Digital Nomad
Living Abroad? How the Foreign Earned Income Exclusion and Housing Limits Are Changing for Digital Nomads in 2025-26
If you're working outside the U.S., updated housing limits and foreign income exclusions can affect your tax bill dramatically—here’s what’s new and how to maximize them.
By NomadicTax Research Team • 5-8 min read • November 21, 2025
## What’s New for Expatriates and Digital Nomads
- The **Foreign Earned Income Exclusion (FEIE)** is climbing to **$132,900** for tax year 2026, up from $130,000 in 2025. This means expatriates can exclude more income earned abroad from U.S. taxation. ([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 IRS has also released new geographic **housing expense limits** under IRC § 911, adjusting them by region for 2025. If you live in a high-cost city abroad, you may now use higher ceilings. ([irs.gov](https://www.irs.gov/irb/2025-13_IRB?utm_source=openai))
- Inflation adjustments under One, Big, Beautiful Bill also affect thresholds for itemized deduction phaseouts, AMT exemptions, and estate tax ceilings—all of which can influence your U.S. tax exposure as you earn abroad. ([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))
## How to Make These Changes Work for You
- **Calculate eligibility**: To use FEIE, you must meet either the bona fide residence test or physical presence test. Keep travel logs, evidence of residence, and documents for foreign housing expenses. |
- **Track housing expenses carefully**: Only certain expenses are allowable—rent, utilities, certain taxes. If you’re in a location newly added to a higher limit, revisit deduction opportunities. |
- **Watch income thresholds**: Some new deductions (like no tax on tips or senior deductions) have phaseouts tied to Modified AGI. These interplay with FEIE—sometimes your excluded amount won’t count toward AGI, helping preserve eligibility. |
## Common Mistakes to Avoid
- Claiming FEIE when you don’t meet tests: Missing even a few days of documentation can cause disqualification. |
- Including non-qualifying housing expenses: Avoid counting meals, travel, or capital expenditures unless clearly allowed under § 911 rules. |
- Overlooking impact on state taxes: Even if income is excluded federally, most states follow different rules and may still tax foreign income or reimbursements.
## Practical Example
- **Sara**, a graphic designer, lives in Lisbon and earns $140,000 in 2026. She claims FEIE for $132,900, meaning $7,100 is taxable federally (plus any other income). Her housing expenses in Lisbon now fall within a newly raised limit, allowing her to deduct additional amounts. This lowers her effective tax rate and may also reduce her phase-out of certain benefits.
## Planning Tips
- Use a tax calendar: note when tests (physical presence or bona fide residence) reset, and when tax forms (e.g. Form 2555) must be filed. |
- Work with a tax-aware bank/payroll provider: overseas income may be reported via foreign entity, third-party settlement etc. Ensure you get proper documentation. |
- Consider foreign tax credits vs FEIE: Depending on foreign tax rates, sometimes taking credit for taxes paid abroad yields a better result than FEIE.
These recent policy updates give digital nomads more breathing room and savings opportunities. Staying aware of shifting limits—and planning accordingly—can make your tax season much lighter.