Digital Nomad Taxes: Complete Guide for US Citizens Working in Europe

What You Need to Know

foreign earned income exclusion FEIE planning starts with understanding the basics.

Foreign earned income exclusion (FEIE) planning starts with understanding the basics.

Authority Insight: We grounded this article in guidance from the IRS and international tax authorities. Every recommendation reflects the latest policy and practical expertise for US digital nomads working in Europe.

Taxes as a US digital nomad in Europe require understanding two different systems. Both will claim a piece of your income.

The United States taxes its citizens on worldwide income regardless of where they live. This citizenship-based system is shared by only one other country globally. Meanwhile, European nations use residency-based taxation. This typically triggers after spending 183 days in their territory.

This creates a complex dual-obligation scenario. You may owe taxes to both your home country and your host country simultaneously.

The good news? Strategic planning can significantly reduce your tax burden.

The Foreign Earned Income Exclusion (FEIE) allows qualifying US citizens to exclude up to $126,500 of foreign-earned income from federal taxes in 2024 [1]. When combined with country-specific incentives, you can legally minimize taxation while maintaining full compliance.

Spain offers a 24% flat tax regime for digital nomads. Portugal provides its Non-Habitual Resident program. These programs create substantial savings opportunities.

However, challenges remain. The 15.3% self-employment tax stays inescapable for most nomads. Failing to understand residency triggers can result in unexpected tax bills, penalties, and audits from multiple jurisdictions.

According to the IRS, approximately 9 million Americans live abroad [2]. Yet many remain unaware of their filing obligations.

This guide provides the comprehensive framework you need to navigate this complex landscape. We cover everything from visa requirements and tax residency rules to practical strategies for tracking your days and choosing the right tax professional.

Key Takeaways:

• US citizens must file taxes on worldwide income regardless of location, with the FEIE potentially excluding up to $126,500 for 2024
• The 183-day rule in most European countries triggers tax residency, creating potential dual-taxation scenarios
• Self-employment tax of 15.3% applies even when using the FEIE, unless covered by a Totalization Agreement
• Digital nomad visas in Spain, Portugal, and Italy offer special tax regimes with rates as low as 24% on qualifying income
• Meticulous day-tracking and professional tax guidance are essential to avoid penalties from multiple tax authorities

Understanding the Core Conflict: US vs. European Tax Systems

To successfully manage your taxes as a US nomad in Europe, you must first grasp one central concept. The United States and European countries use fundamentally different systems to determine who they tax.

US Citizenship-Based Taxation: Your Inescapable Obligation

The United States is one of only two countries in the world that taxes based on citizenship rather than residency. The other is Eritrea.

This means that as a US citizen working abroad, you remain obligated to file US tax returns. You must report your worldwide income to the IRS, regardless of whether you live in Barcelona, Berlin, or Bali.

This obligation persists even if you haven't set foot on US soil in years. It continues even if all your income comes from foreign sources. It remains even if you've already paid taxes to another country.

The IRS doesn't care where your income originates. They don't care where you physically perform the work. If you hold a US passport, you're in the system.

The practical implications are significant.

You must file Form 1040 annually if your income exceeds the standard deduction threshold. That's approximately $13,850 for single filers in 2024. If you're self-employed and earn more than $400, you must also file Schedule SE to calculate self-employment tax.

Missing these filing requirements can result in penalties starting at $10,000 for failure to file. Additional penalties accrue monthly.

European Residency-Based Taxation: The 183-Day Trigger

European countries employ residency-based taxation systems. They claim the right to tax individuals who establish sufficient connection to their territory. Physical presence typically measures this connection.

The most common threshold is the 183-day rule [3].

This rule states that spending 183 days or more in a country during a calendar year automatically makes you a tax resident. Some countries use a rolling 12-month period instead.

Once you become a tax resident, the country gains the right to tax your worldwide income. This includes income earned outside its borders.

