IRS Increases Foreign Earned Income Exclusion to $132,900 for 2026

The Internal Revenue Service (IRS) has announced an increase to the Foreign Earned Income Exclusion (FEIE) for U.S. citizens and resident aliens working abroad. For tax year 2026, the maximum amount of foreign earned income that a qualifying individual can exclude from U.S. federal income tax will rise to $132,900.

This is an increase from the $130,000 limit set for tax year 2025. This provision allows individuals who meet specific criteria to potentially eliminate their U.S. tax liability on a significant portion of their foreign-sourced earnings.

To qualify for the exclusion, individuals must meet either the Bona Fide Residence Test or the Physical Presence Test. The Physical Presence Test requires a person to be physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.

“If you are a U.S. citizen or a resident alien of the United States and you live abroad, you are taxed on your worldwide income. However, you may qualify to exclude your foreign earnings from income up to an amount that is adjusted annually for inflation. In addition, you can exclude or deduct certain foreign housing amounts,” the IRS website states.

The qualifying 12-month period does not need to align with a calendar year. For example, a person outside the U.S. for more than 330 days between June 2025 and June 2026 could qualify for the exclusion on their income for both the 2025 and 2026 tax years. However, spending more than 34 days in the United States during the 12-month period may jeopardize the exclusion.

In addition to the Physical Presence Test, individuals may also qualify if they are a U.S. citizen or resident alien who is a “bona fide resident” of a foreign country for an uninterrupted period that includes an entire tax year.

Furthermore, to claim the exclusion, the individual must have a legal right to work in the foreign country where the income was earned. Historically, the exclusion amount has steadily increased, from $105,900 in 2019 to $126,500 in 2024, reflecting adjustments for inflation.

According to the IRS, foreign-earned income means wages, salaries, professional fees, or other amounts paid to you for personal services rendered by you. It does not include amounts received for personal services provided to a corporation that represent a distribution of earnings and profits rather than reasonable compensation.

A qualifying individual may claim the foreign earned income exclusion on foreign earned self-employment income. The excluded amount will reduce your regular income tax but will not reduce your self-employment tax. Also, as a self-employed individual, you may be eligible to claim the foreign housing deduction instead of a foreign housing exclusion, according to the IRS.

The IRS further clarifies that Foreign earned income does not include amounts such as pay received as a military or civilian employee of the U.S. government or any of its agencies, nor does it include pay for services conducted in international waters or airspace (which are not considered a foreign country).

Additionally, it excludes payments received after the end of the tax year following the year in which the services were performed, and pay otherwise excludable from income, such as the value of meals and lodging furnished for the convenience of your employer on their premises (and, in the case of lodging, as a condition of employment). Foreign earned income does not include pension or annuity payments, including Social Security benefits.

“You may have a foreign tax home if your work is in a foreign country and you expect to be employed in the foreign country for an indefinite, rather than temporary, period of time. You do not have a foreign tax home if your abode remains in the United States (where you keep closer familial, economic, and personal ties) unless you work in a Presidentially-declared combat zone in support of the Armed Forces of the United States,” the IRS states.