What Counts as Foreign Earned Income?

Foreign earned income is pay for personal services you perform in a foreign country, not every dollar that shows up while you live there. For a tax year beginning in 2026, a person who qualifies can exclude up to $132,900 of that pay on Form 2555, the foreign earned income form, up from $130,000 for 2025.

The expensive miss is treating a pension, a dividend, or rent from a place you barely touch as if it were wages. Those amounts stay on the return. If the pay is self-employment, the exclusion also leaves self-employment tax in place once net earnings reach $400. As of October 2026, those figures come from the IRS inflation release for 2026 and from Publication 54.

What Counts as Foreign Earned Income?

It is pay for work you did in a foreign country while your tax home was there and you met either the bona fide residence test or the physical presence test. The IRS foreign earned income page sorts the common items this way.

Where the employer sits does not decide it. The IRS international FAQ, updated February 26, 2024, says earned income can come from a US company or a foreign company. What matters is that you performed the services in a foreign country. A salary for work done in Lisbon, paid by a firm in Chicago, is still foreign earned income if the rest of the tests are met.

What you received	Foreign earned income?	The line the IRS draws
Wages, salary, commissions, bonuses, professional fees, tips	Yes, for work done in a foreign country while you qualify	Pay for personal services
Cost-of-living, family, education, home-leave, quarters, or overseas-differential allowances	Yes, when they are included in your income	Listed allowances on the IRS earned-income page
Fair market value of a home, meals, or a car the employer provides	Yes, unless meals and lodging are already excluded	Noncash pay is earned income
Interest, dividends, capital gains, gambling winnings, alimony	No	Unearned, even if the payer is foreign
Pensions, annuities, Social Security	No	Named exclusions, including foreign pensions
Pay as an employee of the US government	No	Do not file Form 2555 for that pay
Business profit, rent, royalties, a taxable scholarship	Only the part that pays for your services	Variable; the 30% cap can apply

Accountable-plan reimbursements are not foreign earned income. Neither is the value of meals and lodging the employer furnishes for its own convenience when that value was never in your income. A payment that arrives after the end of the tax year following the year of the work is out as well.

Does a US Employer Change What Counts?

No. The source of earned income is the place you perform the services. The IRS example on the same page is work done in France that is paid into a US bank by an employer in New York. That pay is still foreign source. The bank and the employer's location do not move it.

If the contract names an amount for the foreign work, that amount is the foreign earned income. If one salary covers days in the United States and days abroad, or days in international waters or airspace, use the split that most correctly shows the source. In most cases that is days worked in a foreign country divided by total paid workdays, times total pay, including allowances, reimbursements, and noncash benefits.

Use paid workdays in that fraction, not every calendar day you were in the country. International waters, the airspace above them, and US territories are not a foreign country, so days worked there stay out of the numerator. Publication 54 states both limits.

The pay can be the right type and still fail

Form 2555 also requires a tax home in a foreign country for the whole period, plus either qualifying test. Your tax home is your regular place of business. The 2026 instructions use a 28-days-on, 28-days-off offshore rotation: the worker returns to a family home in the United States on the off weeks, the IRS treats the abode as being in the United States, and the exclusions are unavailable.

Physical presence is 330 full days in a foreign country or countries during 12 consecutive months, and the days need not be consecutive. Counting 330 days for the exclusion is where those travel days get placed. Bona fide residence is the other path: an uninterrupted period that includes a full tax year, for a US citizen or for a US resident alien who is a citizen or national of a treaty country. Pay that fails the tax home test never reaches the cap.

Do Pensions, Rent, and Dividends Count?

No. Pensions, annuities, Social Security, dividends, interest, and capital gains are unearned. The IRS FAQ updated August 2, 2022, says a foreign pension cannot be excluded on Form 2555, and railroad retirement benefits treated as Social Security fall in the same group. A retiree living on those checks has no foreign earned income from them.

Rent is variable, and the IRS practice unit says it is generally unearned. Collecting rent and doing minor repairs produces none that is earned. If you perform personal services in producing the rent, up to 30% of the net rental income can be earned. The unit's contrast is a rooming house: operating it as a business can support that 30% slice, and merely owning it cannot.

Royalties and scholarships split the same way. The practice unit treats the part of a writer's royalties that pays for writing done in a foreign country as foreign earned income, and the part of a scholarship that pays for teaching or research and is included in gross income the same way. A royalty with no services this year stays unearned.

US government pay is out even when the job is overseas

Pay as an employee of the United States or its agencies is not foreign earned income, including non-appropriated funds. The instructions say not to file Form 2555 for that pay. A spouse's private-employer salary can still qualify on its own.

When Is Only Part of the Profit Earned Income?

If personal services produce the income and capital is not a material factor, the Form 2555 instructions say the 30% rule does not apply and the gross receipts are earned income. A freelance practice is the usual case. Report the income and the expenses on Schedule C. Expenses allocable to the excluded income are not deductible.

The 30% cap applies when both your labor and capital are material income-producing factors in an unincorporated business. Earned income is then a reasonable allowance for your services, and it cannot exceed 30% of your share of net profits after the deduction for half of the self-employment tax. A shop, a farm, or a rental operation with real capital is the usual case. Profit above that line can be cash in the account and still fail the earned-income test.

A distribution of corporate earnings is not earned income unless it is a reasonable allowance for services you performed. Calling a profit distribution a management fee does not change that. The foreign earned income page states the limit.

