Tax Planning for Digital Nomads: A Practical Guide for US and European Expats

Figuring out citizen taxes versus living location rules helps dodge expensive errors.

The Moment Taxes Catch Up With You

The letter arrives at your parents’ house three months after you leave. Your bank needs proof of tax residency. Then comes the real shock—a notice from the IRS about unfiled returns, threatening passport revocation for unpaid taxes exceeding $60,000.

Many remote workers assume that moving abroad automatically eliminates their tax obligations. For some, relocating can reduce tax burdens significantly. For others—particularly US citizens—this assumption leads to penalties, back taxes, and even passport issues.

The real challenge isn’t whether you owe taxes. It’s determining which country has the right to tax you, and structuring your situation to avoid double taxation while remaining compliant with all applicable laws.

Why Digital Nomad Tax Planning Is Complicated: Two Global Systems

Here’s where it gets tricky: the world has two completely different tax systems, and a lot of digital nomads accidentally fall through the cracks without knowing it.

System A: Citizenship Based Taxation (United States)

The U.S. collects taxes if you’re a citizen—no matter where you are. Living abroad? You still owe federal income tax if you hold a passport or Green Card. It doesn’t matter if you’re settled in Thailand, Germany, or even drifting at sea.

Just two nations tax people based on citizenship—the U.S. along with Eritrea. If you’re American, living far from home still means dealing with taxes.

System B: Residency Based Taxation (Europe and Most Countries)

Most nations charge taxes depending on where you live. When you legally leave Germany, France, or the UK to settle somewhere else, your original country usually quits taxing all your global earnings.

Still, leaving isn’t just about going somewhere else. They look at money links, where your family is, if you own stuff, also whether you’ve officially checked out.

Where Nomads Make Mistakes

Nomads run into trouble when they think the rules work the same everywhere:

• US nomads think leaving the country means no more taxes (wrong)
• European nomads think moving around constantly means nowhere can tax them (almost never true)
• Both groups skip the paperwork that actually keeps them safe

Figuring out what rules fit your case sets the base for smart tax moves when you’re working remotely from different places.

Common Misconceptions Among Location Independent Workers

Let’s clear up some dangerous myths:

• “I’m not living anywhere, so I don’t owe taxes anywhere” - Wrong. Most governments assume you still live in your home country until you prove otherwise
• “I only need to worry about federal taxes” - Nope. State taxes are separate. Your home state might still come after you
• “My digital nomad visa means I don’t pay taxes” - Not true. Visa rules and tax rules are completely different things
• “I haven’t been audited, so I must be doing it right” - Bad logic. Tax authorities can go back several years when they catch up with you
• “I’ll figure it out later” - Terrible idea. Penalties pile up fast, and you could even lose your passport

US Nomads: Understanding FEIE, FTC, and State Residency Rules

US citizens have to file taxes every year, no matter where they live. The good news? There are ways to avoid getting taxed twice on the same income.

Strategy 1: Foreign Earned Income Exclusion (FEIE)

The FEIE lets eligible filers leave out as much as $130,000 earned overseas when calculating U.S. taxes in 2025 (IRS official guidance).

Qualification Requirements:

You need to pass either one of these two checks:

Physical Presence Test: You need to spend 330 full days outside the US in any 12-month period (about 11 months). That gives you only 35 days for US visits. Miss it by even one day? You lose the FEIE for that whole year.

Bona Fide Residence Test: This means living in a different country all year for tax purposes. But it’s difficult if you’re constantly moving between countries, making it a poor fit for nomads who are always on the go.

The Physical Presence Test pops up a lot since you don’t need official residency somewhere else. Whether you’re in Thailand, hanging out in Mexico, exploring Portugal, or just anywhere outside the US, each day counts the same for hitting that 330-day mark.

Strategy 2: Foreign Tax Credit (FTC)

Instead of leaving out earnings, the FTC lets you use overseas taxes paid to reduce what you owe in U.S. taxes.

When FTC Is Preferable:

• You live in high-tax countries (Germany, France, Spain, UK)
• You want to maintain Roth IRA eligibility (using FEIE may disqualify you by reducing earned income)
• You have children and need to claim the Child Tax Credit
• Your overseas tax is higher than what the U.S. charges

The FTC means doing tougher math like Form 1116—though it might wipe out your U.S. tax bill if overseas payments were higher than Uncle Sam’s share.

