Photo by Eric Prouzet on Unsplash
Millions of Americans live abroad. The estimates vary, but one count puts the number at more than 9 million.
They decided on an international lifestyle for a variety of reasons, ranging from work to retirement to new experiences to living closer to relatives.
When the reason is employment related, those who earn income beyond U.S. borders share one thing. They still owe Uncle Sam taxes.
The very long arm of the Internal Revenue Service is due to the United States’ reliance on a worldwide tax system at the individual level. It means the U.S. Treasury gets a piece of your earnings regardless of where in the world you make it.
There are, however, some tax provisions that can help U.S. workers in other countries. And like many parts of the Internal Revenue Code, they are affected by inflation. Yes, dear (and patient) readers, we’ve return to the ol’ blog’s 10-part tax inflation series for 2026. Here in Part 7 is a look at how those annual adjustments apply to Americans working abroad.
Excluding foreign-earned income: The most notable tax break for U.S. taxpayers working outside the country is the foreign earned income exclusion, or FEIE. This allows those who meet certain requirements to legally avoid paying U.S. tax on some of their foreign wages.
For the 2026 tax year, the FEIE is $132,900. That’s an increase from this year’s earnings exclusion of $130,000.
To claim the FEIE in either tax year, you must meet all three of the following requirements:
- Your tax home must be in a foreign country.
- You must have foreign earned income, that is, money from work.
- You must be either
- A U.S. citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, or
- A U.S. resident alien who is a citizen or national of a country with which the U.S. has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, or
- A U.S. citizen or a U.S. resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.
These same requirements also apply to the other major tax benefit allowed Americans working in another country, the foreign housing exclusion or deduction.
Housing tax break, too: Overseas workers also might be able to exclude (or deduct if self-employed) from gross income a certain amount of housing costs.
This foreign housing exclusion helps offset the expenses of living overseas. It can be used for housing-related expenses not paid by your U.S.-based employer. This includes a variety of costs, including rent, utilities, repairs, property insurance, and parking fees near your home. It does not include cable, phone, or domestic help costs.
But since we are talking about the Internal Revenue Code, it’s not as simple as just writing off your London flat’s rent or the cost to get your loo’s water flowing properly. There’s plenty of added math.
First, start with your residential expenses. And note that the Internal Revenue Service says they must be reasonable. If you decide to go lavish with the global version of Elvis’ Graceland, the IRS will say “thank you, thank you very much, but no tax break” for excessive housing costs.
But even more plebian accommodations also have tax limits. Specifically, a housing ceiling and a base amount are used to calculate overseas taxpayers’ ultimate tax break for their residential costs abroad.
The IRS generally sets a ceiling of 30 percent of the annual inflation-adjusted FEIE.
For 2026, that will be $39,870 ($132,900 x 30%). The 2025 housing exclusion is $39,000 ($130,000 x 30%). This is the upper limit on the amount you can exclude or deduct from your foreign housing costs.
But wait. There’s more. The excludable/deductible housing amount also is affected by the base housing amount, which also is a percentage of the annual FEIE amount.
The exact figure is 16 percent, making the 2026 amount $21,264 ($132,900 x 16%). The 2025 amount is $20,800 ($130,000 x 16%).
To use the exclusion, your qualifying housing costs must exceed the applicable tax year’s base 16 percent amount, or to use realty speak, the expense floor. When they do, you can exclude (or deduct) the total of your qualifying expenses up to the maximum amount allowed for the tax year. Part VI of Form 2555, Foreign Earned Income deals with the housing exclusion or deduction. You’ll find a Limit on Housing Expenses Worksheet in the form’s instructions. (Note that the Form 2555 links go to the 2024 tax year version. They will be updated for 2025 filings, but given the government closure, it’s not clear when that might happen.)
Relief in higher-rent locales: If you are, like the hubby and me, a fan of HGTV House Hunters International, you know that sometimes it’s hard to find the kind of international residential bargain that the IRS will reward with a tax break.
Not to worry. There’s also tax help for U.S. citizens and resident aliens who live and work in countries with higher housing costs.
The Department of State tracks the cost-of-living worldwide and grants an allowance to employees officially stationed in a foreign location where the cost of living, exclusive of quarters costs, is substantially higher than in Washington, D.C.
The IRS follows this list and, based on the housing data, allows U.S. taxpayers in those designated locales a potentially larger housing exclusion.
This announcement typically is made months after the tax agency’s general inflation figures release. It’s also included at the end of the tax-year-updated Form 2555 instructions.
But for now, since we don’t have 2026 limits, we’re working with information in IRS Notice 2025-16, Determination of Housing Cost Amounts Eligible for Exclusion or Deduction for 2025, issued in March and discussed in my post IRS announces 2025 tax year allowances for international locales with expensive housing.
That means a U.S. worker who for all of 2025 rents a home in, for example, some idyllic spots in my ultimate dream location of Italy could get more than this year’s basic annual $39,000 housing limit.
The hubby and I most often dream of a villa in Italia. If we ever do set up housekeeping in that Mediterranean peninsular nation, we’ll take note of the five locations that for 2025 get higher housing allowances. They are, alphabetically:
Genoa at $41,800
La Spezia at $40,400
Milan at $65,300
Naples at $44,900
Rome at $43,700
If you’re already in or going to Hong Kong, China, you get a housing allowance of $114,300. You get $67,700 if moving to or in Tokyo, Japan. Geneva, Switzerland, expatriates get $102,600.
