Foreign housing limits update may benefit 2025 returns

The IRS has now released Notice 2026-25, which updates the §911 foreign housing expense limitations for 2026. The notice:  

• Confirms that the maximum foreign earned income exclusion amount for 2026 is $132,900 
• Sets the full-year base housing amount at $21,264 
• Provides a general full-year housing expense limitation of $39,870 before applying any location-specific adjustments 
• The base housing amount and the general limitation are prorated on a daily basis if the taxpayer is not a qualified individual for the entire year
• Updates the list of higher-cost foreign locations that qualify for increased housing expense limits as authorized by §911(c)(2)(B)

This notice also creates a practical planning opportunity for 2025 returns.  

• For some locations, taxpayers who incurred housing expenses in 2025 may use the higher 2026 adjusted housing limitation instead of the amount listed in the 2025 table and 2025 Form 2555 instructions.  
  • For example, the 2026 table lists France locations including Paris, Garches, Sevres, Suresnes and Versailles at $73,600 annually, or $201.64 per day.  

Tax professionals with clients working abroad should review whether the updated location-specific limits produce a better result. 

How the §911 update fits into broader foreign income planning

Tax professionals increasingly encounter clients who earn income abroad through employment, consulting or investments. Understanding how to classify and treat that income under U.S. tax law is vital for minimizing double taxation and ensuring compliance with tax requirements. Beyond this new §911 guidance, tax professionals still need to evaluate the broader foreign income rules that drive Form 1116, Form 2555 and the foreign housing exclusion or deduction.

The global scope of U.S. tax obligations

The U.S. applies a worldwide taxation system; all income of U.S. persons (citizens, green card holders and those meeting the substantial presence test) must be reported, regardless of where it is earned. This creates potential double taxation in cases where foreign jurisdictions and the U.S. both tax the same income.

To mitigate this, two primary tools are available:

• The foreign tax credit (FTC), claimed on Form 1116, Foreign Tax Credit (Individual, Estate, or Trust)
• The foreign earned income exclusion (FEIE), claimed on Form 2555, Foreign Earned Income

FTC principles

The FTC allows a dollar-for-dollar credit for foreign income taxes paid, but only for taxes imposed on foreign-source income. Not all foreign levies qualify. To be eligible for the credit, the tax must meet certain conditions, including being an income tax imposed on net gain and attributable to the foreign jurisdiction.

Key limitations include:

• Separate category rules: Income is categorized into baskets such as passive, general, foreign branch and GILTI. Credits can offset U.S. tax only within the same basket.
• An overall limitation formula caps the credit based on the ratio of foreign-source taxable income to total taxable income.

FEIE eligibility and pitfalls

The FEIE allows up to $130,000 of earned income to be excluded for 2025 and $132,900 for 2026. This applies to earned income only; wages or professional fees qualify, while passive income such as dividends or interest do not.

To claim the exclusion, a taxpayer must:

1. Establish a tax home in a foreign country, and
2. Meet either:

• • The bona fide residence test, which considers intent, integration into the community and duration of stay (typically an entire year)
  • The physical presence test, requiring at least 330 full days of presence in a foreign country during a flexible 12-consecutive-month period

Tax practitioners must recognize situations where a taxpayer, despite living abroad, cannot claim the FEIE if their abode remains in the U.S.

Foreign housing exclusion

The foreign housing exclusion allows certain taxpayers to exclude qualifying housing costs above a statutory floor and below a ceiling, subject to location-specific adjustments. In some cases, taxpayers may apply the higher 2026 adjusted housing limitations to the 2025 taxable year when the 2026 amount is higher.

Only employer-provided amounts qualify for the foreign housing exclusion; self-employed individuals may claim a deduction instead. Common eligible expenses include rent, utilities, insurance and parking, but not furniture or capital expenditures.

Example scenario

Consider Jake, a U.S. citizen who has worked in France for over a year. Jake pays rent, utilities and parking and receives both wages and dividends.

In Jake’s case:

• He likely qualifies under the physical presence test, based on his number of present days. Whether he qualifies under the bona fide residence test depends on the facts and circumstances.
• Most housing costs would qualify for exclusion, excluding furniture.
• Dividends would not qualify for FEIE but may be eligible for FTC under the passive basket.

Properly applying these rules ensures accuracy and reduces client liability.

Learn more about foreign tax planning

To find out which of these options your clients will qualify for, and which may be most beneficial for their tax situation, check out our on-demand webinar, Credits & Exclusions for Foreign-Sourced Income. Gain practical insights on when to claim Form 2555 versus Form 1116, navigate basket limitations and help clients minimize double taxation while remaining compliant.