What Counts as “Earned Income” for the Foreign Earned Income Exclusion?
Many U.S. taxpayers living abroad assume that if they qualify for the Foreign Earned Income Exclusion (FEIE), all their income is excluded.
That is not correct.
The FEIE applies only to earned income — not to investment income, retirement income, or capital gains. Understanding this distinction can prevent costly mistakes.
In summary, the services must be performed in a foreign country. And the exclusion applies to compensation for services performed. It does NOT apply to passive or retirement income.
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This article is for informational purposes only and does not constitute tax advice. Every taxpayer’s situation is unique. Please message me for a complimentary initial consultation to discuss your specific facts and planning opportunities.
What Is Earned Income?
For FEIE purposes, earned income includes compensation you receive for performing services, such as:
• Wages and salaries
• Bonuses and commissions
• Self-employment income
• Professional fees
If you worked for it, it is likely earned income.
What Is Not Earned Income?
The following types of income do not qualify for the Foreign Earned Income Exclusion:
• Interest (bank accounts, CDs)
• Dividends (stocks, mutual funds)
• Capital gains (stock sales, crypto, real estate gains)
• Rental income (in most cases)
• Social Security benefits
• IRA or 401(k) distributions
• Pension or annuity income
If you are receiving investment or retirement income from the United States while living abroad, that income is still taxable under normal U.S. tax rules. Living overseas does not convert passive income into earned income.
A Simple Example
If a taxpayer living abroad earns:
• $110,000 in foreign wages
• $20,000 in dividends
• $15,000 in capital gains
Only the wages may qualify for the exclusion. The dividends and capital gains remain taxable.