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)
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
- Map Your Travel & Residency Now: Track your presence abroad, passport stamps, leases—evidence matters. Missing a few days could make a big difference.
- Compare OBBB vs Other Options: Sometimes, claiming foreign tax credits might yield better overall benefits depending on your home vs source country rates.
- Leverage Deductions: Exclude earned income while maximizing housing exclusion where eligible; reduce non-excluded income with deductions.
- 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.