How to Pay Zero US Taxes as an American Abroad
The playbook every American abroad should know.
Welcome to Digital Citizen 👋
Building companies everywhere showed me success knows no single location or way of thinking.
Right now, you can design life on your terms. Global, smart and intentional.
Digital Citizen guides you to live smarter, work freely, and navigate a borderless world with clarity.
You will learn about residency and visa options around the globe, how to structure your business in a clever way, and how to think big.
Join a community of independent minds shaping a future on their terms 🚀
Zero US Taxes
Imagine waking up in a small apartment in Barcelona. You walk to a café, open your laptop, and start work for your US clients.
Months later you file your US tax return. The amount you owe to the US is zero.
This can be possible because the IRS gives Americans abroad certain tax breaks. If you meet the rules and keep good records, you can use them to reduce or even remove what you owe.
Before we go further, a quick but important note:
This is not tax or financial advice. It is my opinion and experience. Always speak with a qualified tax professional.
Everything here is legal and based on current IRS rules.
US citizens are taxed based on citizenship. There is no single method that removes tax in every case. Many Americans abroad can lower their bill to zero, but only if they qualify.
Zero US taxes still means local taxes. But as you will see in the second real life example at the end of this post, they can be drastically low.
I did a deep dive on US expat taxes for my own life and work in the last couple of weeks.
I am not here to lead you on. This is complex stuff. Use this guide as a first look at what to watch.
You will see the main tools, clear definitions, and common mistakes. Then speak with a qualified tax professional for your specific case.
Tax Systems 101
Countries tax people in three main ways.
Citizenship based. A country taxes its citizens on income from anywhere. The US follows this rule. Long-term green card holders are affected too. You file a US return each year if you pass the filing threshold. The return covers your worldwide income.
Residence based. A country taxes you if you are a tax resident there. Residents report worldwide income. Non-Residents usually report only local income. Each country sets its own tests for tax residency. Days in the country and personal ties often decide it.
Territorial. A country taxes income earned inside its borders. Foreign income is often exempt. There are exceptions and anti-avoidance rules.
This overview is a very simplified map, there are many nuances.
In some residence systems you are taxed on local income, while foreign income is taxed only when you bring it into the country. Thailand works this way.
A territorial system taxes only income earned inside its borders. Panama is a clear example, where foreign income stays outside the tax base even if you transfer it in.
These nuances matter and deserve a full post. For now we stay with the US and show how Americans abroad can reach zero within US rules.
Where the US Fits
The US uses citizenship based taxation.
Living abroad does not remove the duty to file. It also does not remove tax by itself. What can reduce tax are specific tools in US law.
The main ones are the Foreign Earned Income Exclusion, the Foreign Housing Exclusion or Deduction, and the Foreign Tax Credit.
What Counts as Foreign Earned Income
Foreign earned income is pay for services you perform while you are outside the United States.
Salary, wages, freelance pay, and contractor income can qualify. The Foreign Earned Income Exclusion can remove this income up to the annual limit. The limit changes each year.
What decides this is your physical location when you do the work. It does not matter where your employer or client is. Pay from the US government to its employees does not qualify. Work done while you are in the United States is US-source. That part also does not count as foreign earned.
Passive income does not qualify. This includes dividends, interest, capital gains, and most rental income. The Foreign Tax Credit may still reduce US tax on those items if they are foreign-sourced and taxed abroad.
Example. You live in Lisbon and work remotely for a US company all year. Your wages are foreign earned income.
Example. You visit the US for three weeks and keep working. Pay for those days is US-source and does not count as foreign earned income.
Example. You work for a Thai employer in Bangkok. That pay is foreign earned income.
Example. You are a US government employee working abroad. That pay does not qualify for the foreign earned income exclusion.
Terms You Should Know
Before we go deeper, let’s get the language straight. These are the terms you will see throughout this guide.
Foreign earned income. Pay for services you perform while you are outside the United States. Your location decides this, not where your employer sits.
Foreign Earned Income Exclusion (FEIE). Lets you exclude a set amount of foreign earned income each year if you qualify.
Physical Presence Test. You are outside the United States for at least 330 full days in any 12-month period.
Bona Fide Residence Test. You make a real home in one foreign country for a full tax year. Your ties point there.
Foreign Housing Exclusion or Deduction. Extra relief for reasonable housing costs abroad above a base amount.
Foreign Tax Credit (Form 1116). A credit for income tax you pay to a foreign country on the same income. Often brings the US bill down to zero in higher tax places.
US-source vs foreign-source income. Services are sourced to where you did the work. Work done in the United States is US-source. Work done abroad is foreign-source. Many passive items have their own source rules.
Self-employment tax. Separate from income tax. The FEIE does not remove it. A totalization agreement can keep you from paying into two social systems at once if you have proof of foreign coverage.
State tax residency. Some states may still claim you if you keep strong ties. Close accounts, registrations, and addresses if you want a clean exit.
FBAR (FinCEN Form 114). An annual report to the US Treasury for foreign financial accounts when totals pass set levels. No tax added by itself, but penalties for missing it are high.
