Overview of Foreign Earned Income Exclusion Changes
For tax year 2026, the Foreign Earned Income Exclusion (FEIE) increased to $132,900, up from $130,000 in 2025. This allows qualifying U.S. citizens/residents living abroad or working remotely abroad to exclude more income from U.S. taxation. (stayexempt.irs.gov) This is especially relevant for digital nomads and remote workers.
Who Qualifies for FEIE?
You must meet one of the following tests:
- Bona Fide Residence Test: You must be a citizen or resident of the U.S., and live in a foreign country for an uninterrupted period that includes a full tax year.
- Physical Presence Test: You must be present in a foreign country for at least 330 full days during any 12-month period.
You must also elect the exclusion using IRS Form 2555, and provide evidence of foreign residence or foreign employer/business.
What’s New in 2026 for Digital Nomads
- Higher exclusion amount gives more leeway—especially if you're earning around the upper limit of previous exclusion.
- Housing Exclusion/Percentage: The foreign housing amount may also be adjusted for inflation; changes in standard deduction and credits may indirectly affect net tax liability.
- Record keeping pressures: With higher benefits come greater scrutiny. You’ll need good documentation of your days outside the U.S., residence, housing expenses, travel.
Planning Tips for Digital Nomads
- Time your travel to maximize the Physical Presence Test, ensuring you meet the 330-day rule without falling afoul of U.S. trips.
- Keep detailed records: passports, tickets, lodging, leases or bills.
- Understand dual-tax treaties: exclusion doesn’t cover foreign payroll taxes; foreign tax credit may still apply for those.
- Beware of self-employment income: SE tax often still applies even if income excluded under FEIE; look into deductions for foreign self-employed professionals.
Example
Lisa, a graphic designer, works remotely from Lisbon for 11 months in 2026, making $140,000 FEL (Foreign Earned Income). Qualifies under Physical Presence Test. She can elect FEIE to exclude $132,900. The remaining $7,100 is taxable in U.S. She also pays Portuguese social security; some may be eligible for credits under totalization treaties. Her effective U.S. tax drops significantly compared to pre-OBBB levels.
Key Caveats
- Housing costs are only partly excluded; there’s a base amount above which excess is adjusted. Keep invoices and proof of residence.
- State taxes: FEIE doesn’t avoid state tax obligations in many states—residency rules still apply.
- Logistics with income types: Dividends, capital gains, crypto etc. are not covered by FEIE.
Takeaway
The 2026 increase in FEIE makes living and working abroad more tax-efficient for many digital nomads. Pair that with planning, documentation, and professional advice to ensure full benefit while staying compliant.