What the Foreign Earned Income Exclusion (FEIE) Will Be in 2026
For tax year 2026, the IRS has raised the maximum amount that qualified U.S. taxpayers abroad can exclude from income under the FEIE to $132,900, up from $130,000 in 2025. This adjustment reflects inflation changes under the One, Big, Beautiful Bill Act. (irs.gov)
Who Qualifies as a Digital Nomad or Expatriate for FEIE
To use FEIE, you must satisfy both:
- A tax home in a foreign country; and
- Either the bona fide residence test or the physical presence test.
- Bona fide residence: maintaining long-term residence in a foreign country over an entire tax year.
- Physical presence: physically outside the U.S. for at least 330 full days in a 12-month period.
Other eligibility requirements include proper time abroad and maintaining foreign housing (if applicable), filing Form 2555, and ensuring foreign income qualifies.
How the 2026 Increase Affects Tax Planning
- If you were near the previous FEIE cap ($130,000), this $2,900 bump means you can now exclude more earned income — less likely to have to pay U.S. tax on income up to that amount.
- For those with fluctuating income, this cushion aids planning — especially when negotiations or contracts vary unexpectedly.
- The exclusion applies to “wages, salaries, professional fees, or other amounts earned abroad.” Passive income (interest, dividends, etc.) isn’t covered.
Real-World Example
Suppose Bella, a U.S. citizen living in Lisbon, earns $135,000 from remote software consulting in 2026. She qualifies using the physical presence test. She can use FEIE to exclude $132,900 of her earned income — only $2,100 remains taxable in the U.S. (plus any applicable deductions or credits).
If she earns $125,000, she’d benefit fully under the exclusion and pay no U.S. federal tax on that part of her income (federal tax, not state).
Things to Watch Out For
- Monitor MAGI thresholds for other deductions; claiming FEIE might not reduce other thresholds, but ensures basic exclusion.
- Be cautious about dual residency, foreign tax credits, and total tax treaties.
- Keep detailed travel logs, salary records, contracts, and Form 2555 well-documented.
Action Steps for Digital Nomads
- Estimate your 2026 income early in your planning; consider delaying contracts or front-loading vs back-loading income.
- Use FEIE in tandem with foreign housing exclusion (if applicable) to maximize tax savings.
- Stay aware of IRS deadlines: Form 2555 must accompany your return.
By using FEIE optimally, expats and nomads can significantly reduce U.S. tax burdens — the increased cap for 2026 helps more people benefit.