The foreign earned income exclusion

What are the 2026 figures?

Read from the Revenue Procedure and the Notice that set them. That is deliberate: Publication 54 no longer prints these amounts at all (it became a continuous-use guide and points readers to the Revenue Procedure), and the Form 2555 instructions in circulation still carry the previous year's figure, because the IRS announces the inflation adjustment long before the form is revised.

How the rules actually work

Who can claim it

• Publication 54 lists five things that all have to be true at the same time: your tax home is in a foreign country, you live or are present in a foreign country, you have foreign earned income from performing personal services there, you meet either the bona fide residence test or the physical presence test, and you make a valid election by attaching Form 2555 to your return. The tests themselves are open only to US citizens and US resident aliens. IRC 911(d)(1); Pub. 54 (Rev. Dec. 2025), chapter 4, Requirements items 1 to 5
• Your tax home is your principal place of business, employment, or post of duty, regardless of where you keep your family home. It has to be in a foreign country for the period you are claiming. You are not treated as having a foreign tax home for any period your abode is in the United States, unless you are serving in a designated combat zone in support of the Armed Forces. IRC 911(d)(3); Pub. 54 (Rev. Dec. 2025), chapter 4, Requirements item 1
• You are a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year. The statute opens this test to US citizens. Publication 54 adds that a US resident alien may also use it if they are a citizen or national of a country that has an income tax treaty in effect with the United States. Living abroad for a year does not by itself make you a bona fide resident. IRC 911(d)(1)(A) for citizens; the resident alien treaty route is stated in Pub. 54 (Rev. Dec. 2025), chapter 4, Requirements item 4a
• You are physically present in a foreign country or countries for 330 full days during any period of 12 consecutive months. The 330 days do not have to be consecutive, and the test does not care about your intentions or the kind of residence you set up. IRC 911(d)(1)(B); Pub. 54 (Rev. Dec. 2025), chapter 4, Requirements item 4b
• If both spouses work abroad, each has a foreign tax home, and each meets either test, each can claim a full exclusion, for a total of twice the year's maximum. They do not have to meet the same test. IRC 911(a) applied per qualified individual; Pub. 54 (Rev. Dec. 2025), Limit on Excludable Amount

What income counts

• Only income you earned by performing personal services abroad counts: wages, salaries, professional fees, self-employment income, and noncash pay or allowances. Pension and annuity income, including social security benefits and railroad retirement benefits treated as social security, does not count, and neither does interest, ordinary dividends, capital gains, or alimony. IRC 911(b)(1)(B)(i); Instructions for Form 2555 (2025), Part IV, Foreign Earned Income
• Pay from the US Government or one of its agencies, received as an employee of that agency, is not foreign earned income and cannot be excluded. IRC 911(b)(1)(B)(ii); Instructions for Form 2555 (2025), Part IV
• The exclusion is capped at the smaller of the year's maximum amount or your foreign earned income for the year minus any foreign housing exclusion you claim. If you claim the housing exclusion you have to figure that first. The exclusion and the housing deduction together can never exceed your foreign earned income for the year. IRC 911(d)(7); Pub. 54 (Rev. Dec. 2025), Limit on Excludable Amount

How much you can exclude

• If you qualified for only part of the tax year, the maximum exclusion is prorated: multiply the year's maximum by your qualifying days in the year, then divide by 365, or 366 in a leap year. The IRS example for 2025 is 140 qualifying days giving $49,863, which is 140/365 of $130,000. IRC 911(b)(2)(A); IRS, Figuring the foreign earned income exclusion, Part year exclusion
• The minimum time requirements for both tests can be waived if you had to leave a foreign country because of war, civil unrest, or similar adverse conditions there. The IRS publishes the list of countries and dates that qualify. IRC 911(d)(4); Pub. 54 (Rev. Dec. 2025), chapter 4, Requirements item 4c

The housing amount

• The base housing amount is 16 percent of the year's maximum exclusion, computed on a daily basis and multiplied by your qualifying days in the tax year. Housing costs below that base are never excludable. IRC 911(c)(1)(B); Notice 2026-25 section 2
• The housing expenses you may count are generally capped at 30 percent of the year's maximum exclusion, again computed daily and multiplied by qualifying days. For 2026 that general cap is $39,870. IRC 911(c)(2)(A); Notice 2026-25 section 2
• The housing amount is your qualifying housing expenses for the year minus the base housing amount. With the 2026 general cap of $39,870 and the 2026 base of $21,264, the most a full year qualifier outside a listed high cost location can have as a housing amount is $18,606, and that is a ceiling rather than an entitlement because your actual expenses and your foreign earned income can both limit it further. IRC 911(c)(1); Notice 2026-25 section 2; Pub. 54 (Rev. Dec. 2025), Housing Amount
• Higher housing expense limits for specific foreign locations are set annually by IRS notice. For 2026 the table is in Notice 2026-25 section 3, and that notice supersedes Notice 2025-16. Look up your own city there rather than assuming the general cap applies. IRC 911(c)(2)(B); Notice 2026-25 sections 3 and 5
• The housing exclusion applies only to housing paid for with employer provided amounts. The housing deduction applies only to housing paid for out of self-employment earnings. IRC 911(a)(2) and 911(c)(4); Pub. 54 (Rev. Dec. 2025), Foreign Housing Exclusion and Deduction

