What’s New for FEIE in 2026
- The Foreign Earned Income Exclusion (FEIE) limit increased to $132,900 for tax year 2026, up from $130,000 in 2025. (irs.gov)
- Common raising thresholds like itemized deduction limits, standard deduction, and gift exclusions have also been adjusted under inflation rules. (irs.gov)
Who Qualifies for FEIE & What Counts as “Foreign Earned”
To claim FEIE, you must have earned income from foreign sources and satisfy either the Bona Fide Residence Test or the Physical Presence Test. Note: housing and travel reimbursements may or may not be excluded based on specific circumstances.
Actionable Tips to Take Advantage of the FEIE Increase
- Plan contracts and payroll so that more income falls into tax treaties or foreign-source income before reaching the FEIE cap. Anything earned above $132,900 becomes fully subject to U.S. taxes.
- Coordinate with partner/spouse if filing jointly or separately; FEIE is per individual and not dependent on filing status, but timing and structure matter.
- Document travel meticulously if relying on the Physical Presence Test — every day outside the U.S. counts.
- Use foreign tax credits for other income beyond FEIE exclusion; double taxation treaties can reduce your total tax bill.
Common Pitfalls & How to Avoid Them
| Error | Consequence | Prevention Tip |
|---|---|---|
| Missing valid SSN or filing deadline | Loss of credit eligibility or penalties | Keep your SSN for you and dependents ready and ensure timely extension requests |
| Misclassification of income source | Unexpected taxable income | Define “foreign earned income” clearly, seek advice if self-employed with hybrid activities |
| Poor record keeping for travel | Disqualification from physical presence test | Maintain passports, tickets, work logs, photos when possible |
Example Scenario
Sara works remotely in Lisbon for a U.S. employer and earns $150,000 in 2026. She qualifies for the Physical Presence Test. Her FEIE excludes $132,900, and the excess $17,100 is taxed under U.S. rates. With careful withholding and possibly claiming foreign tax credits on that excess, her net liability can be optimized.
Bottom line: The increased FEIE cap gives U.S. expats more room to earn abroad tax-free, but careful planning is crucial to maximize the benefit. Verify whether you meet the tests, document well, and consider income timing and sources.