxable income — but the IRS still uses it to determine your marginal tax rate on remaining income. This is called tax stacking.

To illustrate the rate effect only (ignoring deductions and other return items): if you earn $150,000 and exclude $130,000, your tax on the remaining $20,000 is calculated at the marginal rates that apply to income in the $130,001–$150,000 range, not the $0–$20,000 range. The actual tax is determined using the Foreign Earned Income Tax Worksheet in the Form 1040 instructions.

This means:

• Your effective tax rate on remaining income is higher than you might expect
• If you also claim the FTC, you must remove the foreign taxes allocable to income excluded under the FEIE. The combined result depends on the Form 1116 allocation and limitation calculations and should be modeled rather than inferred from the marginal tax rate alone

Source: IRS — Publication 54 | IRS — Form 1116 Instructions

The FEIE and Self-Employment Tax

The FEIE reduces your US income tax but does not reduce US self-employment tax (Social Security and Medicare taxes, generally 15.3% of net earnings from self-employment, subject to the Social Security wage base and other rules).

If you’re self-employed in Japan, you may still owe US SE tax even if the FEIE eliminates your income tax. The Japan-US Totalization Agreement may affect your SE tax obligations if you are covered by Japanese social insurance, but coverage depends on the agreement’s rules and may require a certificate of coverage.

See our article on Japanese Social Insurance and US Self-Employment Tax for details.

Common Mistakes to Avoid

• Failing the physical presence test by a few days — Count carefully. A business trip or vacation to the US can drop you below 330 days. Keep a travel log
• Not filing Form 2555 when claiming the FEIE — The exclusion is not automatic. If you are required to file and want to claim it, attach Form 2555 to your return
• Excluding investment income — Dividends, interest, and capital gains cannot be excluded. Only earned income qualifies
• Forgetting about tax stacking — Nonexcluded taxable income may be taxed at higher marginal rates than expected because the excluded income remains relevant to the rate calculation
• Revoking the FEIE without understanding the consequences — Once revoked, you generally cannot re-elect for five years without IRS approval
• Assuming the FEIE eliminates all US tax — Self-employment tax, NIIT on investment income, and other taxes may still apply

Frequently Asked Questions

If I earn less than $130,000, do I owe no US income tax?

If all your income is qualifying foreign earned income and you meet the FEIE requirements, the exclusion may eliminate your US income tax on that income. If you are required to file a US return (based on your gross income before the exclusion or another filing trigger), you must attach Form 2555 to claim the FEIE. Self-employment tax and other taxes may still apply.

Can I use the FEIE if I’m a green card holder living in Japan?

Yes, but with a limitation. Green card holders can use the physical presence test (330 days). The bona fide residence test is available to a US resident alien only if the person is a citizen or national of a country with which the United States has an income tax treaty in effect. Holding a US green card does not, by itself, satisfy this requirement. Consult a tax professional for your specific situation.

What if I work remotely for a US company while living in Japan?

If you perform the work while physically in Japan and meet the other FEIE requirements, the income generally qualifies as foreign earned income — regardless of where your employer is located. The key factor is where you perform the services, not where the employer is based.

Can I switch between FEIE and FTC each year?

You can choose the FEIE one year and the FTC the next, but revoking the FEIE election has consequences. Once revoked, you generally cannot re-elect for five years without IRS approval. Consider the long-term implications before switching.

What happens to my Japanese taxes if I use the FEIE?

Japanese taxes allocable to excluded income cannot be claimed as a Foreign Tax Credit. If you exclude all your earned income under the FEIE, you generally cannot also claim an FTC for Japanese taxes on that same income. You may still claim the FTC, subject to the applicable rules, for Japanese taxes on investment income or on earned income that remains taxable after the FEIE.

Next Steps

• Foreign Tax Credit — When crediting Japanese taxes works better
• FBAR Filing — Reporting your Japanese bank accounts
• Japanese Social Insurance and US SE Tax — How the Totalization Agreement affects self-employment tax
• Streamlined Filing — How to catch up if you haven’t been filing