Living and working abroad offers unparalleled freedom—but it also comes with tax obligations that can feel anything but liberating. In this FAQ, we will address some of the most pressing aspects of tax compliance for digital nomads, freelancers, and employees of U.S. employers working abroad.

I'm a U.S. citizen who lives abroad year-round. Do I have to file U.S. taxes?

If you're a U.S. citizen living abroad, you are generally required to file a U.S. tax return if your worldwide gross income exceeds the applicable filing threshold for your filing status and age. However, even if your income is below the filing threshold, you may still want to file to claim any applicable refundable credits or to establish a record of your income and tax situation. It's important to understand that the requirement to file a tax return is separate from the obligation to pay taxes, and while you must report your worldwide income, you may ultimately owe little to no U.S. taxes due to mechanisms designed to prevent double taxation.  

How does double taxation work, and how can I avoid paying taxes in two countries?

Double taxation occurs when two countries tax the same income. For U.S. taxpayers living or working abroad, this often arises when foreign governments impose income taxes on earnings that the U.S. also taxes globally. This can be a significant financial burden, but the U.S. provides two main mechanisms to alleviate it:

• The Foreign Tax Credit (FTC): The FTC allows you to reduce your U.S. tax liability dollar-for-dollar by the amount of foreign taxes paid. However, it's subject to certain restrictions and limitations, such as the FTC limit, which prevents you from claiming a credit that exceeds the amount of U.S. tax you would have paid on that foreign income.
• The Foreign Earned Income Exclusion (FEIE): For tax year 2024, the FEIE lets you exclude up to $126,500 of foreign-earned income from U.S. taxes. To qualify for the FEIE you must meet either the physical presence test, under which you must be physically present in a foreign country or countries for at least 330 full days during a 12-month period, or the bona fide residence test, under which you must demonstrate that you have established a permanent residence in a foreign country and intend to reside there indefinitely…

Can I claim both the FEIE and the FTC?

Generally, you cannot claim the FTC for taxes paid on income excluded under the FEIE. However, you can use a combination of the two for different types of income. For example, based on your particular circumstances, you may want to exclude foreign-earned wages from the FEIE but claim the FTC for foreign taxes paid on investment income.

How do tax treaties impact remote workers employed by U.S. companies abroad or foreign companies in the U.S., and how do they impact freelancers?

Tax treaties between the U.S. and other countries define which country has the primary right to tax various forms of income, such as wages, dividends, interest, and pensions. These treaties can be particularly important for remote workers and freelancers, as they can help to prevent double taxation.

Impact on Remote Workers:

• U.S. Citizens Abroad: If you're a U.S. citizen working remotely for a U.S. or foreign company in another country, a tax treaty may reduce or eliminate the amount of tax withheld from your income by that country. This can be especially beneficial if the foreign country's tax rates are higher than the U.S. rates.
• Foreign Employees in the U.S.: If you're a foreign citizen working remotely for a U.S. company from your home country, a tax treaty might exempt certain income from U.S. taxation. This could include income from short-term work assignments or pensions.

Impact on Freelancers:

• U.S. Freelancers Abroad: If you're a U.S. citizen freelancing from another country, a tax treaty can help you avoid double taxation on your income. For example, the treaty might specify that your freelance income is only taxable in your country of residence, not in the U.S.
• Foreign Freelancers in the U.S.: If you're a foreign citizen freelancing for U.S. clients from your home country, a tax treaty might exempt your U.S.-sourced income from U.S. taxation or provide a reduced tax rate.

What are totalization agreements, and how do they affect social security taxes?

Totalization agreements are bilateral agreements between the U.S. and other countries designed to prevent workers and employers from paying social security taxes in two countries simultaneously. If you work abroad, these agreements help determine which country’s social security system applies to you, often based on where you physically perform the work. For instance, if you’re employed by a U.S. company but working in a totalization country, you may remain covered under U.S. Social Security and Medicare instead of the foreign system.

What documentation do I need to prove I’ve paid taxes abroad?