Closer to home, a residence in Toronto, Ontario, Canada (our northern neighbors’ most expensive city, and possible home of the 2025 MLB World Series champions) will get you a housing amount of $57,400.
If you work south of the U.S. border, you’re given an allowance of $47,900 for a place in Mexico City.
And if you find move to Moscow (Russia, not Idaho) is on your itinerary, you would get a $108,000 housing allowance for being Vladimir Putin’s neighbor. As for 2026’s higher international housing costs, we’ll have to wait until next spring for the IRS’ take on pricier residential areas around the world. But feel free to follow the hubby’s and my example and do some online or real-life shopping in advance.
Expatriation tax adjustments: If you decide after working in another country that you want to more fully, permanently become a part of your new international home, it will cost you tax-wise. When you renounce your U.S. citizenship, you could face an exit tax.
First, you must determine if the IRS considers you a covered expatriate. It will do so in in 2026 if the expatriating person’s average annual net income tax for the five taxable years ending before the expatriation date is more than $211,000. That’s an inflation bump from 2025’s $206,000 average income amount.
Then there’s the exit tax itself. This levy is calculated as if the departing U.S. citizen liquidated all of his or her worldwide assets on the day before expatriation, and then any hypothetical net gain from that amount (that is, the deemed liquidation amount minus the expatriate’s asset basis) that is more than a certain amount is taxed as capital gains.
The taxing threshold for 2026 expatriates’ paper-only liquidations goes to $910,000. That’s the amount that can be excluded from the mark-to-market gain upon expatriation of a covered expatriate. That’s a $20,000 increase from 2025’s threshold of $890,000.
Additional 2025 global tax numbers: In addition to the foreign income, housing, and expatriation tax matters, the IRS annual inflation adjustments for 2026 also cover a few additional international tax matters of note.
There are some gift tax amounts when foreign individuals are involved. The amount of the annual gift tax exclusion for gifts to non-citizen spouses goes to $194,000 next year, up from $190,000 in 2025.
The notice of large gifts received from foreign persons is triggered in 2026 at $20,573. That’s and increase from $20,116 in 2025.
And if you’re remaining a U.S. citizen but planning to travel around the world, then make sure you pay your taxes. If you have what is declared a serious tax delinquency, the State Department could pull your passport or prevent issuance or renewal of your blue bound U.S. documentation.
For 2026, inflation pushes the amount of a serious, problematic passport delinquent tax debt to $66,000. That’s an increase from this year’s $64,000 level.
More foreign tax info: Whatever reason you’re headed abroad, either for work or a short-term adventure or permanent relocation, buon viaggio and c’est la international taxes!
Definitely enjoy soaking up another country’s culture and great food. Yes, it’s always about the food for me, with some great art on the side.
And if you end up having to deal with the IRS, definitely use these tax breaks to make sure you pay the U.S. Treasury less so that you can spend those tax savings exploring.
You can do some pre-move planning on your own, reading more about foreign tax issues in general in IRS Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad.
IRS.gov has special pages with details on the foreign earned income exclusion, as well as an interactive tool where you can see if you’re able to exclude income in a foreign country.
There’s also the IRS online page with more on the foreign housing exclusion, another one for U.S. taxpayers living abroad and the always poplar FAQs about international individual tax matters.
As all these various IRS.gov pages and documents show, international taxes are as complicated as the relocation itself. One good way to make sure your move abroad doesn’t cost you more in taxes than it should, another good tax (and financial) move is to hire a tax adviser who specializes in U.S. expatriate taxes.
Tax inflation review, preview: With this post, our travel down the 2026 inflation adjustment road is getting closer to its conclusion. Yes, we hit a speedbump now and then for other tax matters, but I’m the journey, not the destination, kind of traveler.
You can check out the table of contents below to find links to earlier segments of the tax inflation series and see what’s to come. It also is a good indicator of why I do it as a series.
- 2026 tax rates and income brackets
- Standard deduction amounts and itemized deduction considerations
- Credits and deductions, including adoption costs and assistance, Lifetime Learning Credit, Earned Income Tax Credit, educators’ expenses, interest on education loans and transportation fringe benefits
- Medical-related tax provisions, including contributions to a flexible spending account (FSA), health savings account (HSA), medical savings account (MSA), and eligible and eligible long-term care premiums
- Capital gains tax income brackets, estate and gift tax limits, kiddie tax, kiddie tax, and nanny tax
- Alternative Minimum Tax exemption amounts and One Big Beautiful Bill Act changes for 2026, along with the Social Security wage base increase amount and other pay-related taxes
- International worker tax issues, including foreign income and housing exclusions
- Retirement (e.g., IRA etc.) and pension plan contribution limits
- Penalties, for both individuals and tax pros, for things such as failure to file a timely 1040 or certain information returns
- Standard mileage deduction rates (This is the final component, since the IRS issues these adjustments and later in the year.)
Again, I know all y’all tax geeks want as much tax information as soon as possible. I get it. So, I really appreciate your patience when comes to my extended presentation of the 2026 tax inflation info.
This post also appeared on my Don’t Mess With Taxes Substack.
