Updated Foreign Earned Income Exclusion for TY 2026
The exclusion amount increases to $132,900 for tax year 2026 (from $130,000 in 2025). (irs.gov) This means U.S. citizens or resident aliens who live abroad and meet either the bona fide residence test or physical presence test, or are forced to leave a foreign country due to war, civil unrest, or similar adverse conditions, can exclude up to this higher amount. Note: special waivers are granted under Rev. Proc 2025-17 for time-requirement failures for zones including Ukraine, Iraq, Haiti, and Bangladesh for tax year 2024. (irs.gov)
What Digital Nomads Should Do
- Track your foreign income carefully: Earnings in local currency, housing allowances, bonuses—all need inclusion, then subtraction via exclusion if qualified. The new higher limit means less U.S. tax exposure.
- Stay aware of test dates: Bona fide residence is stricter; physical presence requires 330 full days in any 12-month span. If you leave affected zones, special waivers may apply. Keep diary, travel logs.
- Housing cost differences: While exclusion of foreign earned income doesn’t include housing exclusion here, inflation adjustments and cost-of-living variances may affect tax burden in your state of filing.
Example Life Moves
- María, a software contractor, lives in Lisbon. In 2026 she earns €140,000, converted to USD the equivalent of $140,000. If she meets the physical presence test, she can exclude $132,900, meaning only $7,100 taxable in the U.S.
- Jamal used to live in Ukraine until 2024, then relocated because of conflict. For 2024, he qualifies for a time-requirement waiver under Rev. Proc 2025-17, allowing him to meet the exclusion even though he couldn’t fulfill residence requirements. (irs.gov)
Things to Watch Out
- Even with exclusion, self-employment tax still applies on foreign earned income. Exclusion does not exempt that.
- Foreign housing costs may still be taxable if they exceed CLAC (cost of living allowances) unless housing exclusion rules apply.
- Filing deadlines: an overseas resident may get an automatic 2-month extension to file, but interest accrues on taxes due by original deadline.
The rising exclusion threshold is good news for nomads—pair it with strong record-keeping and awareness of your country of residence and test eligibility to maximize benefit with minimal stress.