FATCA Form 8938. An attachment to your US return that reports foreign financial assets above higher thresholds. Different from FBAR.
Remittance rule. In some countries, foreign income is taxed only when you bring it into the country. Useful to know for your local taxes, separate from US rules.
Now that the terms are clear, we start with the Foreign Earned Income Exclusion.
It is the main lever for work income. It sets how much of your salary or freelance pay you can exclude when you qualify. In the next section you will see the two ways to qualify.
After that baseline, check if the housing exclusion applies.
Then use the Foreign Tax Credit to cover income that was taxed abroad.
Finally, handle social taxes, state rules, and the reporting forms. This order keeps the moving parts straight.
1) Foreign Earned Income Exclusion (FEIE)
What it is
A rule that lets you exclude part of the pay you earn from work while you are outside the United States. It lowers your US income tax on that work income.
Who qualifies
You need one of two paths.
Physical Presence Test. You spend at least 330 full days outside the United States in any twelve month period. Keep a simple day log and your travel records.
Bona Fide Residence Test. You make a real home in one foreign country for a full tax year. Your ties point there. Think lease, local bank, registrations, and daily life.
What counts as foreign earned
Pay for services you perform while you are abroad. Salary, wages, freelance pay, and contractor income can qualify. Your location decides this, not where your employer or client sits. Pay as a United States government employee does not qualify.
What does not count
Work you do while you are in the United States is US source. It does not qualify. Many people pro rate their pay by days inside and outside the country. Passive income does not qualify. Think dividends, interest, capital gains, and most rental income.
How to claim it
File Form 2555 with your US return. The annual exclusion limit changes each year. You can also add the foreign housing exclusion when your reasonable housing costs are above the base amount. City caps vary.
Keep your records tight
Save a day by day log, flight confirmations, passport stamps, and proof of residence abroad. If you revoke the FEIE you usually cannot claim it again for five years without IRS consent, so decide with care.
2) Foreign Tax Credit (FTC)
The Foreign Tax Credit keeps you from paying tax twice on the same income.
If you pay income tax in the country where you live, you can often claim a credit on your US return for that foreign tax. You claim it on Form 1116.
Use the credit after you look at the FEIE. Exclude what you can with the FEIE. Then apply the credit to any remaining earned income that was taxed abroad. The credit also works for passive income such as dividends or interest when that income is foreign sourced and taxed abroad. You cannot claim a credit on income you already excluded.
Think in pairs. Same income. Same year. Foreign tax paid. US tax due on that income. The credit reduces the US side so you are not taxed twice. In higher tax countries the credit often brings your US bill to zero. You still file the return to claim it.
Example. You earn abroad and the FEIE does not cover all of it. Your country taxes the full amount and you pay that tax. On your US return, the FEIE removes part of the income. The credit then reduces the US tax on the rest. With enough foreign tax paid, the US tax drops to zero.
Keep proof. Save foreign tax assessments, pay slips, and year-end statements. You may need to match payments to the year you claim. Simple folders and a short note of what each document proves will save you time later.
3) Self-Employed and US Self-Employment Tax
If you are self employed, you owe US self employment tax on your net profit even when your income tax is zero under the FEIE.
This applies whether you invoice in your own name or through a US LLC that is disregarded for federal tax. Keep clean books. The tax is calculated on Schedule SE.
Disregarded LLC in simple terms
A single member US LLC is ignored (or “disregarded”) for federal tax. The IRS treats you and the LLC as the same person. You report income and expenses on Schedule C. Net profit still flows to Schedule SE for self employment tax. The LLC can help with liability and banking. It does not remove the tax.
What Schedule C does
Schedule C reports profit or loss from your business if you are a sole proprietor or single member LLC.
What Schedule SE does
Schedule SE computes Social Security and Medicare tax on your self employment income. You pay it on your net profit from Schedule C. Half of the amount becomes an income tax deduction on your Form 1040.
Ways to reduce or avoid self employment tax
Totalization agreement. If your country has one with the United States and you are covered by that foreign system, you usually do not owe US self employment tax for that period. Get a certificate of coverage and keep it on file. I might do a deep-dive on totalisation agreements for the most interesting countries, if you have any preference, pls comment the country.
Be an employee on a foreign payroll. Employees normally pay into the local social system. US self employment tax does not apply because you are not self employed.
Lower net profit with real expenses. Ordinary and necessary business costs reduce Schedule C profit, which lowers self employment tax. Retirement plans like a 401(k) or SEP can reduce income tax. They do not reduce the self employment tax base.
Records to keep
Invoices, bank statements, a day by day work and travel log, receipts, and any certificate of coverage. These prove your position if asked.
4) State Taxes Still Matter
You can live abroad and still owe a state if you never ended your state residency. States care about where your true home is.
What states look at
Home or apartment. Spouse or dependents who remain. Days you spent in the state. Driver license and voter registration. Vehicle registration. Property ownership and homestead status. Mailing address on bank and brokerage accounts. Where your employer is. Business interests. Professional licenses. Club and school ties.
