What’s New in 2026 for the Foreign Earned Income Exclusion (FEIE)
- The maximum excludable foreign earned income for tax year 2026 is $132,900, up from $130,000 in 2025. (irs.gov)
- Foreign housing exclusion and deduction limits have also increased slightly: the housing limit is $39,870 for 2026. (irs.gov)
- The standard deductions, tax brackets, EITC, and other inflation‐adjusted items have been updated under the One, Big, Beautiful Bill Act (OBBBA), which impacts overall taxable income and deductions. (irs.gov)
Eligibility: Bona Fide Residence vs. Physical Presence Test
| Test | Requirements | Pros & Cons |
|---|---|---|
| Bona fide residence | Live in a foreign country for an uninterrupted period that includes an entire tax year; must intend to return; other factual conditions apply. (irs.gov) | More flexible, especially if personal/family obligations require travel, but subjective and reviewable. |
| Physical presence | Be abroad at least 330 full days in any 12-month period; counting must include full 24-hour periods. (irs.gov) | Very objective; easier to defend, but stricter travel limits. |
Housing Exclusion and Deduction Basics
- Eligible housing expenses include rent, utilities (excluding meals), and certain related costs. Excess housing over 30% of the FEIE may be disallowed. (irs.gov)
- Foreign housing exclusion applies to employer‐provided amounts; deduction applies if self‐employed. Know which you use and report correctly (Form 2555).
FBAR & FATCA Considerations
- Having foreign financial accounts or assets doesn’t affect FEIE directly, but FBAR (FinCEN Form 114) and potentially Form 8938 under FATCA still apply if thresholds are met.
- Failure to report can trigger civil penalties. FBAR is due April 15 with extension to October 15.
Actionable Tips for Digital Nomads and Long-Term Expats
- Keep detailed travel logs and records to support your bona fide residence or physical presence.
- Budget for foreign housing costs in advance; track bills and leases in writing.
- If income fluctuates, plan how FEIE exclusion interacts with standard deductions and tax brackets (especially under OBBBA).
- Coordinate tax return preparation early—seasons for nonresident or dual status filings often have unusual timing.
Example Scenario
Maria is a U.S. citizen working remotely in Spain for the calendar year 2026. She earns $140,000 in foreign earned income. She meets the physical presence test with 335 days abroad and spends €25,000 in qualifying housing.
- FEIE: She excludes $132,900, leaving $7,100 taxable from foreign income
- Housing exclusion: Up to $39,870 may be excluded/deducted depending on employer/self-employed status
- Compliance: Must file Form 2555, maintain physical presence documentation, report all income, and file FBAR if account thresholds are met
Key Takeaways
- FEIE remains a powerful tool, but be sure to claim correctly and keep records
- Inflation adjustments are helping FEIE and allied deductions/income thresholds grow
- Don’t overlook state tax and reporting obligations back home—you may still have state filing requirements or directed disclosure obligations