US raises foreign-earned-income exclusion to $137,300 for 2027

The annual adjustment increases the ceiling by $4,400 from the $132,900 amount for 2026. It is relevant to qualifying US citizens and resident aliens working overseas, including employees on international assignments.^[1][2]

Amount and application year

Section 3.41 specifies the revised amount under Internal Revenue Code section 911(b)(2)(D)(i), while section 4.01 establishes the general application to taxable years beginning in 2027. The IRS says the 2027 inflation adjustments generally affect returns filed in 2028. This is an adjustment to the maximum income exclusion, not a tax credit or a guaranteed reduction in tax of $4,400.^[1][2]

Eligibility remains fact-specific

Claimants must have foreign earned income and a foreign tax home, and satisfy either the applicable bona fide residence test or the physical presence test. The latter generally requires a US citizen or resident alien to spend at least 330 full days in foreign countries during 12 consecutive months. The bona fide residence route has different requirements for citizens and resident aliens; an overseas posting alone does not establish entitlement.^[3]

Existing forms and deadlines

The filing mechanism remains Form 2555, attached to Form 1040 or Form 1040-X rather than submitted separately. Taxpayers using the physical presence test must provide their qualifying period and travel details. The revenue procedure creates no new filing deadline. Where additional time is needed to satisfy a qualifying test, the existing Form 2350 procedure may be relevant, but that extension does not extend the time to pay tax.^[2][4]

Assignment withholding

For employers, the increase is relevant when reviewing assignment calculations and US withholding arrangements. Under existing IRS guidance, employers need a reasonable basis for believing the employee will qualify before applying the withholding exclusion. A US citizen may supply Form 673, or an acceptable statement, to the employer; this is separate from claiming the exclusion on the tax return.^[4]

Foreign tax credits

Tax teams should also review the interaction with foreign tax credits. Taxes attributable to excluded income cannot also support a foreign tax credit or deduction. Accordingly, the higher ceiling should be incorporated into employee-specific modelling rather than treated as an automatic saving for every international assignee.^[5]