Making and keeping the election

• You claim the exclusion by attaching Form 2555 to your income tax return or amended return. The choice then stays in effect for that year and every later year until you revoke it, which means you have to make the same choice again each year. Not making it in a later year counts as a revocation for that year. IRC 911(a) and 911(e)(1); Pub. 54 (Rev. Dec. 2025), chapter 4, Requirements item 5 and Effect of Choosing the Exclusions and Deduction
• You can revoke the election for any year. If you revoke it and then want the same exclusion again within 5 years, you have to apply for IRS approval by requesting a ruling from the IRS, following the procedure Publication 54 points to. IRC 911(e)(2); Pub. 54 (Rev. Dec. 2025), Effect of Revoking the Exclusions

What the exclusion does not do

• Once you elect the exclusion you cannot take a foreign tax credit or deduction for foreign taxes on the income you excluded. Publication 54 notes that you can still credit foreign taxes paid on the part of your foreign wages that was not excluded. IRC 911(d)(6); Pub. 54 (Rev. Dec. 2025), Foreign tax credit or deduction
• The exclusion reduces regular income tax only. It does not reduce self-employment tax, which still applies to net earnings from self-employment of at least $400 whether you live in the United States or abroad. Publication 54 works an example in which a consultant abroad with a $68,000 net profit pays self-employment tax on the whole $68,000 even though the profit qualifies for the exclusion. IRC 1401 and 1402; IRS, Foreign earned income exclusion, Self-employment income; Pub. 54 (Rev. Dec. 2025), chapter 3, Self-Employment Tax

What people get wrong about the exclusion

• Do not look for the 2026 amount in Publication 54. The December 2025 revision became a continuous use document and removed the inflation adjusted amounts, including the foreign earned income exclusion, telling readers to go to the Revenue Procedure for the tax year instead. The 2025 Form 2555 and its instructions are still the current ones on IRS.gov and they print $130,000, the 2025 figure. IRS source
• The main IRS Foreign earned income exclusion landing page, last reviewed 12 June 2026, still lists maximum amounts only through 2023. Do not read a missing year as no change. The separate page Figuring the foreign earned income exclusion is the one carrying 2026. IRS source
• The housing figure people quote, $39,870 for 2026, is a cap on countable expenses, not tax free housing. The first $21,264 of housing cost is the base amount and is not excludable, so outside the listed high cost locations the housing amount tops out at $18,606. IRS source
• Excluded income still sets your tax rate on everything else. You figure tax on the income you did not exclude using the rates that would have applied if you had excluded nothing, through the Foreign Earned Income Tax Worksheet in the Form 1040 instructions. IRS source
• Taking a foreign tax credit or deduction, the additional child tax credit, or the earned income credit in a later year is itself treated as revoking the exclusion election for that year, and getting the exclusion back within 5 years then needs an IRS ruling. IRS source
• Electing the exclusion blocks the additional child tax credit and the earned income credit for the same year. Publication 54 states both restrictions. IRS source
• A self-employed person who excludes income still owes self-employment tax on the whole net profit, and must also give up the deductions definitely related to the excluded income, including the deductible part of self-employment tax, which Form 2555 collects on line 44. IRS source
• The 330 day physical presence test and the 183 day substantial presence test are different tests with different arithmetic. The 330 is full days abroad in any 12 consecutive months for an American claiming this exclusion. The 183 is a weighted three year total, alongside a 31 day current year minimum, that decides whether a foreign national is treated as a US resident. IRS source
• A foreign country for this purpose is any territory under the sovereignty of a government other than the United States. The Form 2555 instructions say it does not include US territories, the Antarctic region, or international waters and the airspace above them. IRS source
• Notice 2026-25 supersedes Notice 2025-16. For some locations the 2026 limit is higher than the 2025 one, and a qualified individual who had housing expenses in such a location during 2025 may use the 2026 figure for the 2025 tax year instead of the Notice 2025-16 figure. IRS source

Which forms does this involve?

Which test should you look at first?

The physical presence test is mechanical: count full days abroad in any 12 consecutive months. The bona fide residence test is about intent and is judged on the facts, but once you have it, it covers part-years at each end. Both require a tax home in a foreign country, which is the condition that quietly disqualifies people on short postings.