The Foreign Earned Income Exclusion, Explained

By Tom, CPA · Updated October 27, 2026

Part of: Tax Planning

TL;DR: U.S. citizens abroad can exclude up to $132,900 of foreign earned income in 2026 by meeting the bona fide residence or 330-day test. Housing costs above a base can also be excluded. Stacking pushes other income into higher brackets, and SE tax still applies, so compare FEIE with the credit.

Educational only, not tax, legal, or investment advice. Examples are illustrations, not predictions. Rules and limits change; verify current figures and talk to a qualified professional about your situation.

The tax code is 4 million words long, and it follows U.S. citizens everywhere. The United States taxes its citizens and green card holders on worldwide income, no matter where they live. Move to Lisbon, and the IRS still wants a Form 1040. The foreign earned income exclusion (FEIE) is the main relief valve: it lets qualifying people exclude a large chunk of foreign wages or self-employment income.

This guide covers who qualifies, the 2026 amount, the housing exclusion, the stacking rule that surprises everyone, FEIE versus the foreign tax credit, self-employment tax, reporting of foreign accounts, and a worked example. Figures are for 2026, as of Oct 2026.

CPA Warning Label: FEIE elections are hard to undo and foreign account reporting penalties are severe. Model both FEIE and the foreign tax credit and confirm FBAR duties first.

The 2026 exclusion amount

For 2026, you can exclude up to $132,900 of foreign earned income per qualifying person (Rev. Proc. 2025-32). A married couple who both qualify and both have foreign earnings can each exclude up to that amount.

The exclusion is prorated by the number of qualifying days in the year, so in the year you move abroad or return, you will usually get a partial exclusion.

Earned income means pay for personal services: wages, salaries, bonuses, professional fees and self-employment income for work performed abroad. It does not include interest, dividends, capital gains, rental income, pensions, Social Security, or pay from the U.S. government as an employee. Income is sourced where the work is performed, not where the employer or bank account is. A remote worker physically in Spain working for a U.S. company earns foreign-source income.

Who qualifies

You must have foreign earned income, a tax home in a foreign country, and pass one of two tests (IRS FEIE page and Publication 54):

• Bona fide residence test: a U.S. citizen (or resident alien from a treaty country) who is a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year. This is about intent and ties: a lease or home, local tax filing, family with you, indefinite stay.
• Physical presence test: a U.S. citizen or resident alien physically present in a foreign country or countries for at least 330 full days during any 12 consecutive months. Days in transit over international waters do not count, and partial days in the U.S. break the count. The 12-month window can be chosen to maximize qualifying days.

Your tax home is your main place of business or employment. If you keep your "abode" in the U.S., for example a home you return to and family who stays, you may not have a foreign tax home even if you work abroad.

The housing exclusion or deduction

On top of the FEIE, qualifying taxpayers can exclude (employees) or deduct (self-employed) certain foreign housing costs above a base amount: rent, utilities other than phone and TV, insurance, and similar costs. The base is 16% of the FEIE amount, which works out to $21,264 for 2026, and there is a cap that is generally 30% of the FEIE but is higher for many expensive cities listed in IRS guidance.

Mortgage principal, purchased furniture and domestic labor do not qualify. Both the FEIE and housing amounts are claimed on Form 2555.

The stacking rule

Here is the catch most people miss. If you claim the FEIE, the tax on your remaining income is calculated as if the excluded income were still there. The excluded income is taxed at zero, but it uses up the low brackets. Any non-excluded income, such as wages above the limit or U.S. investment income, is taxed starting at the bracket where your total income would have put you.

In practice: someone with $132,900 excluded and $20,000 of dividends does not pay 10% and 12% on the dividends. They pay the rates that apply above $132,900 of taxable income.

Also, excluded income is added back for some calculations: the net investment income tax MAGI, ACA MAGI and Roth IRA MAGI. And you cannot contribute to an IRA based on excluded compensation. See AGI vs MAGI and the NIIT guide.

FEIE or foreign tax credit?

The alternative is the foreign tax credit (Form 1116), which credits foreign income taxes paid against U.S. tax on the same income.

The FEIE is an election. If you revoke it, you generally cannot claim it again for five tax years without IRS approval (Publication 54). Run both methods before choosing, and think several years ahead. See the foreign tax credit and index funds for the investment side.

Self-employment tax and Social Security

The FEIE reduces income tax, not self-employment tax. A U.S. freelancer abroad still owes 15.3% SE tax on net earnings, up to the Social Security wage base of $184,500 for 2026, unless a totalization agreement between the U.S. and the host country assigns coverage to the host country's system. Get a certificate of coverage to prove it.

Employees of foreign employers generally pay into the local system instead. Employees of U.S. employers sent abroad often stay in U.S. Social Security for a period under totalization rules.

Illustration: a remote worker in Portugal

Illustration: a single U.S. citizen lives in a country with a low local tax on her income and works remotely as an employee of a U.S. company all of 2026. She meets the physical presence test for the full year.

• Salary: $150,000. Housing costs: $30,000.
• FEIE: $132,900. Housing exclusion: $30,000 − $21,264 = $8,736 (assuming under the cap).
• Remaining taxable wages: $150,000 − $132,900 − $8,736 = $8,364. Plus $26,000 of U.S. interest income.
• Taxable income after the $16,100 standard deduction: $8,364 + $26,000 − $16,100 = $18,264. Under the stacking rule (section 911(f)) that $18,264 is taxed as if the $141,636 of excluded income were still sitting underneath it, so it lands in the 24% bracket for singles in 2026: about $4,380, instead of roughly $2,000 without stacking. (Had her leftover income been below the standard deduction, her U.S. income tax would simply be zero.)

Result: a modest U.S. bill on income she might have assumed was untaxed, unless foreign taxes paid can be credited against it. If the local country later taxes her fully at higher rates, switching to the foreign tax credit may be better, mindful of the five-year rule.

Assumptions: illustrative; local tax and totalization status vary; state taxes may apply if she keeps state residency.

Foreign accounts and other filings

• FBAR (FinCEN Form 114): required if the total of your foreign financial accounts exceeds $10,000 at any time during the year. Filed with FinCEN, not with your 1040. Penalties for willful failure are severe.
• Form 8938: required above higher thresholds for those living abroad, filed with your return.
• Foreign mutual funds and ETFs are often PFICs with punitive tax rules. U.S.-domiciled funds are usually simpler.
• Filing deadline: citizens living abroad get an automatic two-month extension to June 15 to file, though interest runs on tax owed from April 15.
• State residency: some states keep taxing former residents who have not clearly cut ties. See state income tax planning.
• Rental property abroad or at home is not earned income. See what rental income is taxable and NIIT on rental income.

Keep a day-count calendar with passport stamps and travel records. If the IRS questions the physical presence test, documentation of every entry and exit date is what holds up.

Planning a career move abroad? See growing income and career capital and the tax planning hub.