Digital Nomad
What Digital Nomads Should Know About the IRS Foreign Earned Income Exclusion Increase for 2026
The Foreign Earned Income Exclusion has once more increased under OBBB: digital nomads could deduct more foreign wages in 2026, but need to understand eligibility tests and phase-outs.
By NomadicTax Research Team • 5-8 min read • November 16, 2025
## Foreign Earned Income Exclusion Boosted for 2026
For the 2026 tax year, under the One, Big, Beautiful Bill (OBBB), the foreign earned income exclusion is raised from **$130,000 to $132,900**. This means U.S. citizens or residents working abroad may exclude up to that amount if they meet either the **bona fide residence** or **physical presence** test. ([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))
## Who Qualifies: Tests and Timing
- **Bona Fide Residence Test**: Living in a foreign country full-time for an entire tax year, established rules about permanence, intention, etc.
- **Physical Presence Test**: Being physically present in foreign countries at least **330 full days** out of any continuous **12-month period**.
- Timing matters: if your 12-month window spans 2025-2026, exclusion applies to correct tax years, so plan accordingly.
## Phase-outs and Limitations
- When your **modified adjusted gross income (MAGI)** exceeds **$150,000** (individual) or **$300,000** (married filing jointly), the exclusion begins to phase out. This means the full $132,900 may not be available.
- Income from self-employment still subject to SE payroll taxation, even if excluded from income tax, so budget for Social Security and Medicare obligations.
## Actionable Advice for Nomads
1. **Map Your Travel & Residency Now**: Track your presence abroad, passport stamps, leases—evidence matters. Missing a few days could make a big difference.
2. **Compare OBBB vs Other Options**: Sometimes, claiming foreign tax credits might yield better overall benefits depending on your home vs source country rates.
3. **Leverage Deductions**: Exclude earned income while maximizing housing exclusion where eligible; reduce non-excluded income with deductions.
4. **Plan Ahead for Withholding**: You may need to make estimated tax payments if your foreign income isn't subject to U.S. withholding. Use 2026 tables once they're released with updated wage brackets.
## Example
A freelance software developer earns **$140,000** working entirely abroad—and meets the physical presence test. With the $132,900 exclusion, only **$7,100** is subject to U.S. income tax (plus self-employment taxes). Without planning, some of that could push you higher into state income brackets or impact other phase-outs.
## Watchouts
- Make sure forms like **Form 2555** are properly completed when you file; errors can trigger audits.
- If you receive benefits or compensation from U.S. government employers overseas, rules are different.
- Treat tips and other income cooked into pay carefully: categories may change under OBBB new reporting rules.
**Bottom Line:** For digital nomads, the $2,900 boost in exclusion for 2026 is real money. Pair eligibility with smart income timing and documentation to maximize benefit.