The Foreign Earned Income Exclusion (FEIE) in 2026
The FEIE is the single most valuable tool for Americans working abroad — but it only covers earned income, it never touches self-employment tax, and choosing it can lock you out of the Foreign Tax Credit. Here's the 2026 detail.
For tax year 2026 the Foreign Earned Income Exclusion (FEIE) lets a qualifying US citizen abroad exclude up to $132,900 of foreign earned income from federal income tax, claimed on Form 2555. You must have a foreign tax home and pass either the Bona Fide Residence or Physical Presence test. It excludes wages and self-employment income from income tax only — not passive income, and never the 15.3% self-employment tax.
The United States taxes its citizens on worldwide income no matter where they live — a system called citizenship-based taxation that it shares only with Eritrea. Moving to Dubai or Lisbon does not switch off your IRS filing obligation. What it can do is change the maths, and the Foreign Earned Income Exclusion is the main lever.
For tax year 2026 the FEIE lets a qualifying taxpayer exclude up to $132,900 of foreign earned income from US federal income tax — up from $130,000 in 2025. The figure is indexed to inflation each year and set in Revenue Procedure 2025-32. A married couple who both qualify and both have earned income can exclude a combined $265,800.
Who qualifies: the tax-home rule plus one of two tests
Before either test, there is a gatekeeper the IRS applies first: your tax home must be in a foreign country. Broadly, your tax home is the general area of your main place of business or employment. If your abode remains in the United States, you fail here regardless of how many days you spend overseas.
Clear that, and you must then satisfy one of two tests:
- Physical Presence Test — you are physically present in a foreign country (or countries) for at least 330 full days during any 12 consecutive months. It is a day count. Days count only if you are outside the US for the full 24 hours; travel days over international waters do not count. This test is objective and forgiving of intent — it suits digital nomads and first-year movers.
- Bona Fide Residence Test — you are a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year (a full calendar year for calendar-year filers). This is about the quality of your ties, not a day count: a genuine home, integration, indefinite intent. It permits more US travel but is harder to establish and is judged case by case.
The Physical Presence Test is the safe default for your first year abroad because it does not require a full calendar year of residence — you pick the best 12-month window. Many expats switch to Bona Fide Residence once settled, since it tolerates more time back in the US.
What counts as "foreign earned income" — and what doesn't
The exclusion is narrow by design. "Foreign earned income" means wages, salaries, professional fees and other amounts paid to you for personal services you perform, while your tax home is abroad. Everything else is outside the exclusion.
| Income type | Covered by FEIE? |
|---|---|
| Salary and wages earned while working abroad | Yes — up to the annual cap |
| Self-employment / freelance income (services performed abroad) | Yes for income tax — but see the SE-tax trap below |
| Professional fees, commissions, bonuses for services abroad | Yes |
| Dividends, interest, capital gains, rental income | No — passive income never qualifies |
| Pensions, annuities, US Social Security benefits | No |
| US government / military pay (civilian or military) | No — treated as US-source |
| Amounts received after the year following the year you earned them | No |
Form 2555 and the foreign housing exclusion
You claim the FEIE on Form 2555, filed with your Form 1040. The form asks for your qualifying test, your foreign address and — for the Physical Presence Test — a day-by-day travel log. There is no de minimis: you file the form or you get nothing. The election is also "sticky": once you claim the FEIE you generally keep using it, and if you revoke it you cannot re-elect for five years without IRS consent.
On top of the earned-income exclusion, Form 2555 lets you claim a foreign housing exclusion (for employer-provided amounts) or deduction (for the self-employed) covering rent, utilities other than telephone, and similar costs. It is not a flat number — it is the amount by which your qualifying housing costs exceed a base, capped at a ceiling:
| 2026 housing figure | Amount | Basis |
|---|---|---|
| Base housing amount (floor) | $21,264 | 16% of the $132,900 FEIE — costs below this don't count |
| Standard housing cap (ceiling) | $39,870 | 30% of the FEIE, for most locations |
| High-cost-city caps | Higher | IRS publishes raised limits for 100-plus expensive cities |
So in a standard-cost location for 2026, the housing exclusion can shelter housing costs between $21,264 and $39,870 — over and above the $132,900 earned-income exclusion. The housing figures are computed on the Form 2555 worksheet before the earned-income exclusion, and they are prorated for part-year qualifying periods.
