From the itinerant workers of the past to today’s globe-trotting digital nomads, mobility has long been woven into American culture. Unfortunately, while technology has made remote work easy, US tax law hasn’t kept pace — and for location-independent citizens, compliance can be both confusing and burdensome.
This guide breaks down how the US tax system applies to nomads, outlines key compliance steps, and answers common questions for Americans living and earning abroad.
Understanding US Taxation for Nomads
The United States is one of the few countries that taxes based on citizenship, not residency. This means that whether you are a US citizen or a green card holder (permanent resident), your tax obligations follow you worldwide — regardless of where you live or earn your income.
Key facts about US taxation:
- Federal income tax: Progressive rates up to 37%.
- State income tax: Progressive rates up to 13.3% (e.g., California).
- Municipal taxes: Certain cities, such as New York City, also levy income tax.
- Other taxes: These can include the Alternative Minimum Tax (AMT), self-employment tax (Social Security and Medicare), and a 3.8% tax on net investment income above approximately $125,000.
- Capital gains: Long-term gains taxed between 0–20%; short-term gains taxed as ordinary income.
- Inheritance tax: Applies only to estates over several million USD.
Even if you legally reduce or eliminate your US tax liability, the burden of filing and compliance remains unavoidable. All foreign financial accounts and assets must be disclosed to the IRS, or significant penalties can apply.
Why Compliance Is Non-Negotiable
Complying with US tax law isn’t just about avoiding penalties — it’s also about protecting your freedom of movement. If your unpaid tax liability exceeds $50,000, the US government has the authority to revoke your passport. That could abruptly end your ability to live the location-independent lifestyle.
Step-by-Step Compliance for US Nomads
1. File Your Annual Tax Return
You must file a federal return each year as if you were still living in the United States. If you can’t meet the April deadline, request an automatic extension to October 15 using IRS Form 4868.
2. Report Foreign Accounts and Assets
If the total value of your foreign financial accounts exceeds $10,000 at any point in the year, you must file a Foreign Bank Account Report (FBAR).
- Additional reporting via IRS Form 8938 may be required for larger asset holdings.
- If you own shares in a foreign business, IRS Form 5471 is often mandatory.
- FATCA agreements between the US and other countries make hiding foreign accounts virtually impossible.
3. Use Tax Credits or Exclusions to Minimize Double Taxation
You may qualify for one of two key tax relief mechanisms:
- Foreign Tax Credit (FTC):
Best for nomads living in high-tax countries, as it allows you to offset US tax with foreign taxes paid. It also preserves eligibility for the Child Tax Credit. - Foreign Earned Income Exclusion (FEIE):
Allows you to exclude up to $126,500 (2025) in earned income from US taxation if you meet either the Physical Presence Test (330 days abroad in any 12-month period) or the Bona Fide Residence Test (proving residency in another country).
Note: The FEIE does not apply to dividends, capital gains, or other unearned income, and self-employed individuals must still pay self-employment tax.
You may also claim the Foreign Housing Exclusion/Deduction if eligible.
4. Keep Meticulous Records
Well-organized records make compliance smoother and can protect you during an audit. If in doubt, consult a qualified tax attorney or international tax specialist. The cost of expert advice is far less than the potential penalties and stress of non-compliance.
Frequently Asked Questions
Q1: What currency exchange rate should I use when reporting income?
Use the end-of-year rates provided by the US Treasury unless otherwise instructed by the IRS.
Q2: Should I renounce my US citizenship to avoid taxes?
Generally not recommended. While compliance is burdensome, the benefits of US citizenship — including global mobility and legal protections — usually outweigh the costs.
Q3: Can I legally avoid filing FBAR and Form 5471?
Yes, but only by keeping all financial accounts within the US and using US-registered entities exclusively.
Q4: I haven’t filed taxes in years. What should I do?
The IRS often works cooperatively with overseas citizens who voluntarily return to compliance. In some cases, penalties may be reduced or waived if you use an official disclosure program. Always speak with a tax attorney before contacting the IRS.
Q5: How should I complete a W-9 form while living abroad?
Complete it as you would in the US, using your permanent US tax information.
Final Thoughts
US nomads face a unique tax landscape. While the citizenship-based taxation system can be frustrating, it’s possible to remain fully compliant while minimizing your tax burden through careful planning, proper structuring, and the right use of exclusions and credits.
A proactive approach — supported by professional advice — ensures you can enjoy the freedom of a borderless lifestyle without the risk of costly surprises from the IRS.