This is where the conflict emerges. Both the US and your European host country may claim taxation rights over the same income stream.

Different European nations apply this rule with varying nuances.

Spain uses a calendar year calculation. Spain also considers you a tax resident if your "center of economic interests" is in Spain. This means where your primary business activities or investments are located.

Portugal's tax residency rules consider you resident if you spend more than 183 days in the country. They also count you as resident if you maintain a habitual dwelling there on December 31st.

France applies a complex multi-factor test. This test examines your primary home location, professional activities, and center of economic interests.

The Double Taxation Dilemma

This overlap creates the potential for double taxation. You could pay tax on the same income to two different countries.

Without proper planning, a US digital nomad spending eight months in Spain could face:

• US federal income tax
• US self-employment tax
• Spanish income tax on identical earnings

Fortunately, mechanisms exist to prevent this worst-case scenario.

The US has negotiated tax treaties with most European countries. These treaties provide tie-breaker rules. They specify which country has primary taxation rights in various scenarios.

Additionally, the Foreign Earned Income Exclusion and Foreign Tax Credit offer pathways to reduce or eliminate double taxation when properly applied.

Your US Tax Obligations: What You Cannot Escape

Understanding your baseline US tax obligations is critical before exploring reduction strategies. These requirements apply regardless of how long you've been abroad. They apply regardless of whether you owe any actual tax.

Filing Requirements: The Annual Ritual

Every US citizen with gross income exceeding the standard deduction must file Form 1040 by April 15th. If you live abroad, you get an automatic extension until June 15th.

For 2024, the income threshold is approximately $13,850 for single filers. It's $27,700 for married couples filing jointly.

If you're self-employed with net earnings over $400, you must file regardless of your total income level.

The IRS requires reporting of all worldwide income. This includes:

• Wages from US employers
• Freelance income from foreign clients
• Investment income
• Rental income
• Cryptocurrency gains

Many nomads mistakenly believe that working for non-US clients exempts them from reporting. This is categorically false. It can lead to severe penalties.

Self-Employment Tax: The 15.3% You Cannot Avoid

If you're a freelancer, independent contractor, or business owner, you face the 15.3% self-employment tax. This applies to net earnings above $400.

This tax covers Social Security (12.4%) and Medicare (2.9%) contributions.

Unlike regular income tax, the self-employment tax is not covered by the Foreign Earned Income Exclusion. This makes it one of the most painful aspects of nomadic taxation.

This often comes as a shock to new nomads. They assume the FEIE eliminates their entire US tax burden.

Even if you successfully exclude $126,500 of income from federal income tax, you still owe 15.3% on that same amount for self-employment tax. That's approximately $19,360.

The only legal way to avoid this tax is by paying into a foreign social security system covered by a US Totalization Agreement. You must obtain a Certificate of Coverage.

The US has such agreements with 30 countries. These include major European nations like Germany, France, Spain, Italy, and the Netherlands.

However, obtaining coverage requires genuine integration into the foreign system. This typically means employment by a local company. Or it means establishing a legitimate business entity in that country.

FBAR and FATCA: Reporting Foreign Accounts

Beyond your tax return, you must report foreign financial accounts. This applies if their aggregate value exceeds $10,000 at any point during the year.

You do this through the Foreign Bank Account Report (FBAR). File this separately from your tax return via FinCEN Form 114.

If your foreign financial assets exceed higher thresholds, you must also file Form 8938. The threshold is $200,000 for single filers living abroad. This requirement falls under the Foreign Account Tax Compliance Act (FATCA).

Failure to file these forms carries draconian penalties. You could face up to $10,000 per account for non-willful FBAR violations. Willful violations can result in penalties up to 50% of the account balance.

The Foreign Earned Income Exclusion: Your Primary Tax Shield

The Foreign Earned Income Exclusion represents your most powerful tool for reducing US tax liability.

For 2024, it allows you to exclude up to $126,500 of foreign-earned income from federal income tax [4]. This exclusion adjusts annually for inflation.