FEIE vs the Foreign Tax Credit — you usually can't stack them
The FEIE is not the only way to avoid double taxation, and often it is not the best. The Foreign Tax Credit (FTC), claimed on Form 1116, gives you a dollar-for-dollar US credit for income tax you actually paid to a foreign government. The critical rule: you cannot claim both the FEIE and the FTC on the same dollars of income. Exclude income under Form 2555 and you forfeit any credit for foreign tax on that income.
- Live in a low- or zero-tax country (UAE, a territorial-tax jurisdiction, a country from our no-income-tax list) — the FEIE usually wins, because there is little or no foreign tax to credit.
- Live in a high-tax country (much of Western Europe) — the FTC often wins outright, because the foreign tax you pay exceeds your US liability, wiping it out and leaving carry-forward credits, with no income cap.
- Earn above the cap or want to fund an IRA / claim the Child Tax Credit — the FTC can be better, because excluded income under the FEIE is not "compensation" for retirement contributions and can shrink refundable credits.
In practice many high earners in high-tax countries skip the FEIE entirely and rely on the FTC, or combine FEIE on the first $132,900 with FTC on the remainder. The right answer is a calculation, not a default — and it interacts with your state filing, your retirement contributions and your long-term plans.
How Expectat helps you get there
The FEIE-versus-FTC decision, the housing exclusion and the self-employment-tax question are not one-size-fits-all — they turn on your specific numbers, your host country and where you want to be in five years. We do that arithmetic before you file, not after.
- We map your situation and your numbers — income mix, host-country tax, filing status — and model FEIE versus the Foreign Tax Credit side by side so you claim the combination that actually minimises your total bill.
- We stress-test the traps specific to your case: the 330-day count and tax-home rule, the 15.3% self-employment exposure where no totalization agreement exists, and the retirement and credit knock-ons of excluding income.
- We execute on the ground with vetted local partners — cross-border US tax preparers and host-country accountants — so the US and local sides of your return actually line up.
Book a strategy call and we'll turn the rules above into a filing plan built around your numbers.
Frequently asked questions
What is the FEIE amount for 2026?
For tax year 2026 the maximum Foreign Earned Income Exclusion is $132,900 per qualifying person, up from $130,000 in 2025. The figure is set annually for inflation in Revenue Procedure 2025-32. A married couple who both qualify and both earn can exclude up to $265,800 combined, each on a separate Form 2555.
Does the FEIE eliminate self-employment tax?
No. The FEIE reduces federal income tax only. A self-employed US citizen abroad still owes the full 15.3% self-employment tax (Social Security and Medicare) on net earnings even if all of that income is excluded on Form 2555. The only relief is a US totalization agreement with the host country, which the US has with only about 30 nations.
Can I claim both the FEIE and the Foreign Tax Credit?
Not on the same income. If you exclude income under the FEIE you cannot also take a foreign tax credit for taxes paid on that excluded income — the IRS treats it as a double benefit. You can, however, apply the FEIE to income up to the cap and use the Foreign Tax Credit on income above it. Which is better depends on how much foreign tax you actually pay.
Which is better, the Physical Presence Test or the Bona Fide Residence Test?
The Physical Presence Test (330 full days abroad in any 12 months) is objective and the safer choice for your first year or for nomads, because it doesn't require a full calendar year of residence. The Bona Fide Residence Test requires genuine, indefinite residency for a full tax year but then tolerates more travel back to the US. You need to pass only one.
What income does the FEIE not cover?
Only earned income from personal services qualifies. Passive income — dividends, interest, capital gains, rental income — never qualifies, nor do pensions, annuities, US Social Security benefits, or US government and military pay. Those remain fully taxable by the US, though the Foreign Tax Credit may offset foreign tax on some of them.
Do I still have to file a US return if the FEIE zeroes out my tax?
Yes. The FEIE is claimed on Form 2555, which you can only file by filing a Form 1040. Even at zero tax you must file every year, plus an FBAR if your foreign accounts exceed $10,000 in aggregate and often Form 8938. Excluding your income does not remove you from the US tax system — only formal expatriation does.
Sources
Rules change — always confirm the current position with the primary authority:
- IRS — Tax inflation adjustments for tax year 2026 (FEIE $132,900; Rev. Proc. 2025-32)
- IRS — Foreign earned income exclusion (overview and tests)
- IRS — Foreign earned income exclusion: physical presence test
- IRS — Foreign earned income exclusion: bona fide residence test
- IRS — Foreign housing exclusion or deduction
- IRS — Foreign tax credit (Form 1116)
- IRS — Instructions for Form 2555, Foreign Earned Income
- IRS — Self-employment tax (US citizens and resident aliens abroad)
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