Foreign earned income exclusion 2026: the $132,900 limit and the physical presence test

The foreign earned income exclusion lets a US taxpayer living abroad take part of their pay out of US income tax, without taking it out of the US tax system. For tax year 2026 the IRS sets the maximum at US$132,900, up from US$130,000 for 2025, and a couple who both qualify can each use their own limit. Three things must hold together: foreign earned income, which means pay for work done in a foreign country; a tax home in a foreign country; and either the bona fide residence test or the physical presence test. A valid choice on Form 2555, attached to the return, then makes the exclusion real. It does not end the duty to file, does not touch self-employment tax, and it changes which credits you can claim, sometimes for years. The default case above fails by a small margin, which is how this test usually fails.

The 330-day count, and why it is tighter than it sounds

You meet the physical presence test if you are physically present in a foreign country or countries for 330 full days during any 12 consecutive months. The days need not be consecutive. Your intentions, your visa and the kind of home you keep play no part: Publication 54 says the test depends only on how long you stay. A full day is 24 consecutive hours from midnight to midnight, which is where people lose count. A 12-month period has 365 days, or 366 with a leap day, so you have about 35 days of room at most, and every day you travel to or from the United States uses some of it. Two trips home cost at least four days beyond the time spent at home.

The IRS's own example: you leave the United States for France on June 10 and arrive on June 11 at 9:00 a.m. June 12 is your first full day, since time on or over international waters does not count as time in a foreign country. Flying over a foreign country before midnight on the day you leave changes it: a June 10 departure that passes over France and lands in Spain just after midnight makes June 11 your first full day. Moving between foreign countries costs nothing if the trip stays under 24 hours or stays over foreign territory, as with a flight from London to Stockholm. A ship from Norway to Portugal lasting over 24 hours costs the departure day, the transit days and the arrival day.

Those lines come from the engine behind the counter above. The first one is the lesson: five weeks at home plus the travel days puts you just over the margin, even though it feels like an ordinary expatriate year. The move and the return show proration. When you pass the test for only part of the tax year, the IRS says you must prorate the maximum by the days you met it, so the US$132,900 is a ceiling for a whole year and not a flat amount.

Choosing your 12 months

A 12-month period can start on any day and ends the day before the same date a year later. It need not start on your first day abroad or end on your last, you can choose the period that gives the greatest exclusion, and periods can overlap. The IRS illustrates this with a worker whose tax home was in New Zealand from January 1, 2024 through August 31, 2025: for 2025, either January to December 2024 or September 2024 to August 2025 can be used. Form 2555's instructions add that the period must include 365 days, or 366 in a leap year, part of which falls in the tax year.

No excuse stretches the count. Illness, family problems, vacation or your employer's orders do not forgive a shortfall, and time spent in a foreign country in violation of US law does not count. The one exception is a waiver: the minimum time can be waived if you must leave because of war, civil unrest or similar conditions, in the countries and from the dates the IRS lists each year in a Revenue Procedure. You still have to show you could otherwise have met the test.

Bona fide residence: no count, more judgment

The other route has no number. You must be a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year, which for a calendar-year filer means January 1 to December 31. Publication 54 is blunt that living abroad for a year does not by itself make you one. The IRS looks at your intention, the purpose of your stay, your activities there, and whether you paid tax to that country, among other facts. Brief trips back to the United States or elsewhere do not break it if you clearly intend to return without unreasonable delay.

Two limits matter. Only US citizens, and resident aliens who are citizens or nationals of a country with a US income tax treaty in effect, can use this test, while the physical presence test is open to all citizens and resident aliens. And if you tell the authorities of that country that you are not a resident and they hold you not subject to their income tax as a resident, you are not a bona fide resident. Someone leaning on a local non-resident status should read that sentence twice.

Tax home: the condition behind both tests

Your tax home is your regular or principal place of business, employment or post of duty, wherever your family home is. It must be in a foreign country throughout your period of residence or presence, and for the presence test that period is the 330 full days, not the 12 months around them. A foreign country is any territory under the sovereignty of a government other than the United States, but not international waters and the airspace above them. Pay from working abroad as a US Government employee does not qualify, nor do pensions and annuities, which the Form 2555 instructions list among amounts you cannot exclude.

Form 2555, and what the choice costs you

You claim the exclusion by attaching Form 2555 to your return or an amended return. The form covers both the exclusion and the housing amount, and the version the IRS shows as current when we read it is the 2025 one. Here are the effects that catch people:

It lasts. The choice stays in effect for that year and all later years until you revoke it. If you revoke and want it back within 5 tax years, you need IRS approval, through a ruling request.

It blocks credits. You cannot take a foreign tax credit or deduction on foreign taxes for income you exclude. A high earner can exclude up to the limit and take the credit on what is left. Choosing the exclusion also rules out the additional child tax credit and the earned income credit for that year, and taking one of these credits later counts as revoking the choice for that year.

It does not lower the rate on the rest. Tax on your remaining income is figured at the rates that would have applied without the exclusion, using the Foreign Earned Income Tax Worksheet in the Form 1040 instructions. So the excluded amount comes off the income, but not out of the bracket calculation. See the 2026 federal brackets.

It does not touch self-employment tax. Excluded income still counts for net earnings from self-employment. The IRS's example is a consultant abroad with a US$68,000 net profit who owes self-employment tax on all US$68,000 even though the exclusion applies.

Housing: exclusion for employees, deduction for the self-employed

On top of the earned income limit, you can exclude or deduct a housing amount, meaning your reasonable housing expenses abroad for the qualifying part of the year minus a base amount. The base is 16% of the maximum exclusion, worked out per day. The expenses you can count are capped: the standard limit is generally 30% of the maximum, also per day, with higher limits for high-cost localities listed in the Form 2555 instructions. The exclusion applies to amounts paid with employer-provided amounts, and the deduction to amounts paid with self-employment earnings. If you choose the housing exclusion, you figure it before the earned income exclusion.

The 2025 limit of US$39,000 is the IRS's own figure, and the 2025 base is our arithmetic on its formula. The 2026 column applies the same two percentages to US$132,900, as the instructions for that year were not out when we read them. The high-cost list for 2026 is not reflected here at all, so check the instructions before using a locality figure. With a standard limit, the most a full-year housing amount can reach is US$18,606 for 2026, again by our arithmetic.

What the counter above does, and where it stops

Enter your stays outside the United States, from the day you arrive to the day you leave. The engine drops those two days from each stay, merges stays that share a date, then tries every 12-month period touching the tax year. If some period reaches 330, it picks the one leaving the most days inside the year, because that gives the highest limit, and prorates the maximum. If none does, it shows the closest. It treats arrival and departure days as lost, which is the IRS's normal outcome on an ocean or long-haul trip, though not every land crossing. It cannot see your tax home, so it asks. It uses a single period and leaves out the combination of overlapping periods. Your real limit also stops at your foreign earned income. Since the IRS's test is written in days, a stay log kept while you travel is what you will want on the day you complete the form; the Taxlag app keeps one.

For everything else an American abroad has to file, including the FBAR and Form 8938, read our guide to US expat taxes. Green card holders should also see the substantial presence test page, and anyone taxed as a resident elsewhere as well should read the dual residency guide.