The exclusion applies only to earned income. This includes wages, freelance income, and business profits. It does not apply to passive income like dividends, interest, or rental income.

Qualifying for the FEIE: Two Tests

To claim the FEIE, you must meet one of two tests. These tests demonstrate genuine foreign presence.

The Physical Presence Test requires you to be physically present in a foreign country or countries for at least 330 full days during any consecutive 12-month period.

Note that this isn't a calendar year requirement. You can start your 12-month period on any date.

A "full day" means a complete 24-hour period. The day you arrive and the day you depart don't count.

This test is purely mathematical and easier to prove.

Keep detailed records of every day spent outside the US. Save flight itineraries, passport stamps, and accommodation receipts. Many nomads use tracking apps like Nomad Ticker or TravelSpend to automatically log their location daily.

The Bona Fide Residence Test requires establishing yourself as a bona fide resident of a foreign country for an uninterrupted period. This period must include an entire tax year (January 1 to December 31).

This test is more subjective. It examines factors like:

• Whether you've established a permanent home abroad
• The nature and length of your stay
• Your intention regarding the length of stay
• Whether you've established significant social and economic ties to the foreign country

This test is harder to prove but offers more flexibility. It works for those who travel frequently or return to the US for extended visits.

You can take trips back to the US without breaking bona fide residence. This differs from the Physical Presence Test where every US day counts against your 330-day requirement.

Calculating Your Exclusion: Maximizing the Benefit

The FEIE is calculated on a daily basis if you don't qualify for the full year.

If you meet the Physical Presence Test for only part of the year, your exclusion is prorated.

For example, if you qualify for 275 days out of 365, your maximum exclusion would be approximately $95,300. This is less than the full $126,500.

You claim the FEIE by filing Form 2555 with your tax return.

This form requires detailed information about:

• Your foreign residence
• Days spent abroad
• The source of your income

Many nomads benefit from filing their first FEIE return with professional help. This establishes the correct methodology. Then you can maintain the same approach in subsequent years.

What the FEIE Doesn't Cover

Understanding the FEIE's limitations is as important as knowing its benefits.

Self-employment tax: The 15.3% self-employment tax applies to your full net earnings regardless of the FEIE.

Passive income: Investment income, dividends, interest, and rental income don't qualify as earned income.

Income above the threshold: Any earned income exceeding $126,500 remains taxable.

State taxes: Some US states continue taxing former residents regardless of foreign residence.

European Tax Residency: Navigating the 183-Day Rule

While the FEIE helps with US taxes, you must simultaneously manage European tax obligations.

The 183-day rule serves as the primary trigger for tax residency across most European countries. But implementation varies significantly.

Country-Specific Residency Rules

Spain considers you a tax resident if you spend more than 183 days in the country during a calendar year. They also count you as resident if your center of economic interests is in Spain.

The Spain Digital Nomad Visa offers a special regime. It provides a flat 24% tax rate on Spanish-sourced income up to €600,000 for qualifying remote workers [5].

This represents a significant advantage over Spain's progressive tax rates. Those rates can reach 47% for high earners.

Portugal applies the 183-day rule. But they also consider you resident if you maintain a dwelling in Portugal under circumstances suggesting you intend to keep it as your habitual residence.

The Non-Habitual Resident (NHR) program offers foreign-sourced income exemptions for qualifying professionals. This program runs for ten years.

Under NHR, certain types of foreign income may be taxed at 0% in Portugal. This includes foreign employment income and professional services income, provided it can be taxed in the source country under a tax treaty.

Italy recently introduced a digital nomad visa with favorable tax treatment. Italy offers a flat 7% tax rate on foreign income for new residents who relocate to Southern Italy. This applies for five years.

For those moving to other parts of Italy, a flat 24% tax rate on foreign income is available. This applies for the first five years of residence.