FEIE vs FTC: Decision Framework

Confused about which strategy to use? Here’s how they compare side by side:

State Tax Residency: “Sticky States” vs Tax-Friendly States

Not all states treat residency the same way. Here’s what you need to know about each type:

Strategic Approach: Before leaving the US, establish domicile in a tax-free state. Grab a driver’s license there once you’ve made the move. Sign up to vote locally so things look legit. Set up a hometown bank account instead of keeping your old one. Use a real home address with mail forwarding, not some UPS shop downtown.

Case Study: California’s “Sticky Residency” Enforcement

Let me show you how this plays out in real life. Sarah was a freelance graphic designer who moved from California to Chiang Mai for two years. While abroad, she handled U.S. taxes carefully, tapping the FEIE each year to leave about $85K out of her income report. Because of that break, she owed nothing to the federal government.

What went wrong:

Sarah kept her California driver’s license, stayed on the voter rolls in L.A., and continued using her parents’ address in San Diego for her banking. She figured if she followed federal rules, taxes were sorted.

Two years later, right after she left, California’s tax office slapped a $16,000 bill on her—back taxes bundled with fines.

California’s position:

Even though she wasn’t living there, Sarah still had strong enough links to stay officially based in California. The state won’t treat a move as permanent just because someone’s away on holiday—unless they’ve set up legal residency somewhere else.

The lesson:

Federal tax rules don’t sync with state ones. Getting out of a high-tax state means you’ve got to handle paperwork on purpose:

• Surrender your license or hand it over instead
• Change your voter sign-up to match where you now live
• Update your location on every bank account
• Drop local subscriptions along with regional perks
• Establish clear documentation of new domicile elsewhere

State tax authorities look at the full picture. Simply being physically absent isn’t enough to prove that you’ve changed your tax residence.

European Nomads: The 183-Day Rule and Center of Vital Interests

If you’re from Europe, Canada, Australia, or most other countries, you’re taxed based on where you live—not your citizenship. Sounds simple, right? It’s not. Figuring out residency involves more than just counting days.

The 183-Day Threshold

Many places follow something like this: if you’re there 183 days or longer in one year, taxes usually treat you as local. But it can differ depending on where you are.

This might seem clear—yet things get tricky once you factor in how nations look at non-material aspects, not just location.

Center of Vital Interests: The Qualitative Test

If you’re always on the move but never stay more than 183 days in one place, officials might still see you as local—especially when your main ties are rooted there.

Vital signs show things like:

• Main home or owning real estate
• Where your partner or relatives live
• Bank accounts but also investment options
• Vehicle registration
• Health insurance enrollment
• Licensed practitioner with certified credentials included

A German living abroad in Southeast Asia for nearly a year might still be seen as a tax resident back home—say, if they keep an apartment in Munich, use local banks there, or stay on Germany’s health system even while overseas.

The Critical Step: Official Deregistration

Many places in Europe need you to officially unregister if you move out. If you skip this, the tax office still sees you as living there—even if you’re abroad.

Country-specific procedures:

• Germany: File Abmeldung (leaving the official list at the town hall)
• France: Tell the tax office you’re going—update where you’ll live now
• UK: Submit P85 form to HMRC when leaving (UK government guidance)
• Spain: Cancel empadronamiento (municipal registration)

Not finishing these paperwork steps means your residency stays the same by law, which could lead to owing taxes from past years.

European Tax Treaties and Why They Matter

Many nations across Europe made agreements about taxes to avoid charging people twice. If both places say you live there, special guidelines help settle the matter.

Common tie-breaker hierarchy:

1. Permanent home location
2. Center of vital interests
3. Habitual home—usually where you stay most often
4. Nationality

Figuring out these guidelines lets you set up your circumstances so you can firmly reside where you want. While knowing them doesn’t guarantee success, it gives you a solid starting point that shapes how you proceed differently than others might expect.

Case Study: The UK Deregistration Oversight

Here’s another example that shows why paperwork matters. Tom was a British software developer who spent two years traveling through Southeast Asia and Europe. He kept careful track of his days, never staying in any one place for more than three months, assuming that would keep the tax authorities from challenging his residency.

What he overlooked:

Tom didn’t officially tell HMRC he’d left the UK. Still, he kept using his British bank account. His mail went to his mum’s place instead of a new one abroad. Even so, he stayed signed up with the NHS. While living outside, he sent in UK tax forms—yet never mentioned planning to live under another country’s tax rules.

The outcome:

HMRC sent a demand for over £8,000 in back National Insurance contributions, asserting Tom remained a UK tax resident throughout his travels.

HMRC’s reasoning:

Despite no official cancellation, keeping a British bank account, staying on the NHS list, also holding a local postal address showed Tom’s main ties still lay in the UK. Being away in person counted as a long-term trip instead of moving out for good.

