What’s New for Foreign Earned Income Exclusion (FEIE)
Under the 2026 inflation adjustment, the FEIE increases to $132,900, up from $130,000 in 2025. This reflects cost-of-living changes and benefits nomads who live abroad and qualify. (irs.gov)
Qualification Criteria Recap
To qualify for FEIE, you must meet one of:
- Bona fide residence test: You establish residence in a foreign country for an uninterrupted period that includes a full tax year.
- Physical presence test: You’re physically present in foreign countries 330 full days during any 12-month period.
You also need a tax home that is abroad—you can’t claim FEIE if your home base remains in the U.S. for tax purposes.
Actionable Tips For Digital Nomads
- Audit your days of presence: Keep a calendar, passport stamps, boarding passes—proof that you were outside the U.S. at least 330 days if relying on that test.
- Establish a foreign tax home: Define where you're residing, where you incur living expenses; avoid ambiguous nominal homes in U.S. states to stay safe.
- Plan early for 2026: With the higher exclusion, some income that was previously taxable may now be excluded. Sync your contracts to fall in years with better FEIE thresholds if possible.
- Know limitations: Any income beyond the exclusion is still taxable, and some income (e.g., employer-provided housing, self-employment tax) gets treated differently.
- Combine State & Foreign Tax Credits: For U.S. citizens abroad, FEIE reduces federal tax—but state tax still may apply. Foreign tax credit expenses may further reduce your tax bill.
Example
Alex, a freelance software developer, lives in Lisbon; he earns $140,000 in 2026. He meets the physical presence test. He may exclude $132,900; the remaining $7,100 of income is subject to U.S. tax. Meanwhile he pays local tax in Portugal—he may claim foreign tax credits to reduce double taxation.
Extra Considerations
- Housing exclusion/deduction: If you have housing costs abroad above certain thresholds, you might exclude part of those too—keep receipts and proper documentation.
- Planning travel and work cycles: Short trips back to U.S. while maintaining foreign presence can blur tests—document everything.
- Reporting required: File Form 2555 with your U.S. tax return to claim FEIE.
Takeaway: The 2026 FEIE increase is meaningful, especially for high-earning nomads. But maximizing the benefit means crisp documentation, an established tax home, and careful year-end planning.