Digital Nomad
Digital Nomad Alert: IRS Inflation Adjustments Affect Your Foreign Earned Income Exclusion
With the 2026 foreign earned income exclusion amount rising under the OBBB Act, U.S. expats and digital nomads should reassess their strategies—this change could mean thousands more in excluded income.
By NomadicTax Research Team • 5-8 min read • November 21, 2025
## What Just Changed for Foreign Earned Income Exclusion (FEIE)
The IRS released inflation-adjusted figures under Revenue Procedure 2025-32, part of OBBB’s sweeping changes. Among these is the **foreign earned income exclusion** for 2026, rising 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)) If you’re a U.S. citizen or resident alien working abroad, this means you can exclude more income from U.S. federal taxation.
## How FEIE Works: A Quick Refresher
- To qualify, those living and working abroad must pass either the **bona fide resident test** or the **physical presence test**.
- Amounts excluded reduce your gross income, but cannot offset self-employment tax.
- Additional rules for housing exclusions and deductions may also apply depending on location and income.
## Why This Matters for Digital Nomads
- **Higher exclusion** means you can live in more expensive locations or earn more before U.S. tax applies.
- Helps with **cash flow planning**: fewer U.S. tax liabilities during the year.
- Might influence where to locate or how much to charge as a contractor abroad.
## Tax Planning Moves to Consider
- **Time your overseas travel**: meeting the physical presence test (330 full days outside U.S.) needs careful calendar planning.
- **Evaluate contract structures**: as independent contractors or through foreign entities—FEIE applies to individual income, but self-employment tax still applies unless structured otherwise.
- **Monitor housing exclusion potentials** when you have high costs abroad—some portions not indexed, others separate thresholds.
## Example Case
Imagine a full-time digital nomad based in Lisbon for the entire calendar year 2026. All else equal, with the exclusion rising to $132,900, they can exclude that full amount (if their earnings are under it) from U.S. taxable income. If they earn $150,000, they’ll only pay U.S. tax on the remaining $17,100 (plus taxes for self-employment). That’s a meaningful savings compared to prior years with lower exclusion limits.
## Things to Watch Out For
- **Self-employment and payroll taxes** are still due; FEIE doesn’t touch those.
- **Foreign tax credits** vs. FEIE: sometimes better to take one over the other—depending on tax treaties and foreign tax rates.
- **Currency fluctuations**: income earned abroad converted to U.S. dollars can shift amounts slightly depending on exchange rates.
## Actionable Tips for Digital Nomads
1. Keep detailed travel logs and proof of domicile/physical presence for eligibility.
2. Use the increased exclusion in advance budgeting: plan for what remains taxable.
3. Seek local advice if using foreign entities or doing contracting overseas.
4. Stay informed of any new guidance or Treasury rulings affecting FEIE and housing deductions.
For digital nomads, the rising exclusion gives breathing room—but proper documentation and planning remain essential to reap the full benefits.