Digital Nomad
Digital Nomads & the Foreign Earned Income Exclusion: What's New for TY 2026
If you live and work abroad, the Foreign Earned Income Exclusion rises again—discover thresholds, planning ideas, and limits for the upcoming tax year.
By NomadicTax Research Team • 5-8 min read • November 15, 2025
## The Foreign Earned Income Exclusion (FEIE) Increase
For tax year 2026, the Foreign Earned Income Exclusion climbs to **$132,900**, up from $130,000 in 2025—a key threshold for Americans living abroad or digitally nomading. ([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))
## What Qualifies and How It Works
- To use this exclusion, you must live outside the U.S. and meet either the **Bona Fide Resident Test** or the **Physical Presence Test**. It excludes only wages or self-employment income earned abroad, not passive income or foreign pensions.
- You’ll need to file Form 2555 with your tax return to claim FEIE.
## Strategic Tips for Digital Nomads
- **Time your foreign income carefully**: income received near the end of a calendar year may spill into the next and be subject to the higher exclusion.
- **Consider tax treaties**: Some countries provide additional relief for U.S. expats—know whether treaty benefits might reduce or limit taxation.
- **Track status tests**: Bona fide residency status and physical presence tests can be lost by reentering the U.S. too often. Keep travel records, proof of home abroad, and maintain foreign banking, healthcare, tax residency documents.
## Real-World Example
Liam, a British digital nomad, earns $125,000 of foreign wages in tax year 2026. Under the new FEIE threshold of **$132,900**, he can exclude the full amount—assuming he qualifies under the physical presence or bona fide test. If he makes $150,000 instead, the portion above **$132,900** becomes taxable.
## Limitations and Other Considerations
- The exclusion does not reduce your Social Security or Medicare taxes.
- If you live in a high cost-of-living location, some foreign housing expenses may be excluded—but there are caps tied to U.S. city indexes.
- U.S. state tax laws may not recognize the FEIE or may have special rules—check local state obligations.
## Actionable Steps for Nomads Now
1. Estimate your 2026 workload and expected foreign income to see if exclusion suffices.
2. Organize travel and stay durations to uphold eligibility.
3. Consult a tax professional with expertise in expat issues to take advantage of any treaty or housing deductions.
4. Maintain records meticulously—passport stamps, leases, foreign utility bills, income statements.
## Final Thoughts
The increase in FEIE for tax year 2026 is welcome for many living abroad or traveling long-term. If you position yourself right ahead of time—structuring residence, travel, and income—you can maximize tax benefits and avoid surprises.