What Is the Foreign Earned Income Exclusion (FEIE)?
The FEIE under IRC section 911 allows qualified U.S. citizens/residents living abroad to exclude up to a certain amount of foreign earned income if they meet either the bona-fide residence or physical presence test. (irs.gov)
Key Updates That Matter in 2025-2026
- The FEIE exemption amount for tax year 2025 is $130,000, and will increase to $132,900 for 2026, reflecting inflation adjustments under the One, Big, Beautiful Bill. (irs.gov)
- Revenue Procedure 2025-17 adds countries (Ukraine, Iraq, Haiti, Bangladesh) for which the minimum time requirements under the bona-fide residence or physical presence test are waived due to adverse conditions—so nomads in these areas may qualify even with shortened stays. (irs.gov)
Strategic Planning for Digital Nomads
Residency & Time Tests
- Physical presence test: Being abroad at least 330 full days during any 12-month period. Standard requirement remains unless waived. Use travel records and lodging receipts to substantiate. (irs.gov)
- Bona-fide residence test: More subjective. Must establish a tax home abroad and intent to live there for an uninterrupted full tax year. Waivers under RP 2025-17 may modify the time requirements if you’re forced out due to unrest. (irs.gov)
Income ceiling and qualification limits
- For 2025, cap is $130,000, rising to $132,900 in 2026. Nomads earning above this may only partially exclude, depending on when income is earned. (irs.gov)
- Not all income qualifies: Must be “earned”—no exclusion for investment income, dividends or capital gains. Protect your documentation.
Example: Planning Your Nomadic Move
- Aisha, a software developer, relocates to Lisbon in March 2025 and works remotely for a U.S. employer. She stays abroad through February 2026, satisfying the physical presence test. Her foreign earned income is $150,000. She can exclude up to $130,000 for 2025, but the remaining $20,000 is taxable. For 2026, with $132,900 excluded, planning to shift income streams or timing may mitigate U.S. tax burden.
Practical Tips for Nomads
- Track your travel, lodging, and employment contracts carefully.
- Note your U.S. “tax home” (if you return often, or have strong ties stateside, this can affect eligibility).
- Understand waivers; if forced to leave a country due to unrest, you may still meet tests under RP 2025-17. (irs.gov)
- Coordinate with tax professionals familiar with both U.S. and international tax treaty issues.
Bottom line: The FEIE remains powerful—but you must monitor income thresholds, test requirements, and plan around the recent inflation adjustments to maximize benefit.