Digital Nomad

Digital Nomads & Foreign Earned Income Under OBBB: What to Know in 2025 & 2026

For digital nomads making income abroad, changes from OBBB—like increased Foreign Earned Income Exclusion and tips deductions—may reshape your tax strategy. Learn how to stay compliant and optimize your tax under the new rules.

By NomadicTax Research Team • 5-8 min read • November 18, 2025

## What OBBB Does for Foreign Earned Income The OBBB increases the **Foreign Earned Income Exclusion (FEIE)** for tax year 2026. Under the updated Revenue Procedure, the FEIE rises to **$132,900**, up from $130,000 in 2025.([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)) This is important for U.S. citizens or resident aliens living abroad who qualify under the bona fide residence or physical presence test. ## Key Strategies for Digital Nomads ### 1. Confirm Eligibility and Timing To qualify for FEIE: - Establish **foreign tax home** and either a bona fide residence in another country OR physical presence of 330 full days abroad during any 12-month period. - Apply FEIE for tax year 2025 using its limit ($130,000); the 2026 limit comes when you file returns in 2027. OBBB's FEIE increase applies starting 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)) ### 2. Consider Tips & Overtime Deductions (if they apply) If you’re working online but drawing tips or overtime recognized by U.S. payors, these new deductions (qualified tips, qualified overtime) may apply. Keep thorough records even if abroad—especially if receiving tips via platforms or pay from U.S. persons. Note: reporting and statement requirements may need collaboration with payors in the U.S. for accurate data. The occupation code for tips, and the amount of overtime above regular rates, may need to be documented to claim these deductions.([irs.gov](https://www.irs.gov/newsroom/treasury-irs-provide-penalty-relief-for-tax-year-2025-for-information-reporting-on-tips-and-overtime-under-the-one-big-beautiful-bill?utm_source=openai)) ### 3. Plan Around Inflation Adjustments & Cost-of-Living Thresholds - Be aware of indexed thresholds for standard deductions, AMT exemptions, etc., which rise 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)) - For FEIE foreign housing cost limitations, consult annually published IRS notices/regulations to ensure you claim correct amounts. Adjusted limitations vary by geographic area. (Note: Notice 2025-16 published earlier establishes housing limits.)([irs.gov](https://www.irs.gov/irb/2025-13_IRB?utm_source=openai)) ## Practical Checklist for Digital Nomads - ❏ Track days abroad and maintain records (travel logs, passports) for physical presence test. - ❏ Identify whether your remote work pays you from U.S. entities that require 1099 or W-2 reporting—these are relevant for deductions and for specific occupation/tip/overtime rules. - ❏ Use U.S. withholding estimator tools if you have U.S. source income; adjustments may be needed with higher standard deductions or new exemption rules. - ❏ Keep detailed housing expenses documentation by location for FEIE housing cost deduction limits. - ❏ Monitor IRS guidance on foreign tax credits vs exclusion—sometimes dropping foreign taxes in favor of FEIE may make sense depending on your country’s tax treaty. ## Case Illustration *Sarah*, a software developer from the U.S., lives in Lisbon and earns **$135,000** from U.S. clients in 2026. Applying FEIE, she excludes **$132,900**, paying U.S. tax only on the $2,100 surplus, plus any additional self-employment tax. If she also receives tips from platform-based live-streams, she could deduct **qualified tips** under OBBB, assuming occupation criteria are met and statements from platform provided. ## Common Mistakes to Avoid - Relying on outdated FEIE limits (e.g. using 2025 limits for 2026 income). - Ignoring record requirements for tips and overtime, which are new and specific. - Misclassifying travel days—days of transiting may count differently, so keep precise dates. - Missing deadline for statements from payors so you can claim deductions properly. For digital nomads, OBBB offers tangible relief—but only with disciplined record-keeping, early planning, and staying on top of annual changes.