U.S. Tax Obligations for Expats: Step-by-Step Guide for Digital Nomads Living Abroad

A friend of mine packed up his Austin apartment, bought a one-way ticket to Bali, and announced he was done with U.S. taxes forever. He was wrong.

Being a U.S. citizen means the IRS follows you everywhere. Every beach, every co-working space, and every country. It does not matter if you haven’t set foot on American soil in years.

The good news is that you have real tools to shrink that tax bill dramatically. But you have to know the rules, and you have to use them correctly. Get it wrong, and you’re staring down penalties that can reach six figures. Whether you need a seasoned international tax accountant or you’re just starting to map out your obligations, here’s a walkthrough of the key strategies every U.S. expat and digital nomad needs to understand, whether you’re running an online business from Madrid or freelancing from a café in Chiang Mai.

Step 1: Understand the Foreign Earned Income Exclusion (FEIE)

This is the big one. The FEIE says that if you live outside the U.S. for 330 days or more in a 12-month period, you don’t have to pay federal income tax on your earned income up to a set threshold. At the time of writing, that exclusion amount sits around $126,000. No federal income tax on income up to that cap.

But here’s what trips people up. The FEIE does not exempt you from self-employment tax. If you’re a freelancer or solopreneur running your business abroad, you still owe that self-employment piece. It’s a common pitfall that catches first-time expat filers completely off guard.

The 330-day requirement is also strict. A quick trip home for the holidays, a wedding, or a conference – those days count against you. Track every single day you spend in the U.S., because your tax bill depends on it.

Pro tip: The 330-day test (sometimes called the physical presence test) is separate from the bona fide residence test, which looks at whether you’ve established genuine residency in another country. Either test can qualify you for the FEIE. Talk to a qualified CPA for content creators or expats to figure out which one fits your situation.

Step 2: Evaluate the Foreign Tax Credit (Form 1116)

There’s a real difference between the FEIE and the Form 1116 foreign tax credit, and most people blur the two together.

The foreign tax credit works like this: if you’re a tax resident in another country and you’re paying income tax to that government, you can use those payments as a credit against your U.S. tax bill. Dollar for dollar.

Here’s an example. Say you’re living in Bali, running your online business, paying Indonesia’s corporate income tax rate of 22% on your income (as of the time of writing). You earned $100,000. You’ve already paid $22,000 to the Indonesian government. Now say your U.S. tax obligation, including self-employment tax, comes out to $35,000. The math works in your favor:

• U.S. tax owed: $35,000
• Foreign tax already paid: $22,000
• Remaining U.S. tax bill: $13,000

That is the foreign tax credit doing its job. You’re not getting taxed twice on the same income.

But here’s the catch. In most cases, you cannot take both the FEIE and the foreign tax credit. You pick one or the other, which means the smart move depends entirely on your income level, where you live, and how much tax you’re paying to that foreign government.

For someone earning under the FEIE threshold in a low-tax or no-tax country, the FEIE is almost always the better play. But if you’re living somewhere with a tax rate that rivals or exceeds U.S. rates, the foreign tax credit might save you more. This is exactly the kind of decision where working with an accountant who specializes in expat and international tax strategy pays for itself many times over.

Step 3: Stack the Foreign Housing Credit on Top

Most expats have never even heard of this one, and that’s a shame, because it can save you real money.

The foreign housing exclusion lets you exclude additional income based on what you spend on housing abroad, above a baseline amount. As of the time of writing, that baseline was $19,200. Anything you spend on qualifying housing expenses above that number, up to a cap of around $36,000, can be excluded from your taxable income on top of the FEIE.

What counts as qualifying housing expenses? Rent, utilities, and furniture purchases related to your home. The basics of actually living somewhere.

Here’s a concrete example. Say you live in Madrid, working on your online business. You spend $30,000 on housing for the year and earned $140,000.