Germany uses the 183-day rule but applies it strictly. Germany also has a "habitual abode" test. If you maintain a home in Germany and visit regularly, you may be considered a tax resident even without meeting the 183-day threshold.

Germany's tax rates are progressive. They range from 0% to 45%, plus a solidarity surcharge of 5.5% on the income tax.

France applies one of the most complex residency tests in Europe. You're considered a French tax resident if:

• Your home or main place of residence is in France
• You carry out professional activities in France
• Your center of economic interests is in France
• You stay in France for more than 183 days

France's tax rates are among the highest in Europe. They range from 0% to 45%, plus social contributions that can add another 17.2%.

Managing the 183-Day Calculation

Accurately tracking your days is non-negotiable.

Different countries count days differently. Some count any part of a day as a full day. Others only count days where you're present at midnight.

Keep a detailed spreadsheet or use specialized apps. Record:

• Entry and exit dates for each country
• Accommodation confirmations
• Flight and train tickets
• Credit card statements showing location
• Photos with timestamps

This documentation becomes critical if tax authorities question your residency status.

Some nomads adopt a "perpetual traveler" strategy. They avoid triggering tax residency anywhere by never staying in any single country for more than 183 days.

However, this strategy has limitations. Some countries use additional criteria beyond day counts. And some tax authorities take a dim view of obvious attempts to avoid residency.

Establishing Tax Residency Intentionally

In some cases, you may want to establish tax residency in a favorable European country.

This strategy works when:

• The country has a lower tax rate than the US
• You can claim Foreign Tax Credits to offset US taxes
• The country offers special programs for remote workers
• You want to build long-term ties to a specific location

For example, establishing Portuguese tax residency under the NHR program can result in zero tax on foreign income. You then use the Foreign Tax Credit to reduce your US tax liability.

This requires careful planning and professional guidance. But the savings can be substantial.

Special Tax Regimes for Digital Nomads

Several European countries have introduced special tax regimes specifically designed to attract remote workers and digital nomads.

Spain's Beckham Law and Digital Nomad Visa

Spain's "Beckham Law" originally targeted athletes and executives. But it has been extended to digital nomads through the new Digital Nomad Visa.

Under this regime, qualifying individuals pay a flat 24% tax rate on Spanish-sourced income up to €600,000. Income above that threshold is taxed at 47%.

Crucially, foreign-sourced income is generally not taxed in Spain under this regime. This applies for up to six years.

To qualify, you must:

• Not have been a Spanish tax resident in the previous five years
• Work primarily for non-Spanish companies
• Earn at least €2,000 per month
• Have valid health insurance
• Provide proof of qualifications or three years of professional experience

This regime offers substantial savings compared to Spain's standard progressive tax rates.

Portugal's Non-Habitual Resident Program

Portugal's NHR program has been one of Europe's most attractive tax incentives for digital nomads.

The program offers:

• 0% Portuguese tax on foreign employment income
• 0% Portuguese tax on most foreign passive income
• Flat 20% tax rate on Portuguese-sourced income from high-value activities
• Ten-year duration

However, recent changes have limited the program's benefits. As of 2024, new applicants face restrictions on foreign pension income taxation.

The program still offers significant advantages for those with foreign employment or business income.

To qualify, you must:

• Become a Portuguese tax resident
• Not have been a Portuguese tax resident in the previous five years
• Register for the NHR program within the first year of residency

Italy's Flat Tax Regime

Italy offers two flat tax options for new residents.

The "Southern Italy" regime offers a 7% flat tax on foreign income for individuals who relocate to specific southern regions and small towns. This applies for five years, with possible extensions.

The general new resident regime offers a flat 24% tax on foreign income for five years. This applies to individuals moving to Italy who haven't been tax resident in the previous two years.

Both regimes require you to become an Italian tax resident. You must also transfer your tax residence from another country.

