2026 FEIE Exclusion Limit and Indexation
The Foreign Earned Income Exclusion limit for 2026 is $132,900 (up from $130,000 in 2025 — indexed annually for inflation under Section 911(b)(2)). This is the maximum earned income that can be excluded. If your foreign earned income is below this amount, you can exclude all of it. If above, you can exclude $132,900 and the excess is taxed at US rates (using the 'stacking rule' — the excluded income occupies the lowest tax brackets, so the excess is taxed starting at a higher bracket). Both spouses can each claim the FEIE if both have qualifying foreign earned income — a couple with dual income can exclude up to $265,800 in 2026. The exclusion applies to: wages, salaries, professional fees, self-employment income, bonuses (if earned abroad), and housing benefits provided by an employer.
Physical Presence Test vs Bona Fide Residence Test
There are two ways to qualify for the FEIE: (1) Physical Presence Test (PPT): you were physically present in a foreign country or countries for at least 330 full days during any 12-month period beginning or ending in the tax year. 'Full day' means a 24-hour calendar day outside the US. Travel days only count if you are outside the US for the entire day (midnight to midnight). Partial days in transit do not count. The 12-month period can straddle two tax years — you can use any consecutive 12-month period, not just the calendar year. Common pitfall: emergency returns to the US (medical, family) count as days in the US and erode your 330-day count. (2) Bona Fide Residence Test (BFR): you were a bona fide resident of a foreign country for an uninterrupted period including an entire tax year (January 1 to December 31). This test is qualitative — it considers your intent, establishment of a permanent residence, participation in local life, and whether you have returned to the US for transient reasons only. The BFR test requires IRS approval via Form 2555 Part II — the IRS can challenge bona fide residence status. Recommendation: for most Americans in their first year abroad, the Physical Presence Test is safer and more mechanically definable.
Foreign Housing Exclusion: Additional Tax Relief for High-Cost Cities
In addition to the earned income exclusion, qualifying Americans can claim the Foreign Housing Exclusion (Section 911(c)) for employer-provided housing or housing allowances. Base housing amount (2026): $21,264 ($132,900 × 16% = standard base). This base amount is NOT deductible — only housing costs ABOVE the base qualify. Maximum housing exclusion: varies by location. The IRS publishes annual limits by city. High-cost city limits (2026 approximate): London: $38,860. Singapore: $36,900. Hong Kong: $47,380. Tokyo: $36,680. Sydney: $33,280. Geneva: $42,680. How it works: if you pay $50,000/year in London rent and your employer provides a $50,000 housing allowance: housing exclusion = $50,000 − $20,240 = $29,760 (capped at the London limit of $38,860). The excluded housing amount reduces the FEIE — total exclusion (income + housing) cannot exceed total earned income. Self-employed individuals can claim the Foreign Housing Deduction (not exclusion) — similar calculation but reduces income available for SE tax.
Self-Employment Tax: The FEIE's Most Important Limitation
Self-employed Americans abroad face a critical FEIE limitation: the exclusion reduces US income tax but does NOT reduce self-employment tax (Social Security + Medicare = 15.3% on net self-employment income up to the Social Security wage base, plus 2.9% Medicare on income above). This is because SE tax is technically a Social Security contribution, not an income tax. Example: a US freelancer in Berlin earns $100,000 from US clients. FEIE excludes $100,000 from income tax — $0 US income tax. But SE tax: $100,000 × 92.35% net × 15.3% = $14,130 in SE tax still owed. Strategies: (1) Totalization Agreements: if your host country has a US Social Security totalization agreement (Germany, UK, France, Japan, etc.), you may contribute only to the host country's social security system — not US SE tax — if you meet the agreement's conditions. (2) Foreign corporation: some self-employed Americans form a foreign corporation that pays them a salary — the salary may be eligible for FEIE; corporate profits are subject to GILTI (Global Intangible Low-Taxed Income) rules. Consult a US expat CPA before forming a foreign corporation.
FEIE and Foreign Tax Credit: Stacking Rules and Strategy
The FEIE and Foreign Tax Credit (FTC) can both be used in the same year but NOT on the same income. Strategy decision: (1) Use FEIE if your income is below $132,900 and you live in a low-tax country (UAE, Singapore, Cayman) — FEIE eliminates US tax at no cost. (2) Use FTC if you live in a high-tax country (Germany, France, UK) — foreign taxes paid can credit dollar-for-dollar against US tax, often fully eliminating US liability without using the FEIE. (3) In some cases: use FEIE for the first $132,900 and FTC for income above — but the stacking rule pushes the excess income into higher brackets. Revocation trap: if you revoke the FEIE election, you cannot re-elect FEIE for 5 years without IRS permission (Form 2555 Part IV, Reg. 1.911-7(b)). This is a common and costly mistake — do not revoke FEIE without careful planning. AMT: the FEIE income exclusion is also excluded for AMT purposes — the Alternative Minimum Tax exemption is reduced by the excluded amount. For most Americans abroad, AMT interaction is manageable but should be calculated.