Remote work has reshaped the global workforce – and for many, it’s opened the door to the digital nomad lifestyle. In 2025, more U.S. citizens than ever are choosing to live abroad while earning income online, whether through freelancing, full-time remote roles, or entrepreneurship. Although your work may be location-independent, your tax obligations, however, aren’t. Understanding how U.S. tax laws apply to your foreign-earned income is essential to staying compliant and avoiding unexpected bills.
U.S. Tax Responsibilities Abroad
As a U.S. citizen or resident alien, you’re required to report all worldwide income to the IRS, even if you live and work outside the U.S. This includes freelance income, remote employee wages, and self-employment earnings. The good news? There are tax benefits available that can help reduce or eliminate double taxation.
Foreign Tax Credit
If you pay foreign taxes to another country and are subject to U.S. tax on the same income, you may be able to take either a credit or an itemized deduction for those taxes. In most cases, taking the credit, which reduces your U.S. tax liability, is the better option. Generally, the following must be met to qualify for the foreign tax credit:
- The tax must be imposed upon you
- You must have paid or accrued the tax
- The tax must be the legal and actual foreign tax liability
- The tax must be an income tax (or a tax in place of an income tax)
You’ll need to file Form 1116, Foreign Tax Credit to claim the credit.
The Foreign Earned Income Exclusion (FEIE)
One of the most important tax breaks for digital nomads is the Foreign Earned Income Exclusion (FEIE). For the 2025 tax year, the maximum exclusion amount is $130,000 – a $3,500 increase from last year’s cap.
Who Qualifies for the FEIE?
To claim the FEIE, you must:
- Have foreign-earned income
- Have a tax home in a foreign country, and
- Meet either the:
- Bona Fide Residence Test – You’re a resident of a foreign country for an entire tax year, or
- Physical Presence Test – You’re physically present in one or more foreign countries for at least 330 full days in a 12-month period.
If you meet the qualifications, you can exclude up to $130,000 of your foreign-earned income from U.S. taxation using IRS Form 2555.
Foreign Housing Exclusion or Deduction
In addition to the FEIE, you may also claim a housing exclusion or deduction from your gross income if you live abroad. The housing exclusion applies only to amounts considered paid for with employer-provided amounts, including any amounts paid to you or paid or incurred on your behalf by your employer that are taxable foreign earned income to you for the year. The housing deduction, however, only applies to the amounts paid with self-employment earnings.
Your housing expenses may not exceed a certain amount. The limit on housing expenses varies, however, depending on where you live. Additionally, foreign housing expenses may not exceed your total foreign earned income for the taxable year.
In 2025, the base housing amount is $20,800, and the maximum expense limit is $39,000.
Watch Out for Local Taxes
Although the U.S. may offer exclusions and credits, many digital nomad-friendly countries have their own tax rules. Even if you’re on a “tax-free” digital nomad visa, it’s wise to confirm whether you’re required to file or pay taxes locally. Always research each country’s residency and tax thresholds.
Reporting Foreign Bank Accounts
Digital nomads who hold foreign bank accounts with balances over $10,000 at any point during the year must file a Foreign Bank Account Report (FBAR) using FinCEN Form 114. Failure to do so can lead to steep penalties – even if the accounts don’t generate income.
Final Thoughts
Being a digital nomad comes with incredible freedom, but it also introduces added complexity when it comes to taxes. Staying informed and leveraging exclusions like the FEIE can help you legally minimize your U.S. tax burden. To ensure you remain compliant, we highly recommend working with a tax professional who specializes in expat or remote worker tax issues.