Foreign Earned Income Exclusion 2026 enhancements
Tax year 2026 sees an increase in the foreign earned income exclusion (FEIE): up to $132,900 from $130,000 in 2025. That helps reduce taxable income for nomads working abroad. (irs.gov)
Make sure you qualify under either the bona fide residence test or the physical presence test. If so, you can exclude FEIE and possibly related housing exclusions.
Thresholds you need to watch
- Standard deduction inflation helps even those who don’t itemize. If you live abroad but file U.S. taxes, the larger standard deduction means more income sheltered. (irs.gov)
- Phase-outs of new deductions (tips, car loan interest, overtime) start at MAGI of $150,000 (single) or $300,000 (joint), so plan income carefully. (irs.gov)
How entity setup or payments overseas may complicate things
- If you run business operations from abroad via a company or partnership, you’ll need to assess self-employment tax, U.S. withholding, treaties, and where business income is recognized.
- Car loan interest deduction doesn’t apply if the vehicle isn’t “for personal use” or if used for business—so structure your vehicle ownership and usage carefully. (irs.gov)
Action items for nomads now
- Run projections based on your current and expected overseas income to see if FEIE will help more than foreign tax credits.
- Consider whether slowing income growth past phase-out thresholds might reduce total tax.
- Keep excellent documentation abroad—rent, utilities, days present overseas—for housing exclusion and FEIE.
- Make payments and expenses align with U.S. reporting rules: report tips or overtime per IRS rules if applicable.
Scenario example
You are a U.S. citizen working remotely from Southeast Asia for a tech employer, earning $140,000 total with $10,000 in overseas housing costs. In 2026, you exclude $132,900 as FEIE and claim a housing exclusion calculated by IRS rules. Your taxable U.S. income drops significantly. If you also have some tips or overtime eligibility under OBBB and your MAGI remains under phase-out thresholds, you may benefit from those new deductions too.
For digital nomads, strategic planning over income source, location, and timing has outsized impact under the evolving law.