Digital Nomad
Case Study: Digital Nomad and Foreign Earned Income Exclusion under New Inflation Adjustments
As inflation adjustments under OBBB increase thresholds, this case study explores how a digital nomad can leverage the Foreign Earned Income Exclusion in 2026 and what to watch for in 2025.
By NomadicTax Research Team • 5-8 min read • November 17, 2025
## Who is a Digital Nomad?
A digital nomad is someone who works remotely while living outside the United States, often obtaining foreign income and potentially qualifying for special exclusions or credits under U.S. tax law.
## Foreign Earned Income Exclusion (FEIE) & Inflation Adjustments
The IRS announced that for tax year 2026, the **Foreign Earned Income Exclusion** (FEIE) amount increases 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))
## Case Example: Maria the Marketer
| Scenario | Year | FEIE Limit | Maria’s Income | Taxable of Foreign Earned Income |
|---|---|---|---|---|
| Scenario A | 2025 | $130,000 | $140,000 earned abroad | She can exclude $130,000; remaining $10,000 taxed normally + U.S. tax credits/deductions may apply. |
| Scenario B | 2026 | $132,900 | $140,000 | She excludes $132,900; only $7,100 is taxable. |
Assuming Maria qualifies under the **Bona Fide Resident** or **Physical Presence Test** and meets documentation requirements, she can reduce her U.S. taxable income substantially.
## Additional Considerations
- **Housing Exclusion/Deduction**: If Maria incurs foreign housing costs, she may also be able to deduct or exclude some of those expenses, further reducing U.S. tax owed.
- **State Taxes**: Many states do not offer an FEIE, so state taxable income may still include full foreign income. Maria needs to plan state residency accordingly.
- **Self-Employment Taxes**: FEIE does **not** exclude income for self-employment tax; net self-employment income above exclusion still subject to Social Security and Medicare. Maria should consider whether setting up foreign LLC or partnership affects that.
## Practical Steps for Digital Nomads in 2025-26
- Track foreign earned income and housing expenses carefully; maintain clear records of time spent abroad.
- Confirm eligibility (physical presence or bona fide residence) before claiming FEIE.
- Evaluate whether electing a foreign tax credit might yield a lower total tax than FEIE, depending on foreign tax rates.
- Look into state residency rules and how they treat foreign income—moving or changing domicile may help.
## Takeaways
Inflation adjustments in OBBB are favorable for digital nomads earning foreign income. Using FEIE with updated limits can reduce U.S. taxes significantly, especially in 2026. However, planning is essential to account for state taxes, documentation, and self-employment tax obligations.