US Tax Deductions for Digital Nomads

Luca Mussari

Last updated: Jan 31, 2025 7 min

As a digital nomad, you might think living outside the US means leaving your tax obligations behind. But that’s not the case: if you’re a US citizen or resident alien, the IRS requires you to file taxes no matter where you travel.

Fortunately, there are significant exclusions, deductions, and credits designed explicitly for Americans working abroad. Let us share with you the top US tax breaks for digital nomads so you can focus more on your travels (and less on your tax bill).

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Keep in mind that while this guide will get you started, tax laws and figures are subject to change, so it's always best to consult a qualified tax professional for tailored advice.

Key Takeaways for Busy Nomads (TL;DR)

You must file US taxes no matter where you live. Stay aware of FBAR and FATCA reporting if you have foreign accounts.
Foreign Earned Income Exclusion (FEIE) and Foreign Housing Exclusion can significantly reduce or eliminate taxable income from abroad.
Foreign Tax Credit (FTC) helps avoid double taxation on income already taxed by a foreign government.
Self-employment taxes still apply, but strategic business expenses and home office deductions can lower your overall tax burden.
Keep accurate record-keeping (travel days, expenses) and look for professional advice to maximize savings and stay compliant.

What Are the Digital Nomad Tax Deductions Available?

Here are the 6 areas to focus on when tackling your US taxes as a digital nomad:

Foreign Earned Income Exclusion (FEIE)
Foreign Housing Exclusion/Deduction
Foreign Tax Credit (FTC)
Self-Employment Tax Deductions
Home Office Deductions
Business Expense Deductions

Let’s go through each of these in detail.

1. Foreign Earned Income Exclusion (FEIE)

The Foreign Earned Income Exclusion (FEIE) is often the most popular tax benefit for digital nomads. For the 2025 tax year, it allows qualified individuals to exclude up to $126,500 of foreign-earned income from US taxation.

How does it work?

If you qualify, you can exclude up to the current threshold of your foreign-earned income from US taxation. This can drastically reduce or even eliminate your federal income tax liability, depending on how much you earn and where you reside.

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Keep in mind that foreign-earned income needs to be converted to US dollars for tax reporting, and exchange rate fluctuations might affect the amount excluded under FEIE.

Who qualifies?

To qualify, you need to meet one of two tests:

Bona Fide Residence Test – You must be a bona fide resident of a foreign country (or countries) for an uninterrupted period that includes a full tax year.
Physical Presence Test – You must spend at least 330 full days out of any consecutive 12-month period outside the United States. This is usually the go-to test for digital nomads.

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Note: The FEIE applies only to earned income, not passive income like dividends or capital gains. If you’re self-employed, qualifying for the FEIE excludes your earned income from standard US income tax, but you may still be subject to self-employment taxes.

2. Foreign Housing Exclusion/Deduction

After establishing your eligibility for the FEIE, the next benefit to explore is the Foreign Housing Exclusion or Deduction. This can further reduce your taxable income if you actually meet the requirements.

What expenses qualify?

Rent: Usually the largest eligible expense
Utilities: Electricity, water, or gas may be included
Property insurance: Sometimes deductible, if directly related to your home.
Household repairs: Reasonable repairs count, but not capital improvements
Rental of furniture and accessories: These may also qualify as part of housing costs.

Exclusion vs. Deduction

Exclusion is meant for employees and aims to reduce your foreign-earned wages.
Deduction is for self-employed individuals and it can reduce your foreign-earned income.

You must subtract a base housing amount from your total housing costs, and the maximum housing exclusion is generally 30% of the FEIE amount, though this can vary based on the location's cost of living.

3. Foreign Tax Credit (FTC)

The Foreign Tax Credit (FTC) allows you to claim a dollar-for-dollar credit on your US taxes for any income taxes you’ve paid to a foreign government. This is especially helpful if you aren’t eligible for (or max out) the FEIE.

How does it work?

Say you paid $5,000 in income tax to a foreign government, and your US tax liability on the same income is $8,000. You can typically subtract the $5,000 from the $8,000 you owe, leaving $3,000. If the foreign tax rate is higher than the US rate, you might eliminate your US liability entirely, and you can sometimes carry over excess credits to future years.

