Understanding FEIE and Housing Exclusions
If you're a U.S. citizen or resident working abroad, the Foreign Earned Income Exclusion (FEIE) under IRC § 911 lets you exclude up to a certain limit of foreign-earned income from U.S. taxation. You may also claim a housing exclusion or deduction, reducing taxable income further. (irs.gov)
Updated 2026 Limits
| Type | Limit Amount for Full Year (2026) |
|---|---|
| FEIE | $132,900 per qualifying individual (irs.gov) |
| Housing exclusion/deduction cap (30% of FEIE) | $39,870 (irs.gov) |
| Base housing amount (16% of FEIE) | $21,264 (irs.gov) |
Housing limits can also vary based on geographic adjustments in locations with disproportionately high housing costs. (irs.gov)
Waivers for Time Requirement Due to Instability
Countries affected by war, civil unrest, or natural disaster might qualify as waiver countries, letting those who leave such locales still meet the physical presence or bona fide residence test despite disruptions. For the 2025 tax year, Haiti, Ukraine, Democratic Republic of the Congo, South Sudan, Iraq, Lebanon, and Mali were added. (irs.gov)
Key Compliance Rules and Gotchas for Nomads
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Qualifying tests: Must meet either the bona fide residence test (habitual and intended permanent residence abroad) or physical presence test (330 full days in a 12-month span). Your tax home must be in a foreign country. (irs.gov)
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Exclusions vs. credits: If you take the FEIE or housing exclusion, you cannot claim the Earned Income Credit, Additional Child Tax Credit, or foreign tax credit on excluded amounts. (irs.gov)
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First-time exclusion timing: If you don’t meet the test by the due date (including the automatic 2-month extension for those abroad), you may file timely and then file an amended return after qualifying. Alternatively, request a special extension until you meet requirements. (irs.gov)
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Proper forms and disclosures: Use Form 2555 to claim FEIE and housing exclusion/deduction. Maintain detailed location and housing expense records. (irs.gov)
Example Situation
Sarah, a U.S. citizen, lives in Lisbon full year 2026, works remotely, earns $140,000 foreign income, and incurs $50,000 in housing costs.
- She can exclude $132,900 FEIE.
- Housing base $21,264, cap $39,870, so her housing exclusion is $50,000 minus base = $28,736 (capped by housing cost cap $39,870).
- She reports $8,100 of income not excluded, which is taxable. She cannot take EITC or additional child tax credit on excluded amounts.
Action Plan for Digital Nomads
- Keep travel and residence logs, showing days abroad vs in U.S.
- Document all housing expenses, including lease, utilities, or lodging, and verify eligibility for location-based caps.
- Understand automations for tax deadlines if abroad; Form 2555 instructions detail automatic extensions. (irs.gov)
- Review waiver list annually—countries added if situations change.
- If married and both work abroad, both can claim FEIE separately if they each meet one test. (irs.gov)
Bottom Line
The 2026 inflation adjustments boost tax-free exclusion amounts and housing limits for digital nomads. With proper records, forms, and awareness of waivers and limitations, you can significantly reduce U.S. tax liability while staying compliant.