American Digital Nomad Taxes: Ultimate 2024 Guide

For Americans living abroad, the rules for US taxes can be confusing and overwhelming to understand. If you fail to file correctly, it can even lead to significant penalties.

And this is what you have to know all the ins and outs of the American digital nomad taxes.

If you are a citizen or permanent resident of the US, then regardless of where you are living at the time, you are obligated to file a tax return with the federal government each year.

In addition to the regular income tax return, you may even be required to file an informational return on your assets held in foreign bank accounts.

While the US is one of the few governments that taxes the international income of its citizens and permanent residents, it does have special provisions to help protect you from double taxation and can also entitle you to some tax benefits that locally residing Americans would not receive.

So, whether you are an American living in Sydney or Seattle, it is important to know your tax system.

Digital Nomad Tax Deductions All You Must Know

Living Abroad and Still Paying US Taxes

Tax Systems

The United States tends to take a unique approach when it comes to taxing individual income as it is the only major country in the world that taxes its citizens based on their citizenship.

When it comes to taxing income there are generally two used systems: the Residency-based system or the territorial-based taxation system.

More than 130 countries use a residential tax system. Roughly another 40 countries use the territorial taxation model. This tax system is especially interesting for location-independent professionals.

Residency-Based Tax System

The residency-based tax system is the most widely used tax system in the world today.

Under residence-based taxation, countries like Germany and France tax their local residents on all income earned from both local and foreign sources.

For non-residents in these countries, only income earned locally is taxed, similar to the territorial-based system.

The 130 countries essentially include all major industrialized nations. Most of the EU, Canada, Australia, New Zealand, Japan, and Korea are a few included in that list.

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Territorial-Based Tax System

In a territorial-based taxation system, countries only tax individuals on income from sources inside the country’s borders.

Countries such as Singapore and Lebanon are amongst the 40 countries that use the territorial-based tax system. In countries with a territorial-based taxation system, only income actually generated inside the country is liable to tax.

It has been said that these countries often do not have any or just very weak CFC rules. For tax purposes, it may be considered to make excellent locations for a second residency.

Citizenship-Based Tax System

While the majority of countries will implement either the residency-based tax system or the territorial-based tax system, the US and Eritrea are the only countries that have citizenship-based taxation systems.

This means, if you are an American living abroad, you must file a US federal tax return and pay US taxes because of the simple fact that you are a citizen.

In other words, you are subject to the same rules regarding income taxation as people living stateside.

Therefore, even if you have not lived in the US at any point during the year and have earned all of your income in a foreign territory, the IRS still expects you to file a tax return.

Moreover, you may also be subject to file a state tax return depending on the state rules of where you lived prior to moving abroad.

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Exclusions and Deductions

Double Taxation On Foreign Income

The United States has Tax Treaties with over 60 countries, including most (but not all) popular expat destinations.

One issue that arises in this tax system is that an individual could theoretically be double-taxed on their income earned – both by their country of current residence and the US.

This scenario is especially relevant for an American living abroad full-time who may qualify as a resident in other local tax systems.

Tax Treaties can provide exemptions or reduced tax rates for certain types of income, including retirement/pension plans, as well as reduced withholding rates in passive income such as dividends and interest.

For example, if you were a US Citizen living in Sydney Australia then you would look at the double tax agreement between the two countries.

The US tax treaty with Australia defines the terms that set the relationship between the US and Australia and provides “tie-breaker” rules for determining in which country a taxpayer is considered a resident.

It is primarily of use to those who have doubts or want clarification as to their residency status. It can help alleviate any confusion when you are earning foreign income and submitting taxes to both countries.

Foreign Earned Income Exclusion

To help avoid this negative consequence, the US tax code contains a provision called the Foreign Earned Income Exclusion (FEIE).

Under the FEIE, the US doesn’t ask you to prove where your new tax residence is as long as you spend enough time outside of the United States to prove that it is no longer your home.

That doesn’t necessarily mean that you’re going to pay zero tax, there are other things involved, but you can still live nomadically and qualify for the exclusion.

As of 2024, the Foreign Earned Income Exclusion allows you to exclude up to $126,500 of income.

Foreign Tax Credit

Another provision to help mitigate double taxation is the Foreign Tax Credit.

In this case, Americans earning income internationally may reduce their US tax obligation beyond the limits of the FEIE if they have paid or accrued tax to a foreign government.

Generally, only income, war profits, and excess profits taxes qualify for the credit.

What makes this provision complex, however, is that it applies to only certain types of income, and there are unique considerations related to each foreign country.

Foreign Housing Exclusion

Created by the IRS to offset the expenses that go hand in hand with living overseas, the Foreign Housing Exclusion decreases an expat’s tax liability by allowing certain housing expenses to be deducted from taxable income.

This exclusion can be used if your housing costs were over 16% of the FEIE amount for that year. The first step to qualifying for the Foreign Housing Exclusion is by qualifying for the FEIE.

Rent and utilities are qualified expenses, as are parking, household repairs, real and personal property insurance, and furniture and accessory rentals can all qualify under this exclusion.

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Tax Fairness for Americans Abroad

Due to the headaches that taxes provoke for Americans living abroad, every year thousands of US expats renounce their citizenship.

Historically, up until 2010, US citizens were not required to pay any fee when renouncing their US citizenship. When the fee was initially introduced, it stood at $450. However, in 2015, Americans saw a staggering 422% increase, bringing the cost to its current level of $2,350.

The plans to reverse this substantial increase were initially announced in 2023 when an organization for Accidental Americans filed a legal complaint against the fees. Their argument centered around the belief that the right to renounce US nationality is a fundamental aspect of the US Constitution and that the high fee effectively compels US citizens to remain as such against their wishes.

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Lower US Citizenship Renunciation fees?

The USA is now considering a significant reduction in the renunciation fee for Americans living overseas. In a notice posted on the government’s Federal Register on 2 October 2023, the US Department of State proposed to amend the fee for renunciation of citizenship to $450.

However, since then there have been no updates. Many US citizens are waiting on updates on the renunciation fees and quite a few of them have cited that they’re holding back from renouncing in hopes that it will cost them less to go through the whole procedure.

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Even though you will have to file US taxes as a digital nomad living abroad, this doesn’t mean that your filing obligations have to be a burden.

Tax firms that specialize in expat taxation, like Greenback Expat Tax Services, take the hassle out of filing your American expat taxes so you can get back to your adventure abroad.

Accountants who specialize in expat taxation know the best ways to stay compliant, avoid headaches, and reduce your US tax bill.


Do you want professional help with your own International Tax Strategy and Corporate Structure?

Check out our current services. We are here to guide you and help you navigate through the complex world of International Taxes and Business Structures.


We hope you have enjoyed this article. If you have any further questions please leave us a message below and we’ll get back to you as soon as we can.

    NOTICE: The content of this article is not to be considered as a legal opinion or tax advice. Wanderers Wealth does not hold itself out as a legal or tax advisor. If you want to receive a legal opinion or tax advice on the matter in this article please contact us directly and we will refer you to a legal practitioner.

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