Digital Nomad
Digital Nomads and the Foreign Earned Income Exclusion After OBBB Adjustments
Changes to the Foreign Earned Income Exclusion and housing expense limits under recent IRS inflation‐adjustments affect digital nomads—here’s how to leverage them properly.
By NomadicTax Research Team • 5-8 min read • November 18, 2025
## What’s Changing for Digital Nomads in Tax Year 2026
Digital nomads—foreign‐based U.S. citizens or residents working abroad—often rely on the **Foreign Earned Income Exclusion (FEIE)** under IRC §911, and deductions or exclusions for housing expenses. Under the new inflation‐adjusted items announced for 2026, the FEIE increases from **$130,000 in 2025** to **$132,900 in 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)) Housing expense limitations (which vary by locality) are also updated annually. ([irs.gov](https://www.irs.gov/irb/2025-13_IRB?utm_source=openai))
## Eligibility & Tests to Remember
To qualify for FEIE, you must:
- Be a citizen or resident alien of the U.S.
- Have a foreign tax home.
- Satisfy either the **Bona Fide Residence Test** or the **Physical Presence Test**. For some nomads displaced by war, unrest, or other adverse events, a waiver may apply for time requirements. For example, for TY-2024, Ukraine, Iraq, Haiti, and Bangladesh were added to the waiver list. ([irs.gov](https://www.irs.gov/irb/2025-13_IRB?utm_source=openai))
Rent or other housing expenses eligible for exclusion must be reasonable and exceed base amounts. The limitation is adjusted based on the U.S. versus foreign cost of living, with varying caps by location. ([irs.gov](https://www.irs.gov/irb/2025-13_IRB?utm_source=openai))
## Strategies for Nomads in 2025-2026
- **Document your time abroad** thoroughly, especially if planning to rely on the Physical Presence Test (330 days out of 12 months), or Bona Fide Residence, which depends more on intent and less on exact days.
- **Track your housing costs and location**: Proper records will show whether housing expenses exceed the specified cap. Use local fair market rates as benchmarks.
- **Plan incomes to leverage under the exclusion limit**: If you foresee large income jumps, consider timing income or using tax credits to offset taxable income beyond FEIE cap.
- **Understand impacts of exchange rates**: All income, housing expenses, and thresholds are computed in U.S. dollars—maintain accurate conversion records when abroad.
## Examples
**Example 1**: Alex lives in Lisbon in 2026 and earns $130,000 abroad, pays housing costs $25,000. With FEIE at $132,900, Alex can exclude up to that limit, and also exclude housing costs above the base amount but capped based on Lisbon’s housing cap. If earned income jumps to $160,000, only the portion above FEIE would be taxed.
**Example 2**: Maria, displaced from a country recently added to the waiver list, qualifies under the Bona Fide Residence Waiver for Displacement, allowing her to qualify for FEIE even though full residency was interrupted. Use this if travel plans were disrupted by adverse-conditions country status. ([irs.gov](https://www.irs.gov/irb/2025-13_IRB?utm_source=openai))
## Pitfalls to Avoid
- Exceeding the housing limit without realizing the cap is location‐based can lead to disallowed exclusion.
- Missing deadlines for submitting statements from lenders under the new car interest reporting rules could affect deductions elsewhere.
- Not verifying whether the vehicle qualifies (final assembly, weight, type) under OBBB if claiming interest deduction.
## Final Thoughts
For digital nomads, the rising FEIE and housing expense caps offer meaningful benefits, but only if you stay disciplined in record-keeping and understanding eligibility rules. Coordinate your income, housing expenditures, and travel patterns now to make the most of the 2025-2026 windows.