US Expats in Colombia: How to Shield Your Income with the FEIE (and the Traps to Avoid)

I'm a US Enrolled Agent who lives in Medellin — so I file on both sides of this: the IRS and Colombia's DIAN. The Foreign Earned Income Exclusion (FEIE) is the most powerful tool for US expats here, and also the most misunderstood. Here's how it actually works.

What the FEIE actually does

Form 2555 lets you exclude foreign EARNED income — wages and self-employment — up to about $130,000 (2025, adjusted yearly) from US tax, if you qualify. You qualify one of two ways: the Physical Presence Test (330 full days outside the US in a 12-month window) or the Bona Fide Residence Test (a full tax year genuinely resident abroad — which many of us in Medellin meet).

What it does NOT do — the traps that cost expats

1) It doesn't cover passive income. Dividends, capital gains, rental income, or S-corp K-1 distributions are NOT excludable under the FEIE — for those you use the Foreign Tax Credit (Form 1116). 2) It does NOT erase self-employment tax. There is no US-Colombia totalization agreement, so a self-employed expat still owes roughly 15.3% SE tax even after the FEIE. 3) The stacking rule: if you earn over the exclusion, only the excess is taxed — but at your full marginal rate, as if the excluded income were still on top.

Colombia's side: the DIAN taxes worldwide income

If you're a Colombian tax resident (generally 183+ days in a 365-day period), the DIAN taxes your worldwide income — and there is NO comprehensive US-Colombia income tax treaty. Double-tax relief comes from carefully coordinated foreign tax credits on each side, not from a treaty. Get the ordering or the timing wrong and you can genuinely pay twice on the same dollar.

Don't forget the disclosures

Living abroad triggers extra US filings whether or not you owe tax: the FBAR (FinCEN Form 114) if your foreign accounts ever total over $10,000; FATCA Form 8938 above higher thresholds; and Form 5471 if you own a foreign corporation. The penalties for missing these dwarf the tax itself — this is where DIY expats get hurt.

The bottom line

Done right, a US citizen in Colombia can legally exclude six figures of earned income, credit the rest, stay compliant with the DIAN, and sidestep the penalty traps. Done wrong, you overpay one country, underreport to the other, or trigger disclosure penalties. Coordinating both jurisdictions is exactly the work I do.

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Sabih Shafi, EA — All State Tax Resolution. Enrolled-Agent prepared. General information, not individual tax or legal advice; exclusion amounts and eligibility depend on your specific facts and the current year's limits.