Digital Nomad
Maximizing the Foreign Earned Income Exclusion & Housing Benefits for U.S. Expats in 2026
New limits and updated guidance make understanding FEIE and housing costs more critical than ever for Americans living abroad.
By NomadicTax Research Team • 5-8 min read • August 21, 2026
## What Has Changed for 2026
- **Foreign Earned Income Exclusion (FEIE)** increased to **$132,900** in 2026, up from $130,000 in 2025. ([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))
- 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](https://www.irs.gov/irb/2026-17_IRB?utm_source=openai))
## 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
1. **Determine your housing expenses** abroad (rent, utilities, insurance, etc.)
2. Subtract the **base housing amount** (as above) to get the **housing cost amount**
3. 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](https://www.irs.gov/pub/irs-irbs/irb26-17.pdf?utm_source=openai))
- **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](https://www.irs.gov/individuals/international-taxpayers/foreign-tax-credit?utm_source=openai))
- 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.