Moving abroad does not end U.S. tax filing, but it can shrink the bill. Here is one expatriate’s 2026 return built from IRS Publication 54 and Revenue Procedure 2025-32: what qualifies, how much is excluded, and what is still owed.
Jordan is a single U.S. citizen who moved abroad in 2024 and has lived and worked there since, in a country with no U.S. Social Security totalization agreement. In 2026 Jordan earns a $150,000 salary from a local employer and $40,000 of net profit from freelance work for clients, all for work done abroad: $190,000 of foreign earned income. Rent and qualifying housing costs come to $30,000 for the year.
Publication 54 offers two tests, on top of having a tax home abroad. The bona fide residence test requires residence in a foreign country for an uninterrupted period that includes an entire tax year; Jordan, abroad since 2024, meets it for all of 2026. The physical presence test requires 330 full days in foreign countries during any 12 consecutive months; Jordan spent 25 days in the United States, counting travel days, which leaves 340 full days abroad, so this test is met too. Someone arriving midyear qualifies only for part of the year: from July 1, 184 qualifying days limit the exclusion to $132,900 × 184 ÷ 365 = $66,996.
The housing amount is qualifying housing expenses, up to the general limit of 30% of the exclusion ($39,870 for 2026, higher in listed high-cost cities), minus a base of 16% of the exclusion ($21,264). Jordan’s $30,000 is under the limit, so the housing amount is $30,000 − $21,264 = $8,736. Because 78.9% of Jordan’s foreign earned income is wages, that share of the housing amount, $6,896.84, is a housing exclusion; the self-employed share, $1,839.16, is a housing deduction, allowed here in full because enough foreign earned income remains after the exclusions.
The foreign earned income exclusion is the smaller of $132,900 or foreign earned income minus the housing exclusion: $190,000 − $6,896.84 = $183,103.16, so Jordan excludes the full $132,900. In total $139,796.84 of income is excluded, leaving $50,203.16 of foreign earned income in income.
The exclusion is an income tax rule; Publication 54 says self-employment tax rules are generally the same abroad, and the tax is owed on net earnings of $400 or more. Jordan’s $40,000 of profit gives net earnings of $40,000 × 92.35% = $36,940, and self-employment tax of 15.3% = $5,651.82, with no reduction for the exclusion. (Workers covered by a totalization agreement may instead pay into the other country’s system.) Half of it, $2,825.91, is normally deductible, but Publication 54 treats that deduction as allocable to excluded income; allocating it by the share of foreign earned income still included leaves $746.68 deductible.
Income left after the exclusions is taxed at the rates it would have faced with the excluded income included. Jordan’s adjusted gross income is $50,203.16 − $1,839.16 housing deduction − $746.68 = $47,617.32, and taxable income after the $16,100 standard deduction is $31,517.32. Instead of taxing that from the 10% bracket up, the stacking rule computes tax on $31,517.32 + $139,796.84 and subtracts tax on the $139,796.84 excluded: $7,564.16. Without stacking it would be only $3,534.08. The extra income is taxed at Jordan’s 24% marginal rate.
| Line | Amount |
|---|---|
| Foreign earned income | $190,000 |
| Foreign earned income exclusion | −$132,900 |
| Housing exclusion (wage share) | −$6,896.84 |
| Housing deduction (self-employed share) | −$1,839.16 |
| Deductible part of half of SE tax | −$746.68 |
| Taxable income after the standard deduction | $31,517.32 |
| Income tax with the stacking rule | $7,564.16 |
| Self-employment tax | $5,651.82 |
| Total U.S. tax for 2026 | $13,215.98 |
| Income tax with no exclusion (for comparison) | $33,655.78 |
The foreign earned income exclusion calculator runs the exclusion, housing and stacking steps for other incomes and partial years, and the self-employment tax calculator handles Schedule SE.
Instead of excluding income, a taxpayer can claim a foreign tax credit for income tax paid abroad, or combine the two: Publication 54 notes that high earners can exclude up to the limit and take the credit on foreign tax paid on the wages that were not excluded. What is not allowed is a credit or deduction for foreign tax on income you chose to exclude. In a country whose income tax is higher than the U.S. tax on the same income, the credit alone can wipe out the U.S. income tax on that income, which may beat the exclusion; in a low-tax country the exclusion usually does more. Once chosen, the exclusion stays in effect for later years until revoked, so the choice deserves a careful comparison.
State income tax for people who keep a state domicile, foreign tax actually paid, the effect of excluded income on IRA contributions and refundable credits, foreign bank and asset reporting, and estimated-tax timing. A preparer who works with expatriates should review a real return.
Up to $132,900 of foreign earned income (Rev. Proc. 2025-32), plus a housing exclusion for housing costs above $21,264, if you meet the bona fide residence or physical presence test.
Yes. The exclusion does not reduce self-employment tax; in the example it is $5,651.82 on $40,000 of profit. A totalization agreement can change which country’s system you pay into.
Income left after the exclusion is taxed at the rates that would apply if the excluded income were included, so the exclusion does not move you into a lower bracket.
Not on the same income. You can exclude up to the limit and claim a credit for foreign tax on income you did not exclude.
Bona fide residence requires living abroad for an uninterrupted period that includes a full tax year; physical presence requires 330 full days abroad in any 12 consecutive months.