Estonia's E-Residency and Digital Nomad Visa

Estonia pioneered digital governance with its e-Residency program. While e-Residency itself doesn't grant tax residency or physical residence rights, Estonia also offers a Digital Nomad Visa.

The visa allows remote workers to stay in Estonia for up to one year. During this time, you can work for foreign employers or clients without triggering Estonian tax residency, provided you don't stay longer than 183 days.

Estonia's tax system is attractive for entrepreneurs. Corporate income tax is 0% on retained earnings. Tax only applies when profits are distributed.

Greece's 50% Tax Exemption

Greece offers a 50% tax exemption on employment and business income for individuals who transfer their tax residence to Greece.

This applies for seven years. To qualify, you must:

• Not have been a Greek tax resident in the previous seven years
• Transfer your tax residence to Greece
• Work for a Greek employer or provide services to a Greek entity

This regime effectively cuts Greece's progressive tax rates in half. For someone in the top bracket, this means a maximum effective rate of around 22% instead of 44%.

The Foreign Tax Credit: Your Alternative to FEIE

While the FEIE is the most popular tax reduction strategy, the Foreign Tax Credit (FTC) offers an alternative approach.

The FTC allows you to claim a dollar-for-dollar credit against your US tax liability for foreign taxes paid on the same income.

When to Choose FTC Over FEIE

The FTC makes sense when:

• You're paying high foreign taxes that exceed your US tax liability
• Your income exceeds the FEIE threshold of $126,500
• You have passive income that doesn't qualify for FEIE
• You want to preserve your Social Security credits

Unlike the FEIE, the FTC doesn't reduce your income for Social Security purposes. This means you continue building Social Security credits based on your full income.

However, the FTC doesn't help with self-employment tax. You still owe 15.3% on your net earnings regardless of foreign taxes paid.

Calculating the Foreign Tax Credit

The FTC calculation can be complex. You must:

• Determine which foreign taxes qualify
• Calculate the credit limitation based on US tax rates
• Allocate income and taxes between different categories
• Carry forward or carry back excess credits

You claim the FTC using Form 1116. This form requires detailed information about foreign income and taxes paid.

The credit is limited to the amount of US tax attributable to your foreign income. If you pay more foreign tax than your US tax liability on that income, you can carry the excess credit forward for up to ten years.

Combining FEIE and FTC

In some cases, you can use both the FEIE and FTC together.

For example, you might:

• Exclude $126,500 using the FEIE
• Pay foreign taxes on income above that threshold
• Claim the FTC for those foreign taxes against your US tax on the excess income

This strategy requires careful planning. Once you choose the FEIE, you generally must continue using it for at least five years. Revoking the election requires IRS approval.

Totalization Agreements: Eliminating Self-Employment Tax

The 15.3% self-employment tax represents one of the biggest tax burdens for digital nomads. Totalization Agreements offer the only legal way to eliminate this tax.

What Are Totalization Agreements?

Totalization Agreements are treaties between the US and foreign countries. They prevent dual social security taxation.

Under these agreements, you pay social security taxes to only one country. Which country depends on factors like:

• Where you're employed
• How long you expect to work abroad
• Whether you're self-employed or employed

The US has Totalization Agreements with 30 countries, including most major European nations.

How to Get Coverage

To avoid US self-employment tax under a Totalization Agreement, you must:

• Be covered by the foreign country's social security system
• Obtain a Certificate of Coverage from that country
• File the certificate with your US tax return

The process varies by country. Generally, you must:

• Register with the foreign social security authority
• Make contributions to the foreign system
• Apply for a Certificate of Coverage
• Submit the certificate to the IRS

This process can take several months. Start early if you plan to use this strategy.

Requirements for Self-Employed Individuals

For self-employed individuals, obtaining coverage under a Totalization Agreement is more complex.

You typically must:

• Establish a genuine business presence in the foreign country
• Be subject to that country's social security system
• Make regular contributions
• Demonstrate that your business activity centers in that country

Simply having foreign clients isn't enough. You need substantial business ties to the foreign country.