To claim the FTC or satisfy U.S. reporting requirements, you’ll need comprehensive records, including:

• Tax returns filed in the foreign country.
• Receipts or statements confirming payment of foreign taxes.
• Certificates of Coverage for Social Security exemptions under totalization agreements.

Can I deduct my housing costs if I'm living abroad?

You may be able to exclude a portion of your qualifying foreign housing expenses from your taxable income using the Foreign Housing Exclusion (FHE). The excludable amount is calculated by subtracting a "base housing amount" (set by the IRS annually) from your actual eligible housing expenses. Eligible expenses generally include rent, utilities (excluding non-essential or luxury services), and rental of furniture and accessories. Note: as is the case with other exclusions, the FHE operates differently from a deduction since it directly reduces your gross income, whereas deductions reduce your adjusted gross income (AGI).

What about retirement contributions?

As a freelancer, your ability to contribute to a Traditional or Roth IRA depends on having taxable compensation. If you exclude all your foreign income using the Foreign Earned Income Exclusion (FEIE), you may not be eligible to contribute. By way of contrast, employees of U.S. companies abroad can generally still contribute to 401(k) plans since their employer-sponsored plan is likely based in the U.S., contributions are often made through payroll deductions from their gross salary before the FEIE is applied, and the contributions are not limited by the amount of foreign earned income that is ultimately excluded from taxation on the employee's return.

What forms do I need to file if I’m living abroad or earning foreign-sourced income?

The forms you need to file will depend on the type of income you receive and any exclusions or credits you intend to claim. Here are the most commonly required forms for taxpayers living abroad:

• Form 1040: This is the standard U.S. individual income tax return and serves as the foundation for reporting all income, deductions, and credits.
• Form 2555: Used to claim the FEIE, as well as the FHE, if applicable.
• Form 1116: This is the form used to claim the FTC.
• Schedule C: This form should be used by self-employed individuals to report business income and expenses.
• Schedule SE: Used to calculate self-employment tax on net earnings, including contributions to Social Security and Medicare.

How do FBAR reporting requirements apply to digital nomads?

Under the Foreign Bank and Financial Accounts (FBAR) regulations, U.S. persons must file an FBAR if they have a financial interest in or signature authority over foreign financial accounts with an aggregate value exceeding $10,000 at any time during the calendar year, regardless of whether they are living in the U.S. or residing abroad. 

How do I handle income earned in foreign currencies?

All income must be reported in U.S. dollars, requiring conversions from foreign currencies using the IRS’s year-end exchange rate or the rate on the transaction date. If you receive recurring income in a foreign currency, using an average annual exchange rate may simplify reporting. 

And how do state tax obligations work if I’m no longer living in the U.S.?

Even if you’ve physically relocated abroad, some states may still consider you a resident for tax purposes based on domicile or income-sourcing rules. High-tax states like California and New York are particularly aggressive in pursuing tax obligations from former residents. You may need to change your voter registration, surrender your state driver’s license, and demonstrate that you no longer maintain significant connections to the state to sever ties. 

What happens if I return to the U.S. mid-year while working remotely for a foreign company?

If you return to the U.S. mid-year while working remotely for a foreign company, your tax situation becomes more complicated: 

• Your Tax Home: Upon returning, your tax home generally shifts back to the U.S., impacting eligibility for certain tax benefits.
• The Foreign Earned Income Exclusion: You can only claim the FEIE for the portion of the year you meet either the Physical Presence Test (330 days in a foreign country within a 12-month period) or the Bona Fide Residence Test (residing in a foreign country for an entire tax year). Once you are back in the US, any further income earned is considered US source income and cannot be excluded.
• Income Sourcing: Income is sourced where the work is performed. Working remotely from the U.S. for a foreign company means that the income earned while in the US is U.S.-source income and is ineligible for the FEIE.
• The Foreign Tax Credit: You may claim the FTC for foreign taxes paid on income earned while living abroad to avoid double taxation. However, no FTC is available for income earned while working from the US. A foreign tax deduction is a less beneficial alternative.
• State Taxes: Your state tax obligations will depend on the residency rules of the particular state in question. So be aware that you may owe state income taxes for the portion of the year during which you are considered a state resident.