Digital Nomads

Why Do Digital Nomads Have to Pay U.S. Taxes?

Many digital nomads assume that living abroad means they’re free from U.S. tax obligations. However, the U.S. follows a citizenship-based taxation system, meaning that if you’re a U.S. citizen or green card holder, you must file a federal tax return annually; regardless of where you live or earn income. 

Even if you move frequently and don’t have a fixed address, the IRS still expects you to report worldwide income and pay digital nomad taxes. Fortunately, there are tax benefits that reduce or eliminate liability for digital nomad taxes.

Do Digital Nomads Pay Tax?

Yes, most digital nomads taxes need to be filed; however, whether you actually owe taxes depends on:

✅ Your total income level
✅ Where your clients or employers are based
✅ If you qualify for tax exemptions (like the Foreign Earned Income Exclusion or Foreign Tax Credit)
✅ Your state residency status

Since many digital nomads work remotely for U.S.-based clients or companies, they remain subject to U.S. income tax laws which dictate digital nomad taxes. However, if you’re a contractor or self-employed, you may also owe self-employment taxes unless exempt under a Totalization Agreement.

How Do Digital Nomads Pay Tax?

Our streamlined services help immensely with the complexities of digital nomad taxes; however here is an overview of how  digital nomad u.s. Taxes can be filed:

1. Federal Income Tax

All U.S. citizens must file a Form 1040 tax return annually. If you make over $13,850 (single filers) or $27,700 (married filing jointly) in 2025, you must file.

2. Self-Employment Tax (if applicable)

If you’re self-employed, you must pay a 15.3% self-employment tax (Social Security & Medicare) unless exempt under a Totalization Agreement.

3. Foreign Taxes

If you work in a country that taxes foreign income, you may owe local taxes. The Foreign Tax Credit (FTC) can help offset these taxes.

4. State Taxes (if applicable)

Some states require nomads to pay state taxes, especially if they have ties to California, New York, or Virginia. States with no income tax (e.g., Texas, Florida, Nevada) are better for nomads.

What Tax Breaks Are Available for Digital Nomads?

Several tax exclusions help reduce or eliminate the burden from digital nomad taxes:

1. Foreign Earned Income Exclusion (FEIE)

• Excludes up to $130,000 of earned income in 2025.
• Must meet the Physical Presence Test (spending 330+ days abroad) or the Bona Fide Residence Test.
• Does not apply to passive income (stocks, dividends, rentals).

2. Foreign Tax Credit (FTC)

• Offsets U.S. tax liability with foreign income taxes paid.
• Useful if earning above the FEIE limit or not qualifying for FEIE.

3. Foreign Housing Exclusion

• Deducts qualifying housing expenses (rent, utilities, insurance) from taxable income.
• Varies by city; high-cost areas allow larger deductions.

4. Business Deductions for Self-Employed Nomads

• Laptop, software, coworking spaces, internet, marketing, and travel can be deducted.
• Keeping receipts and records is crucial for IRS compliance.

What Tax Forms Do Digital Nomads Need?

Digital nomads must file standard U.S. tax forms plus additional forms for foreign income, accounts, and businesses:

✅ Form 1040 – Standard U.S. income tax return.
✅ Form 2555 – Claims Foreign Earned Income Exclusion (FEIE).
✅ Form 1116 – Claims Foreign Tax Credit (FTC).
✅ Form 8938 – FATCA reporting for foreign assets over $200K abroad ($50K in the U.S.).
✅ FBAR (FinCEN 114) – Required if foreign bank accounts exceed $10,000.
✅ Schedule C – Reports self-employed income and deductions.
✅ Schedule SE – Calculates self-employment taxes for freelancers and contractors.

Digital Nomad State Taxes: Do You Owe?

Some states require digital nomads to file state taxes even if they live abroad. If you haven’t cut residency ties (driver’s license, voter registration, mailing address), you may still owe state taxes.

Best States for Digital Nomads (No State Income Tax)

✅ Texas
✅ Florida
✅ Nevada
✅ Wyoming
✅ Washington

States That Tax Expats (Difficult to Break Residency Ties)

🚩 California
🚩 New York
🚩 Virginia
🚩 North Carolina

To avoid state taxes, officially cut residency ties before moving abroad.

How to File Your Digital Nomad Taxes

Step 1: Determine Your Filing Requirements

Check if you must file U.S. and foreign tax returns to complete your digital nomad taxes requirement.

Step 2: Gather Required Documents

Collect income records, 1099s, business expenses, foreign tax returns, and bank statements.

Step 3: Claim Exclusions & Credits

Use FEIE, FTC, and business deductions to lower your tax bill.

Step 4: File Electronically

File your digital nomad taxes through IRS Free File, tax software, or an expat tax service.

Step 5: Meet Deadlines

📅 April 15, 2025 – U.S. tax deadline.
📅 June 15, 2025 – Expats get a 2-month automatic extension.
📅 October 15, 2025 – Additional extension deadline (if requested).

Step 6: Report Foreign Accounts

If you meet the FATCA & FBAR thresholds, file Forms 8938 & FinCEN 114.