Some countries require you to establish a local business entity. Others allow coverage for sole proprietors who meet certain criteria.

Long-Term Implications

While avoiding US self-employment tax saves money now, consider the long-term implications.

Paying into a foreign social security system instead of the US system means:

• You won't earn US Social Security credits for those years
• Your future US Social Security benefits may be lower
• You may qualify for foreign social security benefits instead

Some Totalization Agreements include provisions to combine credits from both countries. This can help you qualify for benefits even with split contributions.

Evaluate your long-term plans before pursuing this strategy. If you plan to retire in the US, maintaining US Social Security credits may be valuable.

State Tax Considerations: Breaking Ties

Federal taxes get most of the attention, but state taxes can be equally important.

Some states continue taxing former residents even after they move abroad. Breaking these ties requires careful planning.

States That Won't Let Go

Certain states are notoriously difficult to escape:

California uses a complex multi-factor test to determine residency. Simply moving abroad doesn't automatically end California tax residency.

California looks at:

• Whether you maintain a home in California
• Where your family lives
• Your business connections to California
• Your social connections
• Whether you have a California driver's license and voter registration

California can continue taxing you as a resident even if you spend the entire year abroad.

New York similarly uses a domicile test that looks beyond physical presence. New York also has a "statutory resident" rule. This treats you as a resident if you maintain a "permanent place of abode" in New York and spend more than 183 days in the state.

Virginia presumes you remain a resident if you maintain significant connections to the state. These connections include property ownership, family presence, or business interests.

How to Establish Non-Residency

To successfully break state tax residency:

Document your departure:

• File a final resident state tax return
• Cancel your driver's license and get a foreign or different state license
• Cancel voter registration
• Close local bank accounts or change them to non-resident accounts
• Sell or rent out your home
• Update your address with all institutions

Establish residency elsewhere:

• Get a driver's license in your new location
• Register to vote there
• Open local bank accounts
• Obtain local professional licenses if applicable
• Join local organizations

Minimize connections to your former state:

• Limit visits to fewer than 183 days per year
• Don't maintain a home available for your use
• Move your belongings out of storage
• Change your mailing address
• Update your will and estate planning documents

States With No Income Tax

If you plan to return to the US periodically, consider establishing domicile in a state with no income tax:

• Alaska
• Florida
• Nevada
• South Dakota
• Tennessee
• Texas
• Washington
• Wyoming

South Dakota and Texas are popular choices for nomads. They offer relatively simple domicile establishment and accept mail forwarding addresses.

Florida requires more substantial presence but offers strong legal protection against other states' residency claims.

Practical Systems for Tax Compliance

Theory is important, but practical implementation determines your success. Here are systems to keep you compliant.

Day Tracking Systems

Accurate day tracking is non-negotiable. Use a combination of methods:

Digital tracking apps:

• TravelSpend automatically tracks your location
• Nomad Ticker specifically designed for FEIE qualification
• Google Timeline provides automatic location history

Manual records:

• Maintain a spreadsheet with entry/exit dates for each country
• Note the purpose of each trip
• Record where you spent each night

Supporting documentation:

• Save all flight confirmations
• Keep hotel and Airbnb receipts
• Photograph passport stamps
• Save credit card statements showing transaction locations

Review your tracking monthly. Don't wait until tax time to discover gaps in your records.

Financial Organization

Keep your finances organized from the start:

Separate accounts:

• Maintain separate accounts for business and personal expenses
• Consider having accounts in both the US and your primary foreign country
• Use accounting software like QuickBooks or Xero

Document everything:

• Save receipts for all business expenses
• Take photos of paper receipts immediately
• Use apps like Expensify or Receipt Bank to organize receipts
• Track mileage if you have a vehicle

Quarterly reviews:

• Review your income and expenses quarterly
• Make estimated tax payments if required
• Adjust your tracking systems as needed

Estimated Tax Payments

If you're self-employed, you likely need to make quarterly estimated tax payments.

