Digital Nomad
Freelancers, Digital Nomads, and the Foreign Earned Income Exclusion in 2026
With the OBBB raising the foreign earned income exclusion for tax year 2026, digital nomads can now exclude up to $132,900—here’s how to apply it and avoid common pitfalls.
By NomadicTax Research Team • 5-8 min read • November 14, 2025
## What Is the Foreign Earned Income Exclusion?
The foreign earned income exclusion allows qualifying U.S. taxpayers living and working abroad to exclude a portion of their income from U.S. taxation, provided they meet one of two tests: **bona fide residence** or **physical presence**. ([irs.gov](https://www.irs.gov/irb/2025-13_IRB?utm_source=openai))
The exclusion can reduce double taxation, especially when home country tax rates are high, or foreign tax credits are unavailable.
## New Thresholds for 2026
Under Revenue Procedure 2025-32, the OBBB has raised the exclusion amount for tax year 2026 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))
Other relevant adjustments:
- Higher standard deductions and phase-out thresholds may shift your taxable income, potentially affecting your tax bracket. ([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))
- Inflation adjustments to AMT exemptions, which might impact nomads with diverse income sources.
## How to Qualify—Tests & Tax Home
- **Physical presence test**: You spend at least 330 full days in foreign territories during any consecutive 12-month period.
- **Bona fide residence test**: You establish residency abroad for an entire tax year, showing intent, permanent home abroad, etc.
- **Tax home**: Your center of main business activities must be in a foreign country—not merely a vacation spot.
## Practical Examples
- **Scenario A**: Alice works remotely for a U.S. firm, spends all of 2026 in Thailand. She meets physical presence test. She earns $140,000; can exclude $132,900, and pay U.S. tax only on remaining $7,100 (plus any state tax, minus foreign tax credit if applicable).
- **Scenario B**: Bob splits time across countries and only qualifies by bona fide residence. His $130,000 salary in 2025 is now partially sheltered; in 2026, only ~$2,000 is taxable.
## Potential Tax Planning Moves
- Consider timing income at end of 2025 vs. 2026 based on exclusion amounts and other thresholds.
- If sub-leasing or freelancing in multiple countries, ensure your record-keeping supports whichever test you plan to claim.
- Track housing costs and foreign housing exclusions, which also scale with inflation rules.
## Common Mistakes to Avoid
- Assuming automatic approval—meet the exact tests and keep documentation (residency permits, leases, flight itineraries).
- Forgetting U.S. taxes on self-employment income or state taxes—those often still apply.
- Overlooking changes in tax treaties—foreign tax credit eligibility may shift.
## Conclusion
If you’re a freelancer or digital nomad, these updated inflation thresholds under OBBB give you more breathing room. The foreign earned income exclusion increase to $132,900 for 2026 means more income shielded from U.S. federal tax—but you still need to plan carefully to meet tests, document properly, and align your income timing.