How to exit cleanly
Pick a new home base and make it real. Many people choose a state with no income tax such as Florida or Texas. Get a lease or proof of address. Switch your driver license and voter registration. Update bank and payroll addresses. Move your mail. Close or change old accounts. End homestead claims.
Your filing in the move year
File a part year resident return for the state you left. After that, file nonresident returns only when you have state source income.
What stays taxable after you leave
Income that comes from the state can still be taxed there. Examples include rent from property in the state, wages for work you performed while you were physically in the state, business income from a business with nexus there, and gains on the sale of real property in the state.
Be thorough
Some states review expats closely. Keep proof of the date you left and the steps you took to set up your new home. Save leases, utility starts, license and voter confirmations, address change letters, and travel logs. This bundle is your defense if the state asks.
5) Extra Reporting for Foreign Accounts
Americans abroad often file two extra reports. These forms do not add tax. They tell the government what you hold outside the United States. Think of them as disclosure rules with real penalties if you skip them.
FBAR
FBAR is FinCEN Form 114. You file it online with the US Treasury.
Who must file
You file when the total of all your foreign financial accounts is more than ten thousand dollars at any time during the year. Total means added together across all accounts.
What counts as an account
Bank accounts. Brokerage accounts. Certain cash value insurance. Some foreign pensions. Accounts you only have signing authority over can still count. Credit cards usually do not.
Simple example
You hold 6,000 dollars in a Thai bank, 3,000 in a German bank, and 2,500 in a UK brokerage at any point in the year. The total is 11,500. You file an FBAR.
When to file
Due in April with an automatic extension to October. Keep statements that show the highest balance for each account.
FATCA Form 8938
Form 8938 is attached to your US tax return.
Who must file
For people who live abroad the common thresholds are higher. Single or married filing separately. More than 200,000 dollars at year end or more than 300,000 at any time.
Married filing jointly. More than 400,000 dollars at year end or more than 600,000 at any time.
What counts as an asset
Foreign bank and brokerage accounts. Foreign stocks or funds held outside a US brokerage. Ownership in foreign companies or partnerships. Some foreign retirement plans. This list is broader than the FBAR list.
FBAR vs Form 8938
They are different forms with different thresholds and different agencies. You may need one, both, or neither. Many people file both.
Common mistakes to avoid
Adding up only one account instead of all accounts for the FBAR total
Thinking a signature only account does not count
Missing Form 8938 because assets are outside a bank account
How to stay organized
Make one folder for the year. Keep monthly or year end statements for each account. Write a short note for each file that says what the account is and the highest balance. Save proof of your address abroad and your travel log. These help if questions come up.
Bottom line
Add up your foreign accounts. If the total crosses ten thousand at any point, file the FBAR. If your foreign accounts and assets are large, you may also file Form 8938. File on time. Keep simple records.
Common mistakes to avoid
Here are the slip-ups that cause trouble most often. Read once, then use it as a checkpoint before you file.
Miscounting days for the 330 rule. Full days mean midnight to midnight. Pick the best 12-month window for you.
Working while in the United States and treating that pay as foreign earned. Pro rate your income by days in and out.
Thinking the employer’s location decides the FEIE. Your physical location when you did the work decides it.
Trying to use the FEIE and the Foreign Tax Credit on the same dollar. Choose one tool per dollar of income.
Forgetting self-employment tax. The FEIE reduces income tax only. Social taxes need their own plan.
Skipping the certificate of coverage. With a totalization agreement you need proof you pay into the foreign system.
Keeping state ties active. Driver license, voter registration, home, and mailing address can keep you on a state’s radar.
Ignoring FBAR and FATCA thresholds. These are reports with real penalties. Add up all accounts and file on time.
Treating passive income as foreign earned. Dividends, interest, gains, and most rents do not qualify for the FEIE.
Missing the five-year rule. If you revoke the FEIE you usually cannot claim it again for five years without consent.
Overlooking stock comp sourcing. RSUs and options often need an allocation by workdays. US days stay US-source.
Assuming a tax treaty removes US tax. Saving clauses often keep citizens within US rules. Read the fine print.
Forgetting the housing rules have caps by city. Check the limit before you claim.
Remitting foreign income into a remittance-rule country without a plan. In places like Thailand, timing can trigger local tax.
Weak records. Keep a day log, travel proofs, pay slips, foreign tax receipts, and account statements in one folder.
Putting It Into Practice
With the previous sections, we laid the groundwork.
Now map your year. Where you lived, where you worked, how you got paid, and how many days you spent in and out of the United States.
Gather a simple day log, travel proofs, pay slips, foreign tax receipts, and account statements. With that picture in front of you, the checklist will guide you through the order of steps, apply the FEIE and housing where they fit, use the Foreign Tax Credit on the rest, then finish with social taxes, state status, and the reporting forms.
The goal is a clean file and no surprises.
Now we are going to look at the implementation checklist and a full working example with numbers and dates followed by the Q&A.