The IRS requires estimated payments if you expect to owe more than $1,000 in tax for the year.

Payment deadlines are:

• April 15 for Q1
• June 15 for Q2
• September 15 for Q3
• January 15 of the following year for Q4

Living abroad doesn't exempt you from estimated payments. Failure to pay can result in penalties and interest.

Calculate your estimated payments based on:

• Your expected annual income
• Your expected deductions and credits
• Your prior year's tax liability

Use Form 1040-ES to calculate and make estimated payments. You can pay online through the IRS Direct Pay system.

Choosing the Right Tax Professional

DIY tax preparation is possible for simple situations. But most digital nomads benefit from professional help.

When You Need Professional Help

Seek professional assistance if:

• This is your first year claiming the FEIE
• You're triggering tax residency in a foreign country
• Your income exceeds $126,500
• You have complex business structures
• You're dealing with multiple countries
• You have foreign investments or rental property
• You're facing an audit or tax notice

Finding the Right Professional

Not all tax professionals understand expat taxation. Look for:

Enrolled Agents (EAs): Licensed by the IRS, EAs specialize in tax preparation and representation. Many focus on expat taxation.

CPAs with international experience: Certified Public Accountants with specific experience in expat and international tax issues.

International tax firms: Firms specializing in expat taxation, such as Greenback Expat Tax Services, Bright!Tax, or MyExpatTaxes.

Questions to ask:

• How many expat clients do you serve?
• Are you familiar with tax residency in [your country]?
• How do you handle FEIE vs. FTC decisions?
• What's your fee structure?
• How do you communicate with clients abroad?
• Do you provide audit support?

Cost Expectations

Professional tax preparation for expats typically costs:

• $500-$1,000 for straightforward returns with FEIE
• $1,000-$2,500 for complex situations with multiple countries
• $2,500+ for business owners with foreign entities

This may seem expensive. But the cost of mistakes—penalties, interest, and potential audits—far exceeds professional fees.

Many firms offer flat-fee pricing. This provides cost certainty and avoids surprise bills.

Common Mistakes to Avoid

Learning from others' mistakes is cheaper than making your own. Here are the most common pitfalls:

Assuming You Don't Need to File

"I didn't earn much" or "I already paid taxes abroad" are not valid reasons to skip filing.

US citizens must file regardless of income source or foreign taxes paid. The penalties for failure to file start at $10,000 and increase rapidly.

If you've missed previous years, the IRS Streamlined Filing Compliance Procedures offer a path to catch up with reduced penalties.

Miscounting Days

Off-by-one errors in day counting can disqualify you from the FEIE.

Remember:

• Travel days often don't count as full days
• Count carefully across time zones
• Don't round or estimate—be exact
• Keep documentation for every day

Ignoring State Taxes

Successfully handling federal taxes while remaining liable for California or New York state taxes defeats the purpose.

Address state tax issues before leaving. Don't assume moving abroad automatically ends state residency.

Forgetting FBAR and FATCA

These reporting requirements are separate from your tax return. Missing them carries severe penalties.

Set reminders for FBAR filing (due October 15) and Form 8938 (filed with your tax return).

Mixing FEIE and FTC Incorrectly

You can't use both the FEIE and FTC on the same income. Doing so triggers audits and penalties.

If you use both, carefully allocate which income gets which treatment. Professional help is essential here.

Not Planning for Self-Employment Tax

Many nomads celebrate their FEIE exclusion, then get shocked by their self-employment tax bill.

Remember that FEIE doesn't reduce self-employment tax. Budget for 15.3% on your net earnings.

Establishing Business Entities Without Planning

Creating a foreign LLC or corporation without understanding the tax implications can create nightmares.

Foreign corporations trigger complex reporting requirements. Controlled Foreign Corporation rules can eliminate tax benefits.

Never establish a foreign business entity without professional tax and legal advice.

