What Has Changed for 2026
- Foreign Earned Income Exclusion (FEIE) increased to $132,900 in 2026, up from $130,000 in 2025. (irs.gov)
- The housing cost limits under IRC §911 have been updated. The base housing amount is capped at 16% of FEIE (
$21,264 full-year), and general housing costs at 30% ($39,870 full-year), with location-based adjustments. (irs.gov)
Who Qualifies & Key Tests
To use FEIE, you must be a U.S. citizen or resident alien whose tax home is abroad and satisfy either:
- The Physical Presence Test: 330 full days out of any 12-month period are spent outside the U.S.
- The Bona Fide Residence Test: You are a resident of a foreign country for an entire tax year with genuine ties and an intention to stay.
How To Calculate Housing Exclusion/Deduction
- Determine your housing expenses abroad (rent, utilities, insurance, etc.)
- Subtract the base housing amount (as above) to get the housing cost amount
- If actual expenses exceed statutory limits, you can only exclude up to the adjusted limit (which depends on where you live abroad)
Practical Example
Maria lives in Lisbon all of 2026, meets the physical presence test, and earns $150,000 abroad with housing costs of $45,000. Under FEIE you could exclude $132,900. For housing, the cap in Lisbon might allow excluding housing expenses above the base but up to a location adjusted cap (say 30% of FEIE ≈ $39,870). So Maria might exclude FEIE fully, and housing costs up to the local limit. Anything above that is fully taxable.
Actionable Tips for Expats
- Plan ahead: Estimate your FEIE eligibility period early; know whether you’ll meet either test.
- Track expenses carefully: Keep receipts and proper documentation for housing costs and income abroad.
- Use the higher housing cap if eligible: Look at the IRS tables in Notice 2026-25 to see if your city/location qualifies. (irs.gov)
- File timely or amend: If you didn’t qualify initially, you might be able to amend your return later once you satisfy the test(s).
FEIE Interaction with Other Foreign Tax Tools
- You can’t take foreign tax credit on income that’s excluded via FEIE. (irs.gov)
- If foreign taxes are paid on excluded income, typically you don’t get a credit, but if it’s only partially excluded or treated differently, you’ll need to understand the rules under section 901 and Form 1116.
Bottom Line: For 2026, expats should re-check their FEIE ceiling at $132,900, understand updated housing limits by location, keep meticulous records, and coordinate exclusion vs credit to maximize tax benefits.