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The foreign earned income exclusion for 2026
How much salary earned abroad a US citizen or resident can leave off the federal return, and what is still taxed.
Foreign earned income exclusion
US income tax after the exclusion
$240
$24,494 less than without it
- Exclusion available$132,900
- Excluded$132,900
- Taxable income left$1,000
Taxed at the rates that would apply without the exclusion (stacking). Self-employment tax and foreign tax credits are not modeled.
US citizens and resident aliens are taxed on worldwide income, but those who live and work abroad can exclude up to $132,900 of foreign earned income from federal income tax for 2026, under section 4.39 of Rev. Proc. 2025-32 ($130,000 for 2025). To qualify, your tax home must be in a foreign country and you must pass either the bona fide residence test (a full tax year as a resident abroad) or the physical presence test (330 full days abroad in any 12-month period). The exclusion is prorated by the qualifying days in the year, and it is claimed on Form 2555. Income above the exclusion is taxed at the rates that would apply if the excluded income were still included, the stacking rule: an engineer in Dubai earning $150,000 for the whole of 2026 excludes $132,900, and the remaining income is taxed starting in a higher bracket, $240 of federal tax instead of $24,734 without the exclusion. The exclusion does not cover Social Security or Medicare taxes, investment income or US-source wages, and excluded income is added back for the Schedule 1-A phase-outs.
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What the stacking rule does
Without stacking, excluded salary would push the remaining income down into the 10% and 12% brackets. The Foreign Earned Income Tax Worksheet prevents that: it computes the tax on taxable income plus the excluded amount, then subtracts the tax on the excluded amount alone. The income you keep on the return is therefore taxed at the rates of the top of your total income. The table shows the effect for a single filer abroad all year, with the $16,100 standard deduction.
| Foreign salary | Excluded | Taxable after exclusion | US tax with exclusion | US tax without |
|---|---|---|---|---|
| $100,000 | $100,000 | $0 | $0 | $13,170 |
| $150,000 | $132,900 | $1,000 | $240 | $24,734 |
| $200,000 | $132,900 | $51,000 | $12,240 | $36,734 |
| $300,000 | $132,900 | $151,000 | $43,640 | $68,134 |
The two tests and the tax home
The bona fide residence test requires residence in a foreign country for an uninterrupted period that includes a whole tax year; the physical presence test requires 330 full days in foreign countries during any 12 consecutive months, which can straddle two tax years. In both cases your tax home must be abroad: you work there for an indefinite rather than temporary period and your abode is not in the United States. Short trips home count against the 330 days.
Exclusion or foreign tax credit
An expat in a country with income tax rates similar to or higher than US rates often prefers the foreign tax credit, which offsets US tax with foreign tax paid and keeps the income on the return (useful for IRA contributions or the child tax credit refund). In a country with no income tax, such as the United Arab Emirates, the exclusion is usually the tool, since there is no foreign tax to credit. The IRS has specific rules on choosing and revoking the exclusion, so the choice deserves a two-way calculation before the first return that uses it.
What the exclusion leaves taxable
Interest, dividends, capital gains, rental income and US wages remain fully taxable. The exclusion reduces regular income tax on self-employed income abroad but not self-employment tax, according to the IRS. Pay from the US government, pensions and Social Security are never foreign earned income. The Schedule 1-A and SALT worksheets add it back to modified AGI.
Sources: IRS Rev. Proc. 2025-32: 2026 inflation-adjusted items and 2025 items modified by Public Law 119-21 (October 9, 2025); IRS Rev. Proc. 2024-40: 2025 inflation-adjusted items; IRS Schedule 1-A (Form 1040) 2025, Additional Deductions: tips, overtime, car loan interest, seniors, read on October 11, 2026.