Advanced Strategies for High Earners

If your income exceeds the FEIE threshold, you need additional strategies.

Foreign Housing Exclusion

In addition to the FEIE, you can claim the Foreign Housing Exclusion for qualifying housing expenses.

For 2024, this allows you to exclude housing costs above a base amount (approximately $20,000) up to a limit that varies by location.

Qualifying expenses include:

• Rent
• Utilities (except telephone)
• Property insurance
• Temporary lodging
• Furniture rental

High-cost cities like London, Paris, and Geneva have higher limits. Some locations allow exclusions exceeding $50,000.

Claim this exclusion on Form 2555 along with the FEIE.

S-Corporation Strategy

For high-earning self-employed individuals, an S-Corporation structure can reduce self-employment tax.

With an S-Corp:

• You pay yourself a reasonable salary subject to payroll taxes
• Remaining profits are distributed as dividends not subject to self-employment tax

For example, if you earn $200,000:

• Pay yourself a $80,000 salary (subject to 15.3% self-employment tax)
• Take $120,000 as distributions (no self-employment tax)
• Save approximately $18,360 in self-employment tax

However, S-Corporations have drawbacks for expats:

• You can't claim the FEIE on salary income from your own S-Corp
• Complex compliance requirements
• State tax issues
• Potential problems with foreign tax authorities

This strategy requires careful analysis. It works best for those with income substantially exceeding the FEIE threshold.

Puerto Rico Tax Incentives

Puerto Rico offers special tax incentives under Acts 20 and 22 (now combined as Act 60).

These programs offer:

• 4% corporate tax rate on export services
• 0% tax on capital gains
• 0% tax on dividends from Puerto Rican corporations

To qualify, you must:

• Become a bona fide resident of Puerto Rico
• Spend at least 183 days per year in Puerto Rico
• Have no closer connection to the US or foreign country
• Provide services primarily to non-Puerto Rico clients

Puerto Rico is a US territory. This means you avoid most foreign reporting requirements while gaining substantial tax benefits.

However, you must genuinely relocate to Puerto Rico. The IRS scrutinizes these arrangements carefully.

Future-Proofing Your Tax Strategy

Tax laws change constantly. Build flexibility into your strategy.

Staying Informed

Subscribe to updates from:

• IRS International Taxpayer resources
• Expat tax professional blogs
• Digital nomad tax forums
• Country-specific tax authority websites

Major tax law changes typically occur at year-end. Review your strategy each January to ensure compliance with new rules.

Building Relationships

Develop relationships with professionals in multiple jurisdictions:

• A US tax professional familiar with expat issues
• A local tax advisor in your primary residence country
• A lawyer for visa and immigration issues
• An accountant familiar with your business structure

These relationships pay dividends when you face complex situations or need quick answers.

Documenting Everything

Tax authorities can audit returns up to three years after filing. For international returns, the statute of limitations may be longer.

Maintain

Further Reading & Sources

• En.Wikipedia.Org – Digital Nomad
• Taxesforexpats.Com – Digital Nomad Taxes.Html
• Getgoldenvisa.Com – Digital Nomad Taxes
• Nomadcapitalist.Com – Low Tax Countries Living Europe
• Irs.Gov – Frequently Asked Questions About International Individual Tax Matters
• Globalcitizensolutions.Com – European Countries With Zero Foreign Income Tax
• Jobbatical.Com – Europe Digital Nomad Visa Us
• Deel.Com – Remote Worker Taxes
• Immigrantinvest.Com – Digital Nomad Taxes
• Keepertax.Com – Digital Nomad Taxes
• Brighttax.Com – Digital Nomad Taxes A Complete Guide
• Irs.Gov – Us Citizens And Resident Aliens Abroad
• Irs.Gov – Us Citizens And Residents Abroad Filing Requirements

Final Reminder: Stay compliant with foreign earned income exclusion FEIE to protect your move.