(UNITED STATES) — The IRS raised the Foreign Earned Income Exclusion to $132,900 per qualifying person for tax year 2026. The increase means eligible Americans abroad can shield more foreign-earned income from U.S. federal income tax.

U.S. citizens, green card holders, and resident aliens who live and work outside the United States all fall within its scope. Digital nomads, remote employees, self-employed consultants, and Americans earning salary or business income while physically working abroad are directly affected.

Under the FEIE, qualifying taxpayers can exclude up to $132,900 of foreign earned income from their U.S. taxable income. If both spouses work abroad and each separately meets the requirements, each can claim the exclusion on their own earnings.

Because the United States taxes citizens and resident aliens on worldwide income regardless of where they reside, the FEIE creates a narrow exception. It lets eligible taxpayers reduce their federal income tax burden on qualifying foreign earnings without relinquishing their U.S. filing obligations.

Qualification Requirements

To qualify, a taxpayer must have foreign earned income and a tax home in a foreign country. They must also satisfy either the bona fide residence test or the physical presence test. Citizenship alone does not trigger eligibility; a U.S. passport holder living abroad does not automatically qualify.

The physical presence test requires being present in a foreign country or countries for at least 330 full days during any 12 consecutive months. Those days need not align with the calendar year and can span a 12-month period that includes part of the tax year. This test appeals to digital nomads because it focuses on days abroad rather than long-term residence intent.

A full day means a complete 24-hour period in a foreign country. Days spent in the United States generally do not count, making travel days a frequent source of error.

Bona fide residence demands that the taxpayer be a resident of a foreign country or countries for an uninterrupted period including an entire tax year. The IRS evaluates intention, length of stay, local residence, activities abroad, tax status in the foreign country, and ties to the United States. Simply living abroad for a year does not establish bona fide residence on its own.

This route suits people who genuinely relocate to another country for a longer-term job, family life, tax residence, or permanent foreign assignment.

The Tax-Home Requirement

The tax-home requirement adds another layer. A tax home generally means the main place of business, employment, or post of duty. If the main place of work remains in the United States, the FEIE may not be available. This can complicate matters for remote workers who maintain a U.S. employer, U.S. clients, U.S. payroll, and frequent U.S. travel. A person’s family home and tax home are not always the same.

What Qualifies as Foreign Earned Income

Foreign earned income generally means income received for services performed in a foreign country. It can include salary, wages, professional fees, consulting income, self-employment income, bonuses linked to foreign work, commissions, and other compensation for work performed abroad.

Where the work is performed determines eligibility, not where the employer is located or where payment is made. A U.S. citizen working remotely from Portugal for a U.S. company may have foreign earned income if the services are physically performed in Portugal.

What Does Not Qualify

Not every type of overseas income qualifies. The FEIE applies only to earned income. It generally does not cover dividends, interest, capital gains, rental income, pension income, or Social Security benefits. Also excluded are annuity income, gambling winnings, alimony, corporate distributions, and income earned while physically working inside the United States.

This distinction catches digital nomads and investors off guard. The exclusion can reduce tax on work income, but passive income typically requires separate treatment.

Key Considerations for Digital Nomads

Digital nomads should pay close attention to physical location throughout the year. Remote workers who spend weeks in California, New York, or Texas face a problem. Income earned during those U.S. workdays may not qualify as foreign earned income, even if the employer is foreign. Maintaining a travel calendar, passport stamps, flight records, accommodation records, and work-location notes is essential.

Exclusion Limits and Married Couples

Taxpayers earning less than the maximum face a lower exclusion, limited to actual qualifying income. A qualifying taxpayer earning $90,000 of foreign earned income in 2026 cannot exclude more than $90,000. A qualifying taxpayer earning $180,000 can generally exclude up to $132,900, with the remaining income potentially taxable unless another benefit applies.

Married couples can each claim the exclusion separately, but one spouse cannot use the other’s unused exclusion. Each spouse‘s exclusion is based on that spouse’s own qualifying foreign earned income and eligibility. A married couple filing jointly should still calculate each spouse’s exclusion separately.

Filing Requirements and Self-Employment

Claiming the FEIE requires filing a U.S. federal income tax return, generally using Form 2555. Some Americans abroad mistakenly believe that if their foreign income falls below the exclusion amount, no U.S. return is required. The filing obligation can still apply even when the FEIE reduces taxable income to zero.

Self-employed Americans abroad face an additional trap. A self-employed person may exclude qualifying foreign earned self-employment income from regular U.S. income tax. The exclusion generally does not reduce U.S. self-employment tax, however. Freelancers, consultants, creators, developers, and online business owners may still owe Social Security and Medicare taxes unless a totalization agreement or another rule changes the outcome. Self-employed expats should also weigh estimated tax payments, business expenses, local tax rules, and entity structure.

Withholding Considerations

U.S. employees working abroad may still face federal income tax withholding from wages. In certain cases, a qualifying employee can provide Form 673 to a U.S. employer. This claims exemption from withholding on wages earned abroad, up to the extent of the FEIE and foreign housing exclusion. It affects withholding only, not the filing requirement.

Is the FEIE Right for You?

The FEIE is not always the optimal choice.