Digital Nomad Tax Guide

Foreign Earned Income Exclusion (FEIE) -- Section 911

The FEIE allows you to exclude up to $132,900 (2026) of foreign earned income from US federal income tax. To qualify, you must have a 'tax home' in a foreign country and meet either the Bona Fide Residence Test or the Physical Presence Test.

The Physical Presence Test requires you to be physically present in a foreign country (or countries) for at least 330 full days during a 12-month period. The 12-month period doesn't have to be a calendar year -- you can choose any 12-month window that works. A 'full day' means midnight to midnight; partial days in transit don't count. Days spent in international waters or airspace don't count. Days in the US count against you.

The Bona Fide Residence Test is harder to meet but more flexible for people who travel frequently. You must be a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year. This means establishing genuine residency -- leasing an apartment, having a local visa, integrating into the community. Brief trips back to the US don't disqualify you, but you must maintain your foreign residence as your primary home.

Claim the FEIE on Form 2555, filed with your 1040. If you miss the filing deadline, you can retroactively claim the FEIE by filing within one year of the original due date. After one year, the election must be made on a timely filed return.

Critical nuance: using the FEIE 'stacks' above the zero bracket. Your excluded income is still used to determine the tax rate on your non-excluded income. If you earn $160,000 and exclude $132,900, the remaining $27,100 is taxed starting at the bracket where $132,900 leaves off -- not starting at the bottom of the brackets.

US citizens working abroad can exclude up to $132,900 of earned income from federal income tax if they live outside the US for 330+ days in a 12-month period or are bona fide residents of a foreign country. (IRC Section 911(a) (exclusion); IRC Section 911(b)(2)(D) (2026 limit, inflation-adjusted); IRC Section 911(d)(1) (qualifying individual); Form 2555)

Self-Employment Tax Still Applies -- The FEIE Trap

This is the single most important thing most digital nomads get wrong: the FEIE does not exempt self-employment tax. Even if you exclude your entire income from federal income tax, you still owe self-employment tax (Social Security and Medicare) at 15.3% on your net SE earnings up to the Social Security wage base ($176,100 in 2026), plus 2.9% Medicare on earnings above that.

On $105,000 of net SE income, the SE tax calculation is: 92.35% x $105,000 = $96,968 SE base x 15.3% = $14,836. That $14,836 is owed regardless of the FEIE.

The only way to avoid US self-employment tax on foreign earnings is if a Totalization Agreement exists between the US and the country where you reside, and you are covered under that country's social security system. The US has Totalization Agreements with about 30 countries (including most EU nations, Australia, Canada, Japan, and South Korea). If you're paying into Portugal's social security system and have a Certificate of Coverage, you're exempt from US SE tax -- but you need the certificate to prove it.

Without a Totalization Agreement, or if you're hopping between countries and not covered by any foreign social security system, US SE tax applies in full. This is the 15.3% that turns a 'tax-free nomad lifestyle' into a significant tax bill.

The Foreign Earned Income Exclusion only exempts income tax, not self-employment tax. You owe 15.3% SE tax on worldwide self-employment earnings unless a Totalization Agreement with your country of residence applies. (IRC Section 1401 (SE tax); IRC Section 911(a) (FEIE applies only to income tax); Section 233 of the Social Security Act (Totalization Agreements))

State Tax Domicile -- Sticky States

Leaving the US doesn't automatically end your state tax obligations. Some states are notoriously 'sticky' -- they will continue to claim you as a tax resident unless you can demonstrate a definitive break in domicile.

California is the stickiest. The California Franchise Tax Board (FTB) applies a 'closest connections' test: if you maintain a California driver's license, voter registration, bank accounts, professional licenses, or return to California regularly, they'll argue you never left. California taxes worldwide income at rates up to 13.3%, and they audit nomads aggressively. To break California domicile, you need to sever all ties: surrender your license, cancel voter registration, close bank accounts, and stop using a California address.

New York taxes anyone who maintains a 'permanent place of abode' in the state and spends more than 183 days there. If you keep an apartment or your name on a family member's lease, New York will tax you as a statutory resident even if you claim domicile elsewhere.

Virginia, New Mexico, and South Carolina also have aggressive domicile rules. On the other end, Texas, Florida, Nevada, Wyoming, Washington, and Tennessee have no state income tax -- establishing domicile in one of these states before becoming a nomad eliminates state tax entirely.

The cleanest move: establish domicile in a no-income-tax state before you leave. Get a driver's license, register to vote, and open a bank account there. Use a registered agent address if you need a physical address. This is not fraud -- it's a legitimate domicile choice.

US states have independent residency rules. Some states (California, New York, Virginia) will tax your worldwide income even after you move abroad unless you definitively sever all ties. No-income-tax states provide a clean exit. (Cal. Rev. & Tax Code Section 17014 (CA resident definition); NY Tax Law Section 605(b) (NY statutory resident); Treas. Reg. Section 1.911-2(b) (federal tax home vs state domicile))