Key takeaway for European nomads:

Leaving in person needs to include:

• A heads-up from the tax office
• Dropping out of government medical services
• Moving bank ties to a different region
• Finding proof you live in another place
• Fine records that prove you’ve moved for good

Paperwork weighs just as heavy as where you’re actually based.

Similar patterns across Europe:

• Germany: If you skip the official deregistration, the tax office starts chasing after you—same deal applies
• Spain: Spain’s tax office keeps an eye on your residency records—fail to officially cancel it, so they might charge unpaid taxes from past years
• Portugal: If you don’t cancel your registration or set up residency somewhere else, local tax offices will treat you as still living there

US Nomads Living in Europe: Navigating Dual Filing Requirements

U.S. citizens living in Europe may owe taxes to both governments at the same time.

The Double Taxation Challenge

Spain sees you as a taxpayer if you reside there. Meanwhile, Uncle Sam goes after citizens no matter where they’re based. Because of this setup, two governments might want a piece of what you earn.

Solution mechanisms:

• Tax deals: America’s got agreements with nearly every European nation—keeps people from paying taxes twice while sorting out who gets to collect first.
• Foreign Tax Credit: A lot of Americans living abroad in Europe pick the FTC instead of FEIE, using local taxes to reduce what they owe back home.

Practical example: You make $100,000 living in Germany. The country takes about $30,000 for taxes. When you report that same income on your US return, Uncle Sam would charge around $22,000. But since you already paid more abroad, you use that foreign payment as a credit. So instead of owing money to the US, you end up with nothing due. Plus, you’ve got $8,000 left over in tax credits—save it for next year.

Social Security: Totalization Agreements

Some freelancers from the U.S. living in Europe might end up paying into two separate pension systems at once:

• US workers who run their own business pay around 15.3% of what they earn after costs go out
• European social security contributions: Often 25-30% of income

The US has agreements with 30+ countries to prevent double social security payments (Social Security Administration details). When you submit proof like a Certificate of Coverage, you show where you’re already covered, so you skip payments elsewhere.

Countries with US agreements include:

• UK, Germany, France, Spain, Portugal, Italy
• Netherlands, Belgium, Austria, Sweden
• Canada, Australia, Japan, South Korea
• Plus 20+ additional countries

Important: You’ve got to take action early—grab that certificate on your own. If you don’t, either system might start chasing payment.

Digital Nomad Visas: Tax Residency Implications

Several European countries now offer digital nomad visas that let you live and work there legally. But here’s the catch most people miss—these visas often make you a tax resident, which means you’ll owe local taxes.

Here’s how the major programs compare:

Important for US citizens: U.S. citizens should understand that low local taxes do not eliminate the requirement to file in the United States. You’ve got to send in US returns no matter what—usually claim a credit for foreign taxes paid, so you’re not taxed twice on the same income.

For non-US citizens: If you’re not from the U.S., getting a digital nomad visa in Spain makes you a tax resident there. So, instead of staying on your old country’s rolls, you’ll need to leave that system behind. Then again, filing taxes in Spain becomes required—no way around it.

Common misconception: A lot of people think: “If I get a digital nomad visa, I won’t pay taxes.” But actually, that kind of visa usually makes you a legal resident—so you still owe taxes, just maybe less than usual.

Additional Scenarios in Digital Nomad Tax Planning

The Perpetual Traveler Strategy

Some wanderers try skipping taxes everywhere by always leaving before hitting six months in one spot.

The appeal: The idea sounds great—if you’re just passing through each country, maybe no one can tax you. You’re never there long enough to become a resident, right?

Practical problems:

• Banks need details on where you pay taxes—this helps meet rules like CRS or FATCA
• Center of Vital Interests test might yet prove you live in your passport nation
• Living without a tax home makes buying real estate tricky. Also, setting up companies gets harder. On top of that, getting bank help isn’t easy either
• Some nations like Germany or the UK keep holding onto your resident status unless you officially settle somewhere else instead

Reality: Most people who travel nonstop actually keep a sort of home where relatives stay, packages get sent, or bank stuff is filed. That place might legally count as their tax residence. But it depends on local rules.

