If you are working abroad (digital nomad, freelancer, contractor) you may qualify to save under the Foreign Earned Income Exclusion (FEIE). Under this provision you can exclude a portion of the income that is earned while outside of the United States from your federal income tax that you would owe when it comes time to complete your annual tax return.
The FEIE lets you exclude up to $126,500 (for the 2024 tax year) of foreign-earned income from your federal income taxes. This can double if you are married and both of you qualify.
To qualify for this exclusion:
-You're a U.S. citizen or resident alien,
Your tax home refers to where you work (another country abroad) and does not have to be where you live full time.
For most, the Physical Presence Test is the most common to qualify because it applies to individuals visiting other countries rather than establishing full residency in another country and qualifying for the Bona Fide Residence test (a full uninterrupted period of time abroad living as a resident).
It requires you to be outside of the U.S. for at least 330 full days in a 12-month period ([Foreign earned income exclusion -IRS][https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion).
For self-employed individuals you will need to still pay self-employment taxes for Social Security and Medicare. You will also need to pay state taxes unless you live in a tax-free state like Florida, Texas, or Washington. FEIE only applied to your Federal Income Tax Return.
Essentially to qualify you must prove that you have physically resided outside of the United States for at least 330 days in a year (Physical Presence Test). The Bona Fide Residence test is for individuals that are permanent residence and paying local taxes in the country that they are residing in outside of the United States.
Let’s say you:
That totals 365 days abroad, all under tourist status. Since you're not working for any local employers and aren't subject to local taxes, none of these countries will tax your income. Your tax home would still be considered the U.S., but you’d qualify for the FEIE under the Physical Presence Test (330-day living outside of the United States). You could then exclude up to $120,000 on your federal income tax return for any income earned from work performed abroad.
Let’s say you instead apply for Argentina’s Digital Nomad Visa, which means you can work remotely in Argentina for 6 months remotely with an optional 6-month extension. Under this visa, you're not considered a tax resident, and you’re not working for an Argentine company, so you're not subject to local income tax.
Work is being performed outside the U.S., so you should qualify for the FEIE. Brazil and Columbia are other examples of countries that offer digital nomad visas for individuals as well that can have you working abroad for a year as well.
If you're living and working abroad, be sure to check if you qualify for the FEIE for reducing your tax obligation. The FEIE doesn’t exempt your entire tax obligation (self-employment tax, state tax), but it can help reduce what you owe for federal income taxes.
Be sure to comply with all tax rules and accurately file your taxes with the IRS. This post is simply here to make you aware of possible savings you can make while working abroad.
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