What the 2026 exclusion does—and does not do
For tax year 2026, a qualifying U.S. citizen or resident alien may exclude up to $132,900 of foreign earned income per person under the foreign earned income exclusion. The exclusion is not automatic, and it does not eliminate the obligation to file a U.S. federal tax return. The income must still be reported, generally with Form 2555, and the taxpayer must satisfy either the bona fide residence test or the physical presence test.
The IRS defines foreign earned income by where the services are performed—not by the location of the employer, the bank receiving payment, or the currency used. A U.S. consultant working from India for a New York client generally performs services abroad, but U.S. workdays may be excluded from the foreign-source calculation.
The two qualification routes
- Bona fide residence test: You generally must be a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year.
- Physical presence test: You generally must be physically present in foreign countries for at least 330 full days during a 12-month period.
A taxpayer who moves abroad late in the year may not qualify for the full annual limit. The exclusion is prorated according to qualifying days in the tax year.
Housing exclusion and location-based limits
A separate foreign housing exclusion or deduction may apply to eligible housing costs. For 2026, the general housing-expense ceiling is $39,870, although the IRS publishes higher location-specific limits for certain expensive cities. The housing exclusion is calculated before the foreign earned income exclusion, reducing the remaining income eligible for the general exclusion.
Self-employed taxpayers need extra care
Self-employed individuals must account for business expenses and the deduction for one-half of self-employment tax when allocating costs between excluded and non-excluded income. Excluding gross receipts without performing this allocation can overstate the allowable benefit.
Practical planning checklist
- Track workdays by country and retain travel records.
- Separate foreign workdays from U.S. workdays.
- Preserve leases, visa records, utility bills, and foreign tax documents.
- Estimate housing costs before choosing between the FEIE and foreign tax credit.
- File Form 2555 even when the exclusion eliminates federal income tax on the qualifying portion.
The FEIE can be valuable, but it is a calculation and documentation regime—not a blanket exemption for Americans living abroad.