Mastering the Foreign Earned Income Exclusion in 2026: What U.S. Expats Need to Know

What’s New in 2026 for FEIE and Housing Exclusions

• The Foreign Earned Income Exclusion (FEIE) for tax year 2026 is $132,900, up from $130,000 for 2025 (irs.gov).
• The housing exclusion or deduction, generally limited to 30% of FEIE, is capped at about $39,870 for 2026. The base housing amount (that portion you cannot exceed) is 16%, which equals $21,264 for a full taxable year abroad (irs.gov).
• Notice 2026-25 provides location-specific limits, recognizing cost-of-living differences in foreign cities (irs.gov).

Qualification Rules (who counts, and how)

To claim FEIE or housing exclusion, a taxpayer must be a “qualified individual” under Section 911:

• Either a U.S. citizen/resident who meets the bona fide residence test — i.e. being a bona fide resident of a foreign country for an uninterrupted full taxable year; or
• A U.S. citizen/resident who meets the physical presence test — being present abroad for 330 full days out of any consecutive 12-month period (irs.gov).

There’s also relief if you had to leave a foreign country due to adverse conditions — war, natural disaster, etc. The IRS has identified certain countries and effective dates for these exceptions for tax year 2025 in Rev. Proc. 2026-13 (irs.gov).

Calculating FEIE and Housing Costs: Example

If in 2026 you earn $150,000 in salary abroad, and your housing expenses are $45,000, plus your self-employment net income (if applicable):

1. Maximum FEIE for 2026 is $132,900. You can exclude up to that amount if your foreign earned income/year qualifies.

2. For housing exclusion:

   • Base housing amount = 16% × $132,900 = $21,264
   • Maximum housing expenses generally allowed = up to 30% × $132,900 = $39,870
   • Housing costs beyond that amount may not qualify unless you’re in a high-cost city where the IRS adjusts the limit under Notice 2026-25.

3. Expenses directly related to producing foreign income or self-employment tax deductions must be adjusted proportionally to excluded income if gross foreign income exceeds FEIE threshold (irs.gov).

Procedural Points & Common Pitfalls

• Claiming FEIE and/or housing deduction means you cannot also take foreign tax credits or deductions for exclusions you’ve already claimed: any tax credit must apply only to income not excluded (irs.gov).
• You must make the claim on Form 2555 by filing the return by the due date (or a timely extension), or amend a timely return. If you revoke the election, you need IRS approval if within five years (irs.gov).
• Watch for changes in your residency status, employer situation, or in the foreign country legal status — these can affect qualification.

Actionable Tips for Expats

• Maintain solid records of dates abroad, “tax home” status, and housing expenses by location.
• Before moving to or during a placement abroad, check whether the location’s housing limit in Notice 2026-25 has been raised due to higher cost of living.
• Plan income timing — delays in payment may shift eligible amounts between tax years.
• When in doubt about revoking or making the FEIE election, consider consulting professional international tax counsel.

Bottom line: For tax year 2026, U.S. expats can exclude roughly $132,900 in foreign earned income, with additional housing exclusion depending on location. With proper planning, they can maximize benefits while avoiding common traps.