Sort the year before you touch the cap

1. List every amount you received, including allowances and the fair market value of a home, meals, or a car the employer provided.
2. Keep only pay for services performed in a foreign country during a period you met the tax home test and either qualifying test.
3. Split mixed years with the workday fraction. Days in the United States, in US territories, and in international waters stay out of the numerator.
4. Apply the 30% ceiling only if capital was a material factor. Pure service income is not cut by that ceiling.
5. Leave pensions, Social Security, interest, dividends, capital gains, alimony, and passive rent off Form 2555.
6. If a 2026 payment is for 2025 services, keep it out of Part IV. Attach a statement, enter the excludable amount to the left of line 45, and limit it to what would have been excludable in 2025.

How Much of That Pay Can You Exclude?

For 2026 the ceiling is $132,900, or your foreign earned income if that is smaller. The IRS newsroom and Revenue Procedure 2025-32 both set that amount, up from $130,000 for 2025. You also cannot exclude more than foreign earned income minus any foreign housing exclusion. Publication 54 makes you figure the housing exclusion first, so a housing claim uses up room under the cap.

Publication 54 sets the base housing amount at 16% of that year's maximum exclusion. Sixteen percent of $132,900 is $21,264, and housing expenses have to clear that base before a housing exclusion or deduction exists. The IRS figuring page sets the general 2026 limit on housing expenses at $39,870. Figure any housing exclusion first: the earned-income exclusion cannot exceed foreign earned income minus that housing amount. City caps above $39,870 are in Notice 2026-25, and the worksheet is in the foreign housing exclusion guide.

Two working spouses each get a cap

Publication 54 says that if both spouses have a foreign tax home and each meets either test, each may choose the exclusion. They need not use the same test. Each may exclude up to that year's maximum, for a total of twice the maximum. Twice $132,900 is $265,800 for 2026. Unused room does not move to the other spouse. If one has $40,000 of foreign earned income and the other has $180,000, the exclusions stop at $40,000 and $132,900.

A partial year uses a smaller cap. The IRS figuring page says to multiply that year's maximum by your qualifying days, then divide by 365, or by 366 in a leap year. Its 2025 illustration starts a tax home on August 14, counts 140 days through December 31, and stops the exclusion at $49,863, which is 140/365 times the $130,000 cap. The draft 2026 instructions use the same August 14 start and also count 140 qualifying days. A move in August does not get the full $132,900. 2026 is not a leap year, so the divisor is 365.

You still file. The figuring page says the exclusion applies only if you meet the tests and report the income on a return. A 2026 calendar-year Form 1040 is generally due April 15, 2027. If on that date you live outside the United States and Puerto Rico and your tax home is outside both, the draft instructions give an automatic extension to June 15, 2027 when you attach a statement. Interest still runs on tax unpaid by April 15.

Do You Still Owe US Tax After the Exclusion?

Yes, on anything that was not foreign earned income, on earned income above the cap, and on self-employment tax if you work for yourself. The exclusion reduces regular income tax. It does not reduce self-employment tax. The IRS self-employment tax page for businesses abroad uses a consultant with $95,000 of foreign earned income, $27,000 of business deductions, and $68,000 of net profit. Self-employment tax is due on the entire $68,000 even though the exclusion can remove the income tax on that profit. Publication 54 sets the filing trigger at net earnings of at least $400.

Tax on the income you did not exclude is figured as if you had not claimed the exclusion. That is the Foreign Earned Income Tax Worksheet in the Form 1040 instructions. In the example above, the excluded $132,900 still occupies the lower brackets, so the $47,100 is not taxed as if it were the only income on the return.

The Form 2555 instructions block the additional child tax credit and the earned income credit if you claim either exclusion or the housing deduction. They also block a foreign tax credit or deduction for foreign tax on the excluded income. Claiming that credit on tax you could have excluded can revoke the choice, and a revocation bars the exclusion for the next five tax years unless the IRS approves a new one. Skipping the exclusion in a year with no foreign earned income is not a revocation.

Publication 54 also keeps excluded amounts out of IRA compensation. Pay you exclude under the foreign earned income exclusion or the foreign housing exclusion is not compensation for a contribution, and you do not subtract the housing deduction on top of that. A year that excludes every dollar of pay can leave nothing to contribute.

File the wages, the exclusion, and the items that never qualified on the same Form 1040. Attach Form 2555 for the exclusion, use Schedule B for the interest and dividends, use Schedule E for the rent, and use Schedule SE when the profit is self-employment. Foreign tax paid on the slice you could not exclude can still support a foreign tax credit, which is part of the same expat tax and finance filing.

Put the Pay on the Right Line

Put wages, fees, bonuses, tips, and listed allowances for foreign work on Form 2555, and stop at $132,900 per qualifying person for 2026, or twice that when both spouses qualify on their own pay. Leave pensions, Social Security, dividends, interest, capital gains, and passive rent in income. If capital helps produce the profit, cap the earned slice at 30% after the half self-employment-tax deduction, then compute self-employment tax on the profit the exclusion did not erase.

Data notes / Sources checked

Data note: figures were checked in October 2026. Revenue Procedure 2025-32 reflects the Code as of October 9, 2025, and says later amendments may need more guidance. The 2026 Form 2555 instructions cited here are the IRS draft dated June 23, 2026. High-cost housing cities are in Notice 2026-25, not in the general $39,870 limit.

• IRS foreign earned income page
• IRS newsroom, 2026 inflation adjustments
• Revenue Procedure 2025-32
• IRS page on figuring the exclusion
• Publication 54
• Form 2555 instructions and the draft 2026 PDF
• IRS self-employment tax page
• Schedule SE instructions
• SSA totalization agreements
• IRS international tax FAQ
• IRS practice unit on section 911