What’s New with Foreign Earned Income Exclusion (FEIE)
The IRS announced that the Foreign Earned Income Exclusion for tax year 2026 will increase to $132,900, up from $130,000 in 2025. This means qualifying individuals can exclude more foreign earnings under U.S. tax law. (irs.gov)
Who Qualifies as a Digital Nomad Eligible for FEIE
To claim FEIE, you must meet one of two tests:
- Bona fide residence test: you're resident in a foreign country for a full tax year.
- Physical presence test: you're physically outside the U.S. for 330 full days during any 12-month period.
Also, you must have foreign earned income (not passive income) and maintain a foreign tax home.
How This Impacts Your Tax Planning
- A higher exclusion means more of your foreign income is exempt from U.S. federal taxation—saves you tax dollars.
- Helps reduce double-taxation when combined with foreign tax credits.
- However, the exclusion doesn’t apply to self-employment tax—you’ll still owe Social Security or equivalent on net earnings.
Practical Tips to Maximize the Benefit
- Keep thorough travel logs: Track days in and out of the U.S. precisely to satisfy either test.
- Document foreign expenses and homes: Having a clear foreign tax home (place of work, lodging, etc.) is essential.
- Time contracts wisely: If you can shift income or timing to capture excluded income, do so.
- Use foreign tax credits: If you pay taxes abroad, claim credits to offset U.S. liabilities on non-excluded income.
Example Situation
- Alex, a digital marketing consultant, earns $140,000 last year from clients abroad. With the new FEIE, Alex excludes $132,900, paying U.S. federal taxes only on $7,100 plus any non-qualifying or passive income.
- Maria, working also abroad but earning $80,000, fully excludes her foreign earned income; lower exclusion thresholds in previous years would have constrained her benefit.
Watch Outs and Compliance Requirements
- The excluded income must be “earned” abroad; passive income (investments, royalties) generally not eligible.
- Still required: filing Form 2555 or 2555-EZ with your U.S. return.
- Be aware of Social Security/self-employment taxes.
- If you receive housing-exclusion or deduction, additional rules apply.
Bottom Line
For digital nomads & international professionals, the FEIE increase is a meaningful benefit in 2026. Proper documentation, choice of eligibility test, and combining with foreign tax credits are key to optimizing your U.S. tax exposure abroad.