1. The FEIE excludes $126,000 from federal income tax.
2. That leaves $14,000 still exposed to income tax.
3. Your housing expenses of $30,000 minus the $19,200 baseline gives you a $10,800 housing exclusion.
4. Stack that on top: $126,000 + $10,800 = $136,800 total exclusion.
5. Now you’re only paying income tax on $3,200 instead of $14,000.

That’s a massive difference, and most generic tax prep services don’t even mention it. If you’re a content creator or influencer living abroad, finding an accountant for influencers who understands these expat-specific credits is especially valuable.

See to it whoever you are working with doing your taxes is aware of that or is taking advantage of that for you.

Don’t assume your accountant knows the expat game. Ask specifically about the foreign housing exclusion.

Step 4: File Your FBAR — What Is FBAR and Why It Matters

Now we shift from saving money to staying out of trouble.

So, what is FBAR? It’s the Report of Foreign Bank Accounts, and ignoring it is one of the most expensive mistakes an expat can make.

The rule is straightforward. If you have foreign bank accounts that together total over $10,000 at any point during the year, you must file an FBAR. Not each account individually. Combined. So if you have $6,000 in one account and $5,000 in another, you’ve crossed the threshold.

Cameron, the founder of BizBud, ran into this himself. When he played professional soccer in Iceland, he had an Icelandic bank account with more than $10,000 in it, so he filed the FBAR to report it.

What happens if you don’t file? The penalties are brutal (amounts as of the time of writing):

• Willful failure to file: up to $100,000 or more depending on the situation
• Non-willful failure: up to $10,000 per form you failed to submit

You might think, “How would they even know?” Maybe in the past, you could have gotten away with that gamble. Not anymore. With modern KYC (Know Your Customer) requirements, banks around the world are sharing data with each other and with the IRS. The transparency net is tightening every year.

That’s not a game you want to play because if they ever did find out, the penalties and fines and everything wouldn’t be worth the risk.

This is not the place to get creative. File the form. It costs you nothing but a few minutes.

Pro tip: FBAR filing is separate from your tax return. You file it electronically through FinCEN’s BSA E-Filing System. The deadline typically aligns with tax day, but there’s an automatic extension to October. Don’t wait. Get it done early and move on.

Step 5: Don’t Forget About FATCA

FBAR has a cousin, and its name is FATCA (Foreign Account Tax Compliance Act). While FBAR is filed with FinCEN, FATCA reporting goes directly to the IRS via Form 8938.

The thresholds are higher than FBAR, but the requirements overlap enough to confuse people. Here’s the practical difference: FBAR covers foreign accounts over $10,000 combined. FATCA kicks in at higher amounts and covers a broader range of foreign financial assets, not just bank accounts. Many expats need to file both.

The overlap is confusing, but the cost of getting it wrong is steep, and “I didn’t know” is a defense that only reduces the penalty. It doesn’t eliminate it.

Step 6: Choose the Right Business Structure Before You Leave

This is where your game plan starts to compound. Whether you’re weighing the differences in an S corp vs LLC setup, curious about S corp vs C corp taxation, or wondering how much does it cost to start an LLC before you head overseas, the structure you choose has major implications for your self-employment tax, your ability to use the FEIE, and your overall liability. Running your numbers through an S corp tax calculator before you make any decisions can reveal significant savings you might otherwise leave on the table.

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About The Author:

Cameron Botes is the founder of BizBud, a tax and accounting firm built for content creators, influencers, digital nomads, and entrepreneurs building businesses across borders. A former professional soccer player across four continents, Cameron brings the same discipline, preparation, and pressure-tested execution from his athletic career into helping business owners plan ahead, stay compliant, and keep more control over their financial future.

Since founding BizBud in 2020, Cameron has grown the firm from a one-person practice into a team of CPAs and tax advisors serving hundreds of clients across the U.S. and around the world. With an MBA in finance and accounting, international business experience, and a team with backgrounds at firms like PwC, Deloitte, and EY, Cameron helps creators and founders simplify taxes, clean up their books, and build smarter systems so they can focus on the work they actually love.

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