How U.S. Digital Nomads Can Save on Taxes

Being a digital nomad means freedom from anywhere, exploring new places, and setting your schedule. But one thing you can’t escape? US taxes.

Unlike most countries, the US taxes its citizens no matter where they live. So whether you’re answering emails from a cafe in Bali or taking client calls from a beach in Portugal, you still have to file a US tax return.

The good news? There are legal ways to reduce – or even eliminate – your tax bill as a digital nomad. In this guide, we’ll walk you through the most effective tax-saving strategies, starting with a big one: The Foreign Earned Income Exclusion (FEIE) which could help you exclude more than $120,000 of your income from US taxes.

The Foreign Earned Income Exclusion (FEIE): Your №1 tax shield

If you’re a US digital nomad, the Foreign Earned Income Exclusion (FEIE) could be your best friend. Why? Because it allows you to exclude a huge chunk of your income from US taxes in 2024, that’s $126,500 per person (and it typically increases every year).

Married? If both you and your spouse qualify, you can each claim the FEIE, doubling your tax-free income. That’s a huge savings.

Who qualifies for FEIE?

To claim FEIE, you must prove that you are actually living and working abroad. The IRS gives you two ways to do this:

1. The physical presence test

• You must spend at least 330 full days outside the US in 12 months.
• The days don’t have to be consecutive, but they must be full days abroad (travel days don’t count).
• Even one extra day in the US can disqualify you, so tracking your travel is key.

2. The Bona Fide Residence Test

• You must establish tax residency in another country and plan to stay there long-term (usually at least a full calendar year).
• This test is better for nomads who settle in one country rather than constantly moving around.

What kind of income qualifies for FEIE?

FEIE only covers earned income things like:

• Salaries
• Freelance or contract work
• Business income

But it doesn’t apply to:

• Passive income (dividends, rental income, stock gains)
• Self-employment taxes (you still owe Social Security & Medicare)
• Income earned in the US

If you qualify, FEIE can dramatically reduce your US tax bill – but you must follow the rules carefully.

The Foreign Tax Credit (FTC): Avoid double taxation

The Foreign Earned Income Exclusion (FEIE) is great, but it has limitations. It only applies to earned income and doesn’t eliminate self-employment taxes.

If you live in a high-tax country, an overseas tax consultant might recommend another option that could work even better: the Foreign Tax Credit (FTC).

How the foreign tax credit works

The FTC prevents double taxation by allowing you to offset your US tax bill with taxes you’ve already paid to another country. In some cases, this means you can reduce your US tax liability to zero.

Here’s how it works:

• If you pay income taxes in a foreign country, you can claim a dollar-for-dollar credit against your US taxes.
• This ensures that you don’t get taxed twice on the same income.
• If you don’t use all of your foreign tax credits, you can carry them over for up to 10 years. This is helpful if your income fluctuates.

FEIE vs. FTC: Which should you use?

Both the FEIE and the FTC can help reduce your US tax bill, but they work in different ways. Here’s how to decide:

Scenario	Best tax strategy
You live in a low-tax or tax-free country (e.g., UAE, Thailand)	FEIE—you’re not paying much foreign tax anyway
You live in a high-tax country (e.g., Germany, France, Canada)	FTC—you’re already paying high foreign taxes, so you can offset US taxes
You earn more than the FEIE limit ($126,500 in 2024)	Combine FEIE + FTC—exclude the first $126,500, then use FTC on the rest

 

Pro Tip

• If you live in a country that doesn’t tax foreign income, the FTC won’t help you – stick with FEIE.
• If you live in a high-tax country, the FTC can completely wipe out your US tax bill.
• Be careful when using FEIE and FTC together – you can’t use both on the same income.

Self-employment taxes: How to reduce or avoid them

Most digital nomads are freelancers, consultants, or online business owners. That means they’re self-employed-which comes with an additional tax burden.

Here’s the problem: If you’re self-employed, you have to pay both the employer and employee portions of Social Security and Medicare taxes – a 15.3% tax on all self-employment income. And unlike the income tax, the FEIE doesn’t eliminate this tax. Even if you exclude $126,500 of income with FEIE, you could still owe thousands in self-employment taxes.

How to legally reduce or eliminate self-employment taxes

1. Moving to a country with a totalization agreement
   The US has totalization agreements with more than 30 countries that prevent you from paying double Social Security taxes. If you pay into another country’s social security system, you can often avoid US self-employment tax.

• Examples of countries with treaties: United Kingdom, Australia, Canada, Germany, and France.
• Countries without agreements: Thailand, Mexico, and most of Latin America.

Good for: Nomads who plan to stay in a country for a while and pay into the country’s social security system.

2. Set up a foreign corporation (for high earners)
   If you earn more than $100,000 a year, you may want to set up a foreign corporation (such as an LLC or IBC) in a tax-friendly country.

• Instead of being taxed as a self-employed individual, you pay yourself a salary through your foreign corporation.
• This salary may be exempt from US self-employment tax if structured properly.

Best for: Non-domiciled business owners with high profits who want long-term tax savings.

3. Consider S-Corp tax strategy (if you still have US ties)
   If you operate a US-based LLC, you can elect S-Corp status to reduce your self-employment tax.

• You pay yourself a reasonable salary (subject to self-employment tax).
• The rest of your profits are taken as distributions, which are not subject to self-employment tax.

Best for: Nomads who still have US clients, businesses, or other connections and want to reduce taxes without setting up a foreign corporation.

Tax deductions for digital nomads

In addition to FEIE and the foreign tax credit, tax deductions can help you lower your taxable income even more. If you’re self-employed, you can deduct business expenses just like any other business owner. The trick? Knowing what qualifies and keeping good records to support your claims.

