Digital Nomad
How Digital Nomads Can Navigate U.S. Tax Residency & Foreign Income Rules
For global citizens working remotely from abroad, understanding U.S. tax residency and foreign income exclusions is critical to avoid double taxation. This article lays out what you should know and how to act.
By NomadicTax Research Team • 5-8 min read • November 19, 2025
## Who Counts as a U.S. Tax Resident While Abroad
You’ll generally be treated as a U.S. tax resident—and taxed on worldwide income—if you meet either:
- The **Green Card Test**, or
- The **Substantial Presence Test** (typically 183 days in the U.S. over a 3-year period, counting current and past years’ day fractions).
Even if you're overseas most of the year, meeting either test means full U.S. tax liability. If you don’t meet those, you’re a nonresident alien and taxed only on U.S.‐source income.
## Foreign Earned Income Exclusion, Housing & Tax Credits
If you *are* a resident, you can still reduce foreign income tax exposure via:
- **Foreign Earned Income Exclusion (FEIE)** — up to a threshold amount (for 2025, around $118,500), allowing qualified individuals to exclude foreign wages.
- **Foreign Housing Exclusion or Deduction** — for reasonable housing costs above a base amount.
- **Foreign Tax Credit** — offset U.S. tax with taxes paid abroad on non-excluded income.
## What Recent IRS Policy Updates Affect Digital Nomads?
Two important updates from 2025 to note:
- The IRS’s updated Revenue Procedure 2025-16 increased depreciation limitations and the income inclusion rules for leased or owned **passenger automobiles** (includes trucks/vans) placed in service in 2025. If you use such vehicles abroad, these inflation-adjusted limits affect deductions.([irs.gov](https://www.irs.gov/irb/2025-11_IRB?utm_source=openai))
- IRS final regulations under **TD 10026** involving Disregarded Payments and Dual Consolidated Losses (DCL) will begin to apply for tax years **beginning January 1, 2026**. If you own or use foreign disregarded entities, or have income offsets under foreign law, this could affect whether deductions are allowed.([irs.gov](https://www.irs.gov/irb/2025-33_IRB?utm_source=openai))
## Strategy: Managing Tax Residency & Income Classification
- **Track your days inside and outside the U.S.** precisely, so you know when you might hit substantial presence.
- **Consider making the Bona Fide Residence Test or Physical Presence Test** elections if applicable, to reduce U.S. liability.
- **Structure foreign employment contracts** to maximize FEIE or utilize tax treaties.
- **Maintain detailed documentation**: contracts, housing expenses, pay records overseas.
## Example Practical Application
**Maria**, a software engineer, lives in Portugal for 200 days per year, returns to the U.S. for 60 days:
- Over 3 years, her U.S. days could exceed 183 under the substantial presence test. She must pay U.S. taxes on her worldwide income.
- But she may exclude up to ~$118,500 foreign earned income (2025 limit) and deduct housing excess costs.
- Depreciation limits kick in if she uses a vehicle abroad for work and claims them under U.S. tax rules.
## Action Steps Before Year-End
- Calculate potential residency status for 2025 based on days.
- Estimate whether FEIE or Foreign Tax Credit yields more tax benefit.
- If owning foreign entities or disregarded payments, get advice on how TD 10026 will affect your structure starting 2026.
- Monitor IRS announcements, including depreciation and vehicle limits, as they change with inflation.
**Bottom line:** Digital nomads must understand both residency tests and upcoming regulatory shifts. Planning early ensures you don’t get caught off-guard by unexpected tax exposure.