In a new ruling, Notice 2026-25, 4/7/26, the IRS has bolstered a couple of tax breaks available to taxpayers working abroad.
Starting point: If you earn money overseas, you still must pay federal income tax on the earnings, even if you’ve remained a U.S. citizen. But Uncle Sam permits taxpayers working abroad to shelter from tax some or all of this income under a unique tax exclusion. The maximum “foreign earned income exclusion” for 2026 is $132,900 (up from $130,000 for 2025).
However, this tax break is not automatic. To qualify for the special exclusion, you must meet these three requirements.
- Your “tax home” for the applicable tax year is in a foreign country.
- You are either a U.S. citizen who is a bona fide resident of a foreign country for an entire tax year or a U.S. citizen or resident who is present in a foreign country (or countries) for at least 330 full days of a 12-month period.
- You have received foreign earned income.
According to the IRS, you pass the bona fide resident test if you reside in that country for an uninterrupted period that includes an entire tax year. A short trip or vacation outside the foreign country, even a jaunt back to the U.S. to visit family, won’t jeopardize your status as a bona fide resident as long as you clearly intend to return to the foreign country where you’re residing.
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However, you can’t have it both ways. In other words, your income can’t be excluded from taxation in both the U.S. and a foreign country. Also, you generally won’t be treated as having a tax home overseas if you still maintain a residence in the U.S., unless you’re working in a foreign combat zone.
Finally, certain items aren’t covered by the tax exclusion, including the following:
- Pay received as a military or civilian employee of the U.S. government or any of its agencies.
- Pay for services conducted in international waters (not a foreign country).
- Pay in specific combat zones, as designated by an executive order from the president, that is excludable from income.
- Payments received after the end of the tax year following the year in which the services that earned the income were performed.
- The value of meals and lodging that are excluded from income because it was furnished for the convenience of the employer.
- Pension or annuity payments, including Social Security benefits.
To sweeten the pot, a worker abroad may also qualify for a deduction for foreign housing costs, with the depending on where you reside. This includes employer-paid amounts if you satisfy the bona fide resident test or physical presence test (see above). The base amount for the deduction in 2026 is $21,264 (up from $20,800) but can exceed that amount in certain high-cost areas, like Hong Kong and Geneva, as listed in the new IRS notice.
Packing it up: When the foreign income tax exclusion is claimed, the taxpayer must complete s attach Form 2555, Foreign Earned Income, and attach it to their individual federal tax return. The devil is in the details.
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