Here are some of the most valuable deductions for digital nomads:

1. Expenses for home offices and coworking spaces

• If you work from a dedicated space in your home (not just your kitchen table), you can deduct a portion of your rent, utilities, and internet.
• Prefer to work in a coworking space? That’s 100% deductible, too.

Pro tip: To qualify for the home office deduction, your workspace must be used exclusively for business.

2. Equipment and software

• Need a laptop, camera, or microphone to do your job? Deductible.
• Pay for Zoom, Adobe, or a VPN? Also deductible.

Pro tip: Keep receipts and note how each item is used in the business.

3. Internet and phone bills

• You can deduct the business portion of your Internet and telephone bills.
• For example: If you use your phone 80% for business, you can deduct 80% of your phone bill.

Pro tip: The IRS doesn’t allow 100% deductions unless you have a separate business phone or Internet connection.

4. Expenses for business travel

• When you travel for business, you can deduct things like airfare, lodging, meals, and local transportation.
• But be careful – if you mix business and personal travel, you can only deduct the business portion.

Pro tip: If you fly somewhere for business but stay longer for pleasure, only the business-related days count as a deduction.

5. Marketing and advertising

Running an online business? You can deduct:

• Facebook/Google ads
• Website hosting & domain fees
• Branding and content creation

Pro tip: If you pay for social media promotions or influencer collaborations, those are also deductible.

6. Business meals

• Taking a client or business associate out to lunch? 50% of the cost is deductible.
• The key? Keep the receipt and note who you met and why.

Pro tip: The IRS doesn’t like vague meal expenses. Write down who you met with and what you discussed.

Where should digital nomads pay taxes?

One of the biggest questions digital nomads have is:

“If I live in multiple countries, where do I actually owe taxes?”

The answer? It depends on the tax rules of each country you visit. Some places tax you based on how long you stay, while others don’t care unless you have strong local ties. Here’s what you need to know:

Key factors that determine tax residency

• 183-day rule
• Many countries automatically consider you a tax resident if you spend 183+ days per year there.
• For example: Spending more than six months in Spain? You may owe Spanish taxes.
• Permanent home and ties

If you own property, have a local job, or have family in a country, they may consider you a tax resident – even if you don’t meet the 183-day rule.

• Territorial tax vs. Worldwide taxation

• Some countries tax only local income (the territorial tax system).
• Others tax all worldwide income if you qualify as a tax resident (worldwide taxation).

Best tax-friendly countries for digital nomads

Want to legally reduce your tax bill? Consider countries with friendly tax policies:

• No income tax countries
• UAE, Bermuda, Bahamas, Monaco → No personal income tax at all.
• Territorial tax countries (only tax local income)
• Thailand, Panama, Malaysia, Costa Rica → If your income comes from outside these countries, you don’t owe any local tax.
• Low tax and digital nomad visa countries
• Portugal (NHR program) → Low or zero tax on foreign income for 10 years.
• Georgia (1% tax for small business owners) → No worldwide taxation.
• Malta, Cyprus → Offer low tax residency programs.

Common tax mistakes digital nomads must avoid

Even experienced digital nomads make tax mistakes that result in IRS penalties or thousands in overpaid taxes. The good news? Most of these mistakes are avoidable.

Here are some of the biggest tax pitfalls-and how to avoid them.

1. Failure to file US taxes (even if you owe $0)

• Myth: “I don’t live in the US, so I don’t have to pay taxes.”
• Reality: If you’re a US citizen or green card holder, you must file a tax return if your income is above the IRS filing threshold-even if you live abroad.

Solution: File your taxes every year and use FEIE, FTC, and deductions to reduce or eliminate what you owe.

2. Overstaying in a country and triggering tax residency

Many countries have a 183-day rule – spend more than six months there and you could become a tax resident.

One solution:

• Track your time in each country.
• Research local tax residency rules before staying too long in one place.

3. Ignore FBAR & FATCA reporting

• If you have more than $10,000 in foreign bank accounts, you must file a Foreign Bank Account Report (FBAR).
• If your foreign assets exceed $200,000, you must file a FATCA Form 8938.

Solution: Keep records of all foreign accounts and file these reports to avoid steep IRS penalties.

Pro tip: These are reporting requirements, not taxes – but ignoring them can still get you in trouble with the IRS.

4. Failure to retain receipts for deductions

The IRS won’t accept deductions if you can’t substantiate them. If you get audited and don’t have receipts, you could lose your deductions.

Solution: Keep digital copies of all receipts for business expenses.

5. Not planning for self-employment taxes

FEIE does not exempt you from self-employment taxes (15.3%) – so even if you exclude $126,500 in income, you could still owe thousands in Social Security and Medicare taxes.

Solution:

• Check foreign tax residency to see if you qualify for an exemption.
• Use totalization agreements if you live in a country that has one with the US
• Consider incorporating abroad to structure your income more tax-efficiently.

Bottom line

Just because you’re a US digital nomad doesn’t mean you have to overpay taxes. But you do need to plan ahead and comply with IRS regulations.

Key takeaways

• Use FEIE or FTC to legally reduce or eliminate US taxes.
• Don’t ignore self-employment taxes – they still apply even if you’re overseas.
• Take every deduction you qualify for to reduce your taxable income.
• Be aware of tax residency rules to avoid surprise foreign tax bills.
• File FBAR, FATCA, and your US tax return on time to avoid IRS penalties.

A little tax planning goes a long way. Do it right, and you’ll keep more of your hard-earned money while staying in good standing with the IRS.