Digital Nomad
Living & Working Abroad: How Foreign Earned Income Exclusion Is Increasing in 2026
U.S. expats benefit from higher exclusion limits in 2026—but residence, eligibility and treaty matters must be watched carefully.
By NomadicTax Research Team • 5-8 min read • November 17, 2025
## Increase in Foreign Earned Income Exclusion (FEIE)
For tax year 2026, the Foreign Earned Income Exclusion is rising to **$132,900**, up from **$130,000** in 2025. This means qualifying taxpayers working abroad can exclude more income from federal taxes.([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))
## Qualifying Conditions and Practical Steps
To claim FEIE, you must satisfy either the **Bona Fide Residence Test** or the **Physical Presence Test** (330 days in a 12-month period). Expenses airfares, housing, home-state filing obligations, and ties to the U.S. all matter in establishing eligibility.
Practical steps expats should take:
- Keep accurate records of your travel dates and documentation for residency abroad.
- Track housing expenses and foreign taxes paid—these may enable additional deductions or credits.
- Review U.S. tax treaties where you live; they can influence creditability of foreign taxes against U.S. liability.
## Interactions with Other Expat Benefits
- **Foreign Housing Exclusion or Deduction**: Expenses above a set base amount may be deductible, reducing taxable income beyond the FEIE itself.
- **Tax Credits for Foreign Taxes Paid**: You may choose between exclusion and claiming credit depending on which yields greater savings.
- **Self-employed Expats**: You’re still liable for self-employment and other U.S. taxes; FEIE doesn’t exempt you from all tax obligations.
## Actionable Planning Tips
1. Review where you’ll be in 2026: long-term abroad or switching between homes? Plan trips to satisfy the Physical Presence Test.
2. Evaluate where to live: high foreign tax jurisdictions vs low ones can shift your strategy for credits vs exclusions.
3. Consider timing income—if possible, defer bonus or contract work until a year where your exclusion will maximize savings.
4. Consult tax experts familiar with expat law and relevant treaties—they can save you double taxation costs.
## Example Case
Sarah lives in Italy and works remotely for a U.S. company. In 2026, her salary is $140,000. She meets the Physical Presence Test. She excludes $132,900 via FEIE, pays U.S. tax only on $7,100 (minus deductions and credits). If her foreign tax rate is high, claiming foreign tax credit instead might still yield savings.
**Bottom line**: The increase in exclusion offers expats a bigger shield against U.S. taxation on foreign income. Use the margin wisely—it could significantly reduce your U.S. tax load.