Military Contractors Will Make $132,900 Tax-Free in 2026

According to the IRS, the Foreign Earned Income Exclusion has increased in recent years as part of its annual inflation adjustments. The exclusion was $120,000 for 2023, $126,500 for 2024, $130,000 for 2025, and rises to $132,900 for 2026. For contractors working outside the United States, that means a larger portion of qualifying overseas income may be excluded from U.S. federal income tax each year, as long as the worker meets IRS requirements.

To qualify, most overseas contractors must meet either the Physical Presence Test or the Bona Fide Residence Test. The Physical Presence Test generally requires being physically present in a foreign country or countries for at least 330 full days during any 12-month period; those days do not have to be consecutive, but the contractor’s tax home must be in a foreign country. This matters for contractors on rotation schedules, because short U.S. visits, medical returns, employer-directed travel, or extended time stateside can affect eligibility.

Contractors should also understand that the FEIE does not make overseas income automatically “tax-free.” U.S. citizens are still required to file U.S. tax returns on worldwide income, and some workers may still face self-employment tax, foreign bank reporting requirements, or tax obligations in the country where they work. Locations with local income tax systems, long-term residency rules, or employer withholding requirements can complicate the picture, especially for contractors working in Europe, parts of Asia, or countries where tax treaties and local labor rules apply. The advantage is real, but it depends on proper qualification, documentation, and contract structure.