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.