Digital Nomad
Digital Nomad Guide: Foreign Earned Income Exclusion & Housing Deduction in 2025-2026
For U.S. citizens working abroad, recent updates to IRS Publication 54 sharpen how the Foreign Earned Income Exclusion and Housing Deduction are calculated—essential reading for digital nomads.
By NomadicTax Research Team • 5-8 min read • August 6, 2026
## What is Publication 54 & What’s New?
**IRS Publication 54**, revised December 2025, provides detailed rules for U.S. citizens and resident aliens living abroad. It explains how to use the **Foreign Earned Income Exclusion (FEIE)**, **Foreign Housing Exclusion/Deduction**, and other international income rules under U.S. tax law. ([irs.gov](https://www.irs.gov/publications/p54?utm_source=openai))
New or updated items include:
- The FEIE has been adjusted to **$132,900** for 2026, up from $130,000 in 2025. ([irs.gov](https://www.irs.gov/publications/p54?utm_source=openai))
- Publication now notes new forms: **Form 8964-ELE** and **Form 8964-TRA** for Section 987 “Qualified Business Unit (QBU)” elections and transition reporting. ([irs.gov](https://www.irs.gov/publications/p54?utm_source=openai))
## Qualifying for FEIE & Housing Exclusion
**Eligibility depends on two tests**:
- **Physical Presence Test**: Be physically present in a foreign country for **330 full days** in a 12-month period.
- **Bona Fide Residence Test**: Establish a foreign residence for an entire tax year, with intent and actual residency, and not have a tax home in the U.S. typically applies to diplomatic or contracted work situations. Publication 54 explains both. ([irs.gov](https://www.irs.gov/publications/p54?utm_source=openai))
The **housing exclusion** is only available if you maintain a tax home abroad and meet one of those tests. Costs like rent, utilities, and insurance may count—but limits apply depending on the location.
## Actionable Tips for Digital Nomads
- **Track days abroad carefully** to guarantee you meet 330 days (for physical presence) or establish bona fide residence where feasible. Periods of travel into or from the U.S. may interrupt either test.
- **Maintain accurate expense documentation**, especially housing costs, including rent, utilities, foreign taxes—good records will be essential if audited.
- **Evaluate your tax home**: Normally, your tax home is the foreign location of your primary business or employment. If you're frequently moving or your family remains in the U.S., the IRS may challenge your tax home.
- **Use new forms if needed** (QBU/Form 8964) to report business unit elections correctly—avoid penalties from misreporting.
## Examples
- **Nomad Noel** is in Lisbon from Jan-June 2025, then travels across several countries the rest of the year. He needs to find a consecutive 12-month period with 330 full days abroad to qualify for FEIE.
- **Remote Worker Rina**, based in a foreign country with her spouse and household, qualifies under Bona Fide Residence; her housing deduction may include utilities and local taxes.
- **Entrepreneur Evan** earns from foreign clients and owns a QBU under Section 987; he must file Form 8964-ELE or TRA as explained in Publication 54 to elect or transition as required.
## Why This Matters Now
- The **FEIE amount increased**, giving higher exclusion potential for 2026.
- Filing mistakes concerning housing exclusion, tax home, or misusing forms can result in large taxes or loss of benefits.
- With the revamp of Publication 54, understanding these tools correctly is more important than ever.
## Summary
If you live and work abroad, take heed: the updated FEIE amount, new forms for business units, and clearer Publication 54 guidance should help digital nomads optimize their U.S. tax position—if you plan carefully and document thoroughly.