Cryptocurrency Income and Capital Gains

Cryptocurrency taxes differ wildly depending on where you are, which makes planning tricky—each region handles it its own way:

• Portugal: Used to charge no tax on cryptocurrency earnings—lately changed rules, so trade income now faces rates as high as 28%
• Germany: If you keep crypto less than a year, it’s taxed like income—rates go up to 45%. But hold it longer? Then no taxes apply. Different rules kick in after the one-year mark. So timing matters when selling
• Spain: If you make money from crypto, it’s taxed between 19% and 26%, based on how much you earn
• U.S.: Crypto’s seen as property—each swap counts as a tax moment, so you need to track your cost basis

For US nomads: If you’re a U.S. nomad, taxes still hit your crypto profits no matter which country you’re in. Earned income gets help from the FEIE—investment cash? Not so much.

Planning consideration: Think about using a crypto tax tool like Koinly or CoinTracker to keep track of your trades. When you’re buying and selling often, doing it by hand just doesn’t work well anymore. Instead, these apps help organize everything automatically. Without one, things can get messy pretty fast.

The 6-Step Tax Planning Checklist for Digital Nomads

Planning to go nomadic? Here’s your step-by-step checklist before you leave:

Step 1: Audit Your Current Tax Residency Status

• For Americans, sending federal taxes is required no matter where you live
• Non-U.S. residents should review their current country of residence and take the necessary steps to properly close or transfer any U.S. records
• Document days spent in each country during current calendar year
• Check if you’ve accidentally stayed long enough (over half a year) in any place, making you a resident without meaning to

Step 2: Sever Ties to Previous Residency

For US nomads leaving sticky states:

• Obtain driver’s license from tax-free state (Florida, Texas, Nevada)
• Sign up to cast your ballot where you now live
• Change your postal address at banks or credit unions
• File IRS Form 8822 (Change of Address)
• Get your mail sent to a home address using a forwarding setup instead

For European nomads:

• Full official cancellation in your nation
• Drop your sign-up in the country’s medical coverage plan
• Shut down a bank account or move it somewhere else
• Change your contact details for any formal letters
• Get papers that show you’ve set up a new place to live

Step 3: Implement Day Tracking System

Accurate day counting is essential for both the FEIE 330-day test and 183-day residency thresholds.

Tracking methods:

• Apps: TravelSpend, Nomad List, or dedicated spreadsheets
• Keep every paper like boarding passes or hotel receipts safe. Store your Airbnb receipt separately from other stuff. Hold on to booking emails just in case something changes
• Turn on your phone’s GPS so old pics show where they were taken
• Keep your entry/exit stamps and visa documentation

Step 4: Choose Your Tax Strategy

US citizens:

• Detect if FEIE or FTC fits you best—check the side-by-side chart
• Work out expected earnings plus how much tax you’ll pay abroad
• Consider retirement contribution goals and Child Tax Credit eligibility
• Consult with an expat tax specialist if things get tricky

Non-US citizens:

• Set up your tax home in a place you pick
• Familiarity with regional submission rules along with due dates
• Check out digital nomad visas that offer good tax deals
• Look into tax rules shared by your old country and where you now live

Step 5: Maintain Comprehensive Records

If there’s an audit, records back you up:

• Full list of trips showing when you went where
• Paperwork showing where you stayed or big purchases
• Bank statements that include overseas payments
• Job papers or deal forms that prove overseas gigs
• Rent deals or house papers
• Dated photos that show where they were taken

Keep digital files in safe online spaces—also save extra versions.

Step 6: File Returns On Time

US deadlines:

• April 15: Standard filing deadline
• June 15: Automatic extension for Americans abroad
• October 15: Extended deadline with Form 4868
• April 15: File FBAR if you’ve got overseas accounts totaling more than $10k (automatic extension to October 15 available)
• April 15: FATCA Form 8938 (foreign assets over $200,000)

Consequences of missing deadlines:

• Fees for sending it late—5% each month, maxing out at 25%
• Fees added when taxes aren’t paid on time
• Lost the FEIE benefit during that year’s taxes
• Potential passport revocation for seriously delinquent tax debt ($62,000+)

For non-US citizens: Deadlines depend on where you live. Look into what’s needed for taxes in your new location, while also checking rules back home just in case you still owe something there.

Conclusion: Structure Creates Freedom

Look, tax planning isn’t fun. But skipping it costs way more in the long run—think penalties, back taxes, and major headaches when you try to renew your passport.

This isn’t about dodging taxes. It’s about setting things up the right way so you don’t get taxed twice, you stay legal, and you can actually enjoy the freedom of living anywhere.

Living anywhere is true freedom—but only if you’ve got your paperwork sorted. Know whether your taxes follow your passport or your location. Track your days. File on time. Do those things, and tax season becomes just another part of nomad life instead of a constant worry.

For more digital nomad financial planning resources—including banking guides, multi-currency tools, and tax compliance checklists—check out the NomadWallets US Digital Nomad Hub.