FTC vs. FEIE

You cannot claim both the FEIE and FTC on the same income. If your foreign tax rate is higher than the U.S. rate, you may carry over unused credits to future tax years.

4. Self-Employment Tax Deductions

Most US digital nomads tend to be self-employed, whether as freelancers, sole proprietors, or single-member LLC owners. If you earn more than $400 annually in net self-employment income, you’re generally responsible for self-employment taxes (Social Security and Medicare).

How to Lower Your Tax Burden When Self-Employed

Retirement contributions: You can contribute to a Solo 401(k) or SEP IRA to reduce your taxable income.
Health insurance premiums: You are eligible to deduct premiums for medical coverage if you pay for it yourself.
Business expenses: You are allowed to lower your net income (and thus self-employment tax) by deducting legitimate business costs.

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Note: You’ll typically pay self-employment taxes even if you exclude all your income through the FEIE, unless you reside in a country that has a totalization agreement with the US.

5. Home Office Deductions

Even digital nomads sometimes have a base of operations or a dedicated workspace in their rented homes or apartments abroad. If you’re self-employed, you may be able to claim home office deductions if you use a portion of your space regularly and exclusively for business.

What can you deduct?

A portion of your rent, utilities, and insurance as long as it's proportional to how much space you use for your home office. For example, if 10% of your apartment is strictly used as an office, you may deduct 10% of eligible costs. Alternatively, you can use the simplified method, which allows you to deduct $5 per square foot of your home office, up to a maximum of 300 square feet.

What are the criteria for claiming a home office deduction?

Regular and exclusive use – The workspace must be solely for business activities.
Principal place of business – You conduct the majority of your work there or use it for client meetings/storage.

6. Business Expense Deductions

Accurate tracking and reporting of ordinary and necessary business expenses are another way to keep your taxes low. Some common deductions for American digital nomads include:

Mobile and Internet Service: You can deduct the percentage of your phone/internet bills that apply to business activities
Marketing and Social Media Advertisement Expenses: Any costs for ads on Facebook, Google, etc., directly related to your business
Website Hosting and Domain Fees: Any costs for hosting, domain purchasing, plug-ins, and premium themes related to your company website/s
Coworking and Home Office Space: Membership fees or day passes for coworking spaces
A portion of your rent or mortgage: If this meets the IRS criteria for a home office
Educational Courses and Costs: Course fees and materials for training that improve or maintain your current business skills
Equipment and Software: Items like laptops, microphones, or software subscriptions (with partial personal use accounted for if applicable).

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Pro Tip: Keep business and personal expenses separate with different bank accounts or credit cards. Proper documentation is crucial in case of an audit!

Bonus Tip: Be Aware of Foreign Bank Accounts and FBARs

Beyond any tax exclusions, there is something else to keep in mind. Simply opening or holding money in foreign bank accounts triggers additional reporting requirements. These don’t reduce your tax bill, but compliance is critical for you to avoid large fines. The two main ones to be aware of are:

FBAR (Report of Foreign Bank and Financial Accounts)
FATCA (Foreign Account Tax Compliance Act Form 8938)

FBAR

FBAR is submitted to the Financial Crimes Enforcement Network (FinCEN), and penalties for failing to file can be severe. To comply, you must file an FBAR if the total of your foreign bank account balances exceeds $10,000 at any point during the year.

Form 8938 (FATCA reporting)

The FATCA is required if your foreign assets exceed certain thresholds, which vary by your tax filing status and whether you reside in the US or abroad (for instance, $200,000 on the last day of the year for single filers living abroad).

Don't forget to submit these two key reports! If you’re not compliant, the risk of incurring large fines and penalties is real.

Need help filing digital nomad taxes?

Ask the Experts

For over 13 years, Greenback Expat Tax Services has helped American digital nomads relieve the anxiety and hassle of filing taxes. Discover how they can help you, too.

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Written by Luca Mussari

Marketer and digital nomad. After leaving his 9-to-5 corporate job in London, he co-founded Freaking Nomads to inspire others to embrace unconventional paths and find happiness wherever they go.

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