Digital Nomad
Maximizing Deductions as a Digital Nomad: Foreign Earned Income Exclusion and Housing Cost Limits
If you’re living abroad or traveling extensively, knowing how to leverage the Foreign Earned Income Exclusion and housing expense limits can keep your US tax bill manageable.
By NomadicTax Research Team • 5-8 min read • November 16, 2025
## Understanding the Foreign Earned Income Exclusion (FEIE)
A US citizen or resident alien living overseas may exclude up to **$126,500** of foreign earned income for **tax year 2024**, provided they pass either the bona fide residence test or the physical presence test.([irs.gov](https://www.irs.gov/irb/2025-13_IRB?utm_source=openai))
### What qualifies:
- Your tax home must be in a foreign country.
- You meet the bona fide residence test (residing for an uninterrupted taxable year in a foreign country) **or** the physical presence test (being present at least 330 full days out of any 12 consecutive months abroad).
## Using the Housing Expense Limitation
For digital nomads, the cost of housing abroad often exceeds US norms — and that’s accounted for in IRS adjustments. Notice 2025-16 updates housing expense limits for **tax year 2025** based on geography. If you live in a high-cost foreign city, your allowable housing expenses, above a base amount, can be deducted.([irs.gov](https://www.irs.gov/irb/2025-13_IRB?utm_source=openai))
## Practical Examples
- **Sarah**, a graphic designer, lived in Lisbon, Portugal for all of 2025 and earned $140,000. She qualifies for FEIE, excluding $126,500. She then calculates housing deduction using Lisbon’s housing limit from Notice 2025-16. Savings include avoiding US tax on over $126,500 and reducing taxable income further via housing deduction.
- **Mike**, a software consultant, lived abroad only 11 months, missing the physical presence test. But because his country of residence was declared a waiver country due to war (see Rev. Proc. 2025-17), he still qualifies.([irs.gov](https://www.irs.gov/irb/2025-13_IRB?utm_source=openai))
## Actionable Insights
- **Track your travel and stays**: Keep accurate records to support physical presence or bona fide residence claims.
- **Understand foreign housing limits**: Reference the latest IRS housing expense limitations by location. Using outdated or generic limits can undercut your deductions.
- **Include waivers when applicable**: If you had to leave a foreign country due to war or unrest, make sure you check whether it’s designated for waivers under Rev. Proc. 2025-17.([irs.gov](https://www.irs.gov/irb/2025-13_IRB?utm_source=openai))
## Pitfalls to avoid
- Mixing FEIE and housing deduction claims without meeting both tests.
- Ignoring that housing limits vary widely. Using US rental norms could lead to underestimating allowable deductions.
- Waiting until the last minute to collect foreign bank statements or lease agreements — supporting documentation is key.
By staying current on IRS updates like Notice 2025-16 and Rev. Proc. 2025-17, digital nomads can significantly reduce US taxable income while staying within compliance.