Diet and Travel

Last April, a client named Sarah called me from a co-working space in Medellín. She had been freelancing from Colombia for 18 months, earned $74,000, and just opened a letter from the IRS saying she owed $9,200 in penalties and interest.

She had never filed Form 2555 for the Foreign Earned Income Exclusion. She didn’t know it existed.

Sarah’s mistake is the most common one I see among US digital nomads. The US taxes its citizens on worldwide income, regardless of where they live. But the tax code also provides powerful tools — if you know how to use them. Here are five concrete tips to keep your tax bill legal and low in 2026.

1. The FEIE vs. Foreign Tax Credit: Which One Saves You More Money?

Two main tools reduce double taxation for Americans abroad: the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC). They work differently, and picking the wrong one costs you real money.

The FEIE lets you exclude up to $126,500 (2026 figure; adjusted annually) of foreign-earned income from US taxation. To qualify, you must pass either the Physical Presence Test (330 full days outside the US in any 12-month period) or the Bona Fide Residence Test (established tax home in another country with intent to stay).

The FTC gives you a dollar-for-dollar credit for income taxes you paid to a foreign government. If you paid $10,000 in Thai income tax, you subtract $10,000 from your US tax bill.

Here’s the key distinction most nomads miss: You cannot use the FEIE on the same income you claim FTC. But you can use them on different income buckets. For example, if you earn $100,000 in salary and $20,000 in investment income, you can exclude the salary via FEIE and credit foreign tax on the investments.

My recommendation for most digital nomads: Use the FEIE if you live in a low-tax country (Thailand, Vietnam, Mexico, Colombia) because you pay little foreign tax to credit. Use the FTC if you live in a high-tax country (Germany, Australia, Japan) because your foreign tax exceeds the FEIE limit.

A common mistake: claiming the FEIE when you paid more foreign tax than the exclusion amount. In that case, you lose the excess credit. Run the numbers both ways.

Scenario	Income	Foreign Tax Paid	Best Strategy	US Tax Due
Low-tax country (Thailand)	$80,000	$0	FEIE	$0
High-tax country (Germany)	$80,000	$28,000	FTC	$0
Mixed income	$100,000 salary + $10,000 investments	$3,500	FEIE on salary, FTC on investments	$0

2. The 330-Day Rule: How to Qualify Without Losing Your Mind

The Physical Presence Test requires 330 full days outside the US in any 12-month period. A “full day” means midnight to midnight outside the US. A single day inside the US — even a layover — breaks the streak.

This trips up many nomads. You fly home for Christmas for 10 days. You think you’re fine because you spent 355 days abroad. But those 10 days reset your 330-day count if they fall within your 12-month window.

How to manage it practically:

• Pick your 12-month period strategically. You can choose any consecutive 12 months — it doesn’t have to be the calendar year. If you know you’ll visit the US in December, start your 12-month period in February so December falls outside it.
• Track every border crossing. Use a simple spreadsheet or an app like Trail Wallet. Record date, time, and location of every entry and exit.
• Avoid US territories. Puerto Rico, US Virgin Islands, Guam, and Northern Mariana Islands count as US soil for this test.
• Short trips matter. A 2-day trip to Miami for a client meeting costs you 2 days. Plan around it.

One client visited the US for 12 days in March and assumed he qualified because he had 353 days abroad. He didn’t. He owed $6,400 in tax plus penalties. Don’t guess — count.

3. FBAR and FATCA: The Two Forms Nomads Forget Most Often

The FEIE and FTC are about income tax. FBAR and FATCA are about reporting foreign accounts. They are separate obligations, and failure to file them carries severe penalties.

FBAR (FinCEN Form 114): Required if you have foreign financial accounts totaling more than $10,000 at any point during the calendar year. This includes bank accounts, investment accounts, and even some digital wallets like Wise or Revolut if they hold a balance. The form is filed electronically with FinCEN, not with your tax return. Deadline: April 15, with automatic extension to October 15.

FATCA (Form 8938): Required if your foreign assets exceed certain thresholds ($200,000 for single filers living abroad, $400,000 for married filing jointly). This form goes with your tax return. It asks for account numbers, maximum balances, and financial institution names.

