Digital Nomad
Case Study: A Digital Nomad Using the Foreign Earned Income Exclusion in 2026
Meet Sara, a remote worker overseas—this case study explores how 2026 inflation adjustments and tax treaties affect her strategies using the foreign earned income exclusion under the One, Big, Beautiful Bill.
By NomadicTax Research Team • 5-8 min read • November 24, 2025
## Background
Sara is a U.S. citizen living in Lisbon, Portugal. She works remotely for a U.S. tech company and qualifies under the **physical presence test**. Her annual salary is projected to be **$140,000 gross income** in 2026. Sara wants to reduce U.S. tax liability using the **Foreign Earned Income Exclusion (FEIE)** and understand how recent policy shifts under the OBBB impact her.
## Policy Changes That Affect Her
1. **Increased Exclusion Threshold**: In tax year 2026, the FEIE rose to **$132,900**, up from $130,000 in 2025.([irs.gov](https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2026-including-amendments-from-the-one-big-beautiful-bill?utm_source=openai))
2. **Standard Deduction Under OBBB**: For heads of households or married filing separately, the standard deduction increased slightly (e.g., Single taxpayers get $16,100; Married filing jointly, $32,200).([irs.gov](https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2026-including-amendments-from-the-one-big-beautiful-bill?utm_source=openai))
## Scenario Analysis
| Scenario | Without FEIE | With FEIE | Estimated Tax Savings |
|---|---|---|---|
| Gross income $140,000; Single filing | Taxed on full $140,000 minus deductions (~$16,100) ≈ $123,900 subject to brackets | Exclude $132,900 under FEIE; taxable on ~$7,100 plus deductions | Significant saving in higher brackets and on FICA/social security/state taxes (if applicable) |
“In Sara’s case, using FEIE nearly eliminates U.S. taxable income if she has few other deductions, reducing liability dramatically.”
## Action Plan for Digital Nomads
- **Track days** carefully to meet the physical presence or bona fide residence test. Missed days mean lost exclusion.
- **Keep a detailed income log**, including any foreign housing amounts (if eligible).
- **File Form 2555** with your return to claim FEIE.
- **Consider social security totalization agreements** if abroad, to avoid double contributions.
## Risks & Other Considerations
- WAR – What If Treaty relief applies or forms change. Meetings with a tax advisor can help determine if treaty benefits surpass FEIE.
- Expense deductions, state taxes, and foreign taxes don’t change under FEIE; they may still apply.
- Currency fluctuations and documentation: ensure foreign income is documented in USD, with accurate exchange rates.
## Outcome for Sara
With the FEIE and standard deduction, Sara’s U.S. taxable income might be as low as **$7,100**, saving thousands in federal taxes and potentially eliminating liability depending on state of residence or tax treaties. Early planning and full documentation will be key in light of 2026 inflation adjustments.