What’s New in US Foreign Earned Income Exclusion for 2025–2026
The IRS announced inflation adjustments for tax year 2026, including raising the foreign earned income exclusion to $132,900, up from $130,000 in 2025. (irs.gov)
This means US citizens and residents who live abroad and qualify under the bona fide residence or physical presence tests can exclude this higher amount of foreign earned income from their US taxable income. (irs.gov)
Who Qualifies and How to Claim It
Criteria include:
- Meeting either the bona fide residence test (a full calendar year in a foreign country with intent to remain) or the physical presence test (330 full days outside the US over a consecutive 12-month period).
- Having a tax home in a foreign country.
- Complete Form 2555 when filing your US tax return.
Actionable Steps for Digital Nomads
- Plan your travel schedule to satisfy the physical presence test if your travel is unpredictable. Track travel meticulously with apps or spreadsheets.
- Establish foreign tax home by maintaining local residence/lease, bank accounts, or local professional registration.
- Monitor the exclusion cap—if your foreign income approaches or exceeds $132,900 for TY 2026, explore splitting income between spouses, if filing jointly, or using foreign tax credits for additional income.
- Evaluate staying abroad vs. returning—if you don’t meet either test entirely, your foreign income may be partially taxed; sometimes switching base location or adjusting your work itinerary can yield savings.
Example: Nomad Workflow Case
Alice, a software consultant, earns $150,000 USD in foreign earned income in 2026. She qualifies under the physical presence test, so she excludes $132,900 and reports the remaining $17,100 on her US tax return.
Without the exclusion, Alice would have had to report all $150,000 as taxable income. With the rise in the exclusion, she saves significantly compared to prior caps.
Staying Compliant—Pitfalls to Avoid
- Audit risk when claiming FEIE: inconsistent travel or lack of documentation can result in FOIA or IRS denying the exclusion. Always retain proof like passports, tickets, work contracts.
- Double taxation: Even with FEIE, non-earned income (investments, interest) remains taxable. Use foreign tax credits to avoid overlapping.
- State taxes: Most US states do not recognize FEIE, so income excluded federally may still incur state tax liability depending on home state.
Summary
By incorporating the updated foreign earned income exclusion into planning, digital nomads can:
- Reduce taxable income substantially for TY 2026 up to $132,900,
- Avoid double taxation on earned income abroad, and
- Use foreign tax credits effectively when exclusion caps are exceeded.
Being proactive—tracking travel, maintaining your foreign tax home, and getting documentation in order—is key to maximizing benefits while staying compliant.