Penalties for missing FBAR can reach $10,000 per non-willful violation and $100,000 or 50% of the account balance for willful violations. That’s life-ruining money.

What I tell every client: If you have a foreign bank account with more than $10,000, file FBAR every year even if you owe zero income tax. It takes 20 minutes. The IRS has data-sharing agreements with over 100 countries. They will find the account eventually.

If you missed past filings, the IRS offers a Streamlined Filing Procedure for non-willful noncompliance. You file three years of amended returns and six years of FBARs, pay any tax due (usually zero if you qualify for FEIE), and the IRS waives penalties. This is not legal advice — consult a tax professional.

4. Self-Employment Tax: The $15,300 Trap Most Freelancers Miss

Here’s a scenario that catches freelancers: You earn $100,000 as a US-based freelancer. You pay 15.3% self-employment tax (Social Security and Medicare) on the first $168,600 of net earnings. That’s $15,300.

Now you move to Portugal. You earn the same $100,000. You claim the FEIE and exclude all of it from income tax. Great.

But self-employment tax is not income tax. The FEIE does not apply to self-employment tax. You still owe $15,300 to the IRS.

This is the most expensive surprise I see. Freelancers assume “excluded from income tax” means “no tax.” It doesn’t.

How to handle it:

• If you live in a country with a Totalization Agreement (social security agreement) with the US, you may be exempt from US self-employment tax. The US has agreements with 30+ countries including Germany, Japan, South Korea, Australia, and most of Western Europe. Check the SSA’s list.
• If no agreement exists, you pay US self-employment tax on your net earnings above $400, regardless of where you live.
• Consider structuring as an S-corporation or using a foreign entity — but this requires professional advice and costs money.
• Budget for it. Set aside 15.3% of your freelance income every month. Treat it as a fixed cost.

For most nomads in non-agreement countries (Thailand, Vietnam, Mexico, Colombia), the self-employment tax is unavoidable on earned income. Plan accordingly.

5. State Taxes: The Hidden Liability You Can’t Escape by Moving Abroad

Moving abroad does not automatically sever your state tax residency. Some states — California, New York, Virginia, South Carolina — aggressively pursue former residents who maintain ties.

California considers you a resident if you have a driver’s license, voter registration, bank account, or property in the state. Even if you live in Bali full-time. The Franchise Tax Board has an entire unit dedicated to tracking down expats.

How to actually break state residency:

• Sell or rent out your primary residence. Do not keep a home “for when you visit.”
• Surrender your driver’s license. Get one from your new country or use a passport as ID.
• Register to vote in your new country (if eligible) or use federal write-in absentee ballot — do not maintain state voter registration.
• Close bank accounts and credit cards tied to that state address. Move everything to a no-income-tax state like Texas, Florida, or Nevada before you leave.
• Spend fewer than 30 days per year in your former state. Some states use a 183-day threshold, but California uses any “significant connection.”

The cleanest move: Establish residency in a zero-income-tax state (Texas, Florida, Nevada, Washington, Wyoming, South Dakota, Alaska, New Hampshire, Tennessee) before you leave the US. Spend 30+ days there. Get a lease, register a car, open a bank account, get a library card. Then move abroad. This eliminates state tax risk entirely.

One client kept his California driver’s license and voted in California elections while living in Mexico. The FTB assessed $47,000 in back taxes plus interest. He spent $12,000 on a tax attorney to fight it. Don’t be that person.

Filing Checklist for 2026

Here’s your annual workflow, in order:

1. Confirm your physical presence days. Count every day outside the US. If you’re short, adjust your 12-month window.
2. Calculate total foreign earned income and foreign taxes paid.
3. Run the FEIE vs. FTC comparison. Pick the method that minimizes total tax.
4. File Form 2555 (FEIE) or Form 1116 (FTC) with your 1040.
5. File FBAR (FinCEN Form 114) online by April 15, extension to October 15.
6. File Form 8938 (FATCA) if your foreign assets exceed thresholds.
7. Pay self-employment tax if applicable. Use Schedule SE.
8. Verify state tax status. If you maintained any ties to a high-tax state, consult a professional.