Expatriates in Mexico see Foreign Earned Income Exclusion rise to $132,900

The Foreign Earned Income Exclusion lets qualifying U.S. citizens and residents abroad exclude up to $132,900 of foreign earned income from U.S. federal income tax for 2026. The IRS set the cap after an inflation adjustment, up $2,900 from $130,000 in 2025.

It applies to wages, salaries, bonuses and self-employment income earned abroad. It doesn't cover passive income such as pensions, investments or U.S. government pay and it doesn't erase self-employment tax.

Who in Mexico can use it

U.S. expats, digital nomads and some retirees in Mexico can qualify if they have a foreign tax home and pass either the Physical Presence Test or the Bona Fide Residence Test. The physical presence test requires 330 full days outside the U.S. in any 12-month period.

Married couples can exclude up to $265,800 combined if both spouses qualify. Tourists and short-term visitors usually don't qualify because they lack a foreign tax home. Remote workers for U.S. employers may qualify if their tax home shifts abroad and the exclusion can often wipe out U.S. income tax when paired with the standard deduction. See our visa updates for related filing news.

What to file and when

Claim the break by filing Form 2555 with your 2026 Form 1040 in 2027. The return is due April 15, 2027, with an automatic expat extension to June 15.

Track days carefully if you rely on the physical presence test, especially with trips back to the U.S. Partial-year qualifiers get a prorated exclusion. Read our full Mexico guide for the complete picture.