Digital Nomad
How Digital Nomads Can Maximize the Foreign Earned Income Exclusion Under the New Inflation Adjustments
With the IRS's recent inflation adjustments raising thresholds and the One, Big, Beautiful Bill modifying exclusions, digital nomads have new opportunities to reduce their US tax burden.
By NomadicTax Research Team • 5-8 min read • November 21, 2025
## What’s New for 2026: Inflation Adjustments and OBBB Changes
IRS has released inflation adjustments for **Tax Year 2026** under *Revenue Procedure 2025-32*. Key updates include:
- **Foreign Earned Income Exclusion (FEIE)** rises from $130,000 (for 2025) to **$132,900** for 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))
- Standard deduction, AMT exemptions, estate exclusion, and ranges for marginal tax rates also adjusted upward. ([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))
- The *One, Big, Beautiful Bill (OBBB)* permanently codifies many temporary tax provisions—affecting exclusions and deductions going forward. ([irs.gov](https://www.irs.gov/newsroom/one-big-beautiful-bill-provisions?utm_source=openai))
## Strategies for Digital Nomads to Leverage the FEIE
Here’s how nomadic professionals and remote workers can benefit:
- **Test for Bona Fide Residence or Physical Presence:** Those with qualifying days abroad can exclude more income due to higher FEIE limits. If you spend 330 days outside the US in a 365-day period, you may qualify. Use OBBB’s inflation adjustment to plan.
- **Optimize for 2025 vs 2026:** Since OBBB made certain tax rate tables permanent after 2025, income near the top thresholds could benefit from timing income or deductions. ([irs.gov](https://www.irs.gov/newsroom/inflation-adjusted-tax-items-by-tax-year?utm_source=openai))
- **Watch Exchange Rates & Days Count Carefully:** With inflation-adjusted thresholds higher, small mistakes in days abroad or residency can push you into higher taxed territory. Always document travel, lodging, and work locations meticulously.
## Example Scenario
- Marissa, a consultant, earned $135,000 in 2025 while working 350 full days in Thailand. She qualifies under FEIE—the exclusion is $130,000. She excludes up to that, and the remaining $5,000 is taxed at her marginal rate.
- For 2026, her income rises to $140,000; FEIE now $132,900. She excludes $132,900 and pays tax on $7,100.
## Actionable Tips
- **Plan ahead for 2025 vs 2026 income spikes** to align income within exclusion limits.
- **Keep accurate travel and residence logs.** Physical presence test: 330 full days abroad. Bona fide residence: establish intent and permanence overseas.
- **Make use of OBBB’s permanent rate tables**—know your bracket thresholds so you can estimate tax liability and plan deductions (like retirement contributions or housing costs documented under IRC Section 911) accordingly.
## Potential Pitfalls to Avoid
- Assuming all “working abroad” qualifies—the tax home and residence tests are strict.
- Overlooking income types: FEIE does **not cover business profits beyond earned income**, or self-employment taxes. Also, **foreign housing exclusion/deduction** has separate limits.
With the new inflation adjustments and permanent provisions under OBBB, digital nomads have more leverage—but the complexity also rises. Diligent planning and documentation will be your best tools.