Digital Nomad
Digital Nomad Planning: Foreign Earned Income Exclusion and Source-Based Tax Rules for U.S. Expats
U.S. citizens abroad can save significantly if they properly take advantage of the Foreign Earned Income Exclusion and follow source-based tax rules.
By NomadicTax Research Team • 5-8 min read • March 1, 2026
## What is the Foreign Earned Income Exclusion (FEIE)?
The FEIE allows qualifying U.S. taxpayers living outside the U.S. to exclude up to **$132,900** of earned income in tax year 2026. ([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)) To use it, you must pass either the **physical presence test** (330 full days out of 12 months abroad) or the **bona fide residency test** (resident in a foreign country with established citizenship or residence intent).
## How Source-Based Rules Affect Your Income
Even when you exclude earned income, other sources still matter:
- **Passive income** like interest, dividends is generally taxed in the U.S. regardless of location.
- **Foreign tax credits** can offset U.S. tax on non-earned income taxed abroad once excluded income has been accounted for.
- **Self-employed expats** still owe self-employment tax (Social Security / Medicare) even if they exclude earned income via FEIE, but OBBB may include adjustments in certain situations—verify your status.
## Recent Changes from “One, Big, Beautiful Bill” (OBBB)
- The FEIE amount increased from **$130,000 to $132,900** for 2026. ([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))
- Standard deduction thresholds, AMT exemptions, and other brackets shifted due to indexing under OBBB. Reviewing these helps correct filing. ([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 is a U.S. citizen freelance content creator living in Portugal. In 2026, she earns $120,000 in gross freelance income (earned income), plus $5,000 in dividends (passive income). Here’s how things play out:
- Maria can exclude up to $132,900 under FEIE, so her entire $120,000 earned income is excluded.
- Her $5,000 passive income is **not excluded** and is taxed by the U.S.
- She may compute foreign tax credits if she paid foreign tax on that passive income, reducing U.S. tax liability.
- She still needs to file Form 2555 to claim the FEIE, Form 1040 for general income, and possibly Schedule B for passive income.
## Tips & Caution Points
- **Maintain rigorous travel/log records** for either presence test or bona fide residency test. Gaps or errors disqualify you.
- **Track foreign taxes paid** especially on passive income to maximize foreign tax credits, avoid double taxation.
- **Stay updated on AMT phase-outs** and other limitations—it affects higher earners abroad.
- **File timely and keep eligible forms** like Form 2555, FBAR (if you have foreign bank accounts over thresholds), FATCA declarations where applicable.
## Summing Up
For digital nomads, the FEIE remains a powerful tool under the 2026 tax rules—but it’s only part of the picture. Proper source‐based income tracking, satisfying eligibility tests, and combining with foreign tax credits can ensure you stay legal and minimize tax liability abroad. Always do annual reviews to make sure changes in law, income, or residence don’t upend your planning.