The rise of remote work has enabled millions of Americans to embrace the digital nomad lifestyle, working from coffee shops in Lisbon, co-working spaces in Bali, or beachside apartments in Mexico. While this lifestyle offers unprecedented freedom, it comes with significant tax obligations that many overlook until it becomes a costly problem.
United States citizens and green card holders must file federal tax returns and report all worldwide income regardless of where they live or earn money. The United States operates on a citizenship-based tax system, meaning physical location does not exempt individuals from these obligations. Understanding these requirements is essential for avoiding penalties, interest, and potential legal consequences.
Understanding Filing Requirements and Income Thresholds
Digital nomads must file a federal tax return once income exceeds the thresholds for their filing status. For the 2025 tax year, these thresholds are:
- $15,750 for single filers under age 65
- $31,500 for married filing jointly under age 65
However, for self-employment income: which applies to most freelancers, consultants, and online business owners: the threshold drops to just $400 per year. This low threshold means virtually every digital nomad earning money abroad must file a return.
All income types count toward these thresholds, including wages, freelance payments, consulting fees, and business profits earned anywhere in the world.
Essential Tax Forms for Digital Nomads
Individuals earning foreign income should expect to file several forms beyond the standard tax return. The specific forms required depend on income sources, foreign tax payments, and financial account holdings.
Primary Income Reporting Forms
- Form 1040 – The main U.S. individual income tax return where all income from domestic and foreign sources must be reported
- Schedule C – Required for self-employed individuals (freelancers, consultants, business owners) to report business income and expenses, with all amounts converted to USD using IRS exchange rates
- Schedule SE – Used to calculate self-employment tax (Social Security and Medicare) owed on net earnings of $400 or more
Tax Benefit Forms
- Form 2555 – Required to claim the Foreign Earned Income Exclusion
- Form 1116 – Used to claim the Foreign Tax Credit for income taxes paid to foreign governments
The Foreign Earned Income Exclusion: A Powerful Tax Reduction Tool
The Foreign Earned Income Exclusion (FEIE) represents one of the most significant tax benefits available to Americans living and working abroad. For 2026, qualifying taxpayers can exclude up to $132,900 of foreign-earned income from U.S. taxable income.
Qualifying for the FEIE
To claim this exclusion, taxpayers must meet one of two tests:
Physical Presence Test: The individual must be physically present in a foreign country or countries for at least 330 full days during any 12-month period. Days spent in the United States, even partially, do not count toward this requirement.
Bona Fide Residence Test: The individual must establish genuine residence in a foreign country for an uninterrupted period that includes a complete tax year. This test considers factors such as the nature of the stay, purpose of living abroad, and ties to the foreign country.
Income Eligible for the FEIE
The exclusion applies to earned income only:
- Salary or wages from any employer (domestic or foreign) for work performed while physically abroad
- Freelance income and consulting fees earned outside the United States
- Self-employment income from online businesses while living abroad
- Bonuses and commissions for services performed in foreign countries
Important Limitation: The FEIE does not reduce self-employment taxes, which remain due at 15.3% on net earnings. Additionally, passive income such as rental income, dividends, interest, and capital gains remains fully taxable and cannot be excluded.
Self-Employment Tax Obligations
Digital nomads who are self-employed face additional tax obligations beyond income tax. The self-employment tax rate of 15.3% covers Social Security (12.4%) and Medicare (2.9%) contributions.
This tax applies even when:
- Income qualifies for the Foreign Earned Income Exclusion
- The individual has not lived in the United States for years
- Income was earned entirely in foreign countries
Totalization Agreements: The United States has totalization agreements with certain countries that may exempt individuals from U.S. self-employment tax if they are already contributing to that country's social security system. Countries with such agreements include the United Kingdom, Germany, France, and several others. Taxpayers should verify whether their host country has an agreement in place.
FBAR: The Often-Overlooked Filing Requirement
Beyond income tax returns, digital nomads with foreign financial accounts face an additional reporting obligation that carries severe penalties for non-compliance.
If the aggregate value of all foreign financial accounts exceeds $10,000 at any point during the calendar year, the account holder must file FinCEN Form 114, commonly known as the FBAR (Foreign Bank Account Report).
Accounts That Must Be Reported
The FBAR requirement extends beyond traditional bank accounts to include:
- Foreign checking and savings accounts
- Investment accounts held at foreign institutions
- Payment processor accounts such as PayPal, Wise, Revolut, or similar services when the account is held at a foreign financial institution
- Retirement accounts in foreign countries
- Any account where the individual has signature authority
Filing Deadlines and Penalties
The FBAR is due April 15 with an automatic extension to October 15. Unlike tax returns, this is a separate filing submitted directly to the Financial Crimes Enforcement Network (FinCEN), not the IRS.
Penalties for non-compliance are severe:
- Non-willful violations: Up to $10,000 per violation
- Willful violations: Up to $100,000 or 50% of the account balance, whichever is greater
Documentation: The Foundation of Compliance
Maintaining comprehensive records is essential for supporting tax positions and claiming exclusions. Digital nomads should track and preserve the following documentation:
Location Records
- Entry and exit dates for each country visited
- City and country of residence on each date
- Passport stamps and visa entries
- Flight tickets, boarding passes, train and bus tickets with dates
- Accommodation confirmations from hotels, Airbnb, and rental agreements
Financial Records
- Bank and credit card statements showing foreign transactions
- Invoices issued and payments received
- Receipts for business expenses including co-working space memberships
- Records of foreign taxes paid
Supporting Evidence
- Photos with dates and timestamps showing location
- Lease agreements or utility bills in foreign countries
- Evidence of ties to foreign country of residence
Avoiding Double Taxation
Many digital nomads find themselves potentially subject to taxation in both the United States and their host country. Two primary mechanisms exist to prevent double taxation:
Foreign Tax Credit (Form 1116): Taxpayers who pay income taxes to a foreign government can claim a credit against their U.S. tax liability for those foreign taxes paid. This dollar-for-dollar credit directly reduces the tax owed to the IRS.
Hybrid Approach: Many taxpayers use a combination strategy, excluding some income using the FEIE and claiming the Foreign Tax Credit on the remainder. However, the FTC cannot be claimed on income already excluded under the FEIE.
With proper planning and business structuring, individuals can minimize or sometimes eliminate their U.S. tax liability while remaining fully compliant.
Catching Up on Missed Filings
Digital nomads who have missed filing deadlines in previous years have options for coming into compliance. The Streamlined Filing Compliance Procedures allow eligible taxpayers to:
- File the last three years of delinquent tax returns
- Submit six years of missed FBARs
- Certify that the failure to file was not willful
If the IRS accepts the submission, penalties may be reduced to zero for eligible taxpayers. This program provides a pathway to compliance without the severe penalties that would otherwise apply.
Professional Guidance for Complex Situations
The intersection of foreign income, self-employment, and international financial accounts creates complexity that extends beyond standard tax preparation. Digital nomads should consider working with tax professionals who specialize in expatriate taxation.
TIG Tax Services provides comprehensive tax preparation services for self-employed individuals and those with complex tax situations. Proper planning before the tax year ends can significantly impact the taxes owed and ensure full compliance with all reporting requirements.