Digital Nomad
What Digital Savvy Expats Should Know: Foreign Earned Income Exclusion & Related IRS Updates for 2026
With changes to exclusion thresholds, depreciation-related rules, and evolving compliance demands, U.S. citizens abroad need to be especially precise in claiming foreign earned income and reporting foreign assets.
By NomadicTax Research Team • 5-8 min read • September 2, 2026
## Understanding the Foreign Earned Income Exclusion for 2026
For **taxable years beginning in 2026**, U.S. citizens or resident aliens living abroad can exclude up to **$132,900** of foreign earned income under IRC § 911(b)(2)(D)(i). This is an inflation adjustment from previous years. ([irs.gov](https://www.irs.gov/pub/irs-drop/rp-25-32.pdf?utm_source=openai))
Requirements to use FEIE include meeting either the **bona fide residence test** or the **physical presence test**, and having a tax home in a foreign country. For example, for the physical presence test you must be abroad for **330 full days** during a consecutive 12-month period. Part days or travel days don’t count. ([stayexempt.irs.gov](https://www.stayexempt.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion-physical-presence-test?utm_source=openai))
## Related IRS Adjustments & Bulletin Items
- **IRS Bulletin 2026-29** announced inflation adjustments not only for FEIE, but also for clean energy production credits (sections 45U, 45V, 45Z), and marginal well credits under § 45I. These affect businesses or individuals involved in energy or carbon‐intensive sectors abroad. ([irs.gov](https://www.irs.gov/pub/irs-irbs/irb26-29.pdf?utm_source=openai))
- Publication 54 (rev. December 2025) clarifies housing deduction or exclusion rules, revocation procedures, and how tax home is determined for expats. ([irs.gov](https://www.irs.gov/pub/irs-dft/p54--dft.pdf?utm_source=openai))
## FBAR, FATCA & Other Reporting Obligations
Even with FEIE, U.S. persons abroad may still have to report:
- **FBAR**: FinCEN Form 114 if aggregate foreign financial accounts exceed $10,000 at any point during the year.
- **FATCA**: Form 8938 on Form 1040 if foreign assets exceed certain thresholds (varies by filing status and whether living abroad).
- No changes yet reported in the past 30 days for FBAR/FATCA thresholds—so existing rules continue for now.
## Case Example
Maria, a U.S. citizen, works in Italy in tax year 2026. She earns $150,000 in foreign wages, qualifies under the physical presence test, and has a foreign tax home. Under FEIE she excludes $132,900, leaving $17,100 subject to U.S. income tax (plus housing-exclusion or deduction if eligible). Meanwhile, she files necessary FBAR and FATCA forms because of her overseas bank accounts.
## Actionable Advice for Expats & Digital Nomads
- Check if you qualify under **physical presence** vs **bona fide residence**—start tracking days now.
- Keep good documentation: contracts, residency proof, foreign housing expenses, etc.
- Watch inflation-adjusted thresholds each year; IRS updates FEIE amount in its annual revenue procedure.
- Seek professional guidance if running a business abroad, using foreign trusts, or dealing with multiple income sources to manage both tax liability and reporting burdens.
## Summary
2026’s bump in the FEIE limit, along with clarified housing exclusion rules, offer meaningful savings for those living or working overseas. But exclusion alone doesn’t erase U.S. filing or reporting obligations. Stay diligent, stay compliant, and plan proactively while working abroad.