Digital nomads take note: The $132,900 foreign earned income exclusion for 2026 could wipe out tax on overseas income, here's the catch

The Internal Revenue Service published its annual inflation adjustments for the 2026 tax year. Among the changes is an increase to the Foreign Earned Income Exclusion. Americans living and working abroad can exclude up to $132,900 of overseas earned income from federal income taxes in 2026. That threshold sat at $130,000 for tax year 2025.

The exclusion applies strictly to earned income, such as wages or self-employment pay. It doesn't shield passive income like dividends, capital gains, or pensions from federal tax. Taxpayers must also meet specific residency requirements or pass the physical presence test abroad to qualify.

2026 Foreign Earned Income Exclusion: What Digital Nomads Need to Know

The foreign earned income exclusion applies to qualifying income earned from working in another country. It doesn't simply cover everything an American earns while overseas.


The taxpayer also has to meet the IRS requirements for claiming the exclusion. That can involve establishing a foreign tax home and meeting either the bona fide residence test or the physical presence test.

The physical presence test is particularly important for people who move around. Generally, they need to spend at least 330 full days outside the United States during a qualifying 12-month period.

There’s another detail that can easily get missed. The exclusion applies to earned income. It isn't a general tax break for foreign investment income. Dividends, interest and capital gains don't suddenly become tax-free because the taxpayer happens to be living abroad.

For self-employed Americans, the foreign earned income exclusion can reduce regular federal income tax, but it doesn't wipe out self-employment tax.

What is the foreign earned income exclusion?

The Foreign Earned Income Exclusion, or FEIE, allows qualifying U.S. citizens and resident aliens to exclude certain income earned from working in a foreign country.

The changes aren't limited to Americans living overseas. The standard deduction for a single taxpayer rises from $15,750 in 2025 to $16,100 in 2026. For married couples filing jointly, it increases from $31,500 to $32,200.

The income-tax brackets are also wider. For a single taxpayer, the 10% bracket now reaches $12,400, compared with $11,925 in 2025. The 22% bracket starts above $50,400, up from $48,475.

The 0% long-term capital-gains threshold also moves higher. For 2026, it reaches $49,450 for single filers and $98,900 for married couples filing jointly. Retirement accounts get higher limits as well. The 401(k) and 403(b) contribution limit rises to $24,500, while the IRA contribution limit increases to $7,500.

For someone living abroad, the $132,900 figure is easy to remember. The harder part is determining whether the income actually qualifies. That distinction matters because the exclusion isn't a promise that an American earning less than $132,900 overseas will pay no U.S. tax at all.

The taxpayer's residence, travel history and type of income can all change the calculation. Other 2026 figures are changing too. The annual gift-tax exclusion remains unchanged, while the estate-tax exclusion rises to $15 million for people who die during 2026. HSA contribution limits also increase to $4,400 for self-only coverage and $8,750 for family coverage.