So you wanna flee the USA? Uncle Sam has a tax break for that.

Every election cycle, there’s a familiar buzz about moving abroad to escape the U.S. and embracing a sense of “not my circus, not my monkeys.” It’s a feeling you get as a U.S. expatriate living abroad, looking back at the U.S. from international lands.

But beyond the ‘healthy boundary’ that you want to set with the U.S., there are tangible financial perks to living abroad, especially when it comes to taxes – provided you meet specific criteria.

With the rise of digital nomad visas, it’s easier than ever to take advantage of these tax breaks. For example, the Foreign Earned Income Exclusion (FEIE) can save you up to $23,402 in federal taxes annually. In 2024, the FEIE allows you to exclude up to $126,500 in earned income (non-passive), provided you meet the physical presence test by spending at least 330 days outside the U.S. in a 12-month period.

Although navigating the nuances of tax rules, visas, and residences can require some research and admin work, the opportunities for savings are abundant if you can physically leave the U.S. and earn a living by working online.  

Key Assumptions for Tax Savings

1) The destination country doesn’t consider you a tax resident. Many countries offer digital nomad visas which source your income to the U.S. and do not require you to pay tax in the destination country.    

2) You stay outside the U.S. for at least 330 days in a 12-month period. While the IRS also allows you to qualify under the bona fide residency test, it’s harder to prove and lacks clear-cut guidelines compared to the physical presence test.

3) Your job can be performed outside the U.S. This includes considering things like employer policies, time zones, and IT security requirements. If you're self-employed, there are very few things to consider outside of ensuring your clients policies don't have a security conflict (e.g., you work with governments).

Visas

Without some type of visa, the only place you can technically live is in the U.S.  To be a remotely working expat, another country must legally permit you to stay and decide that your work doesn’t create the need for a work-permit, or provides a path for you to obtain one. 

The good news? The pandemic sparked a surge in digital nomad visas as countries seek new revenue streams. However, some countries like Japan or Switzerland are notoriously challenging for long-term stays unless you have local ties (employer or marriage). There are places you can take advantage of some grey visa rules (e.g., you can apply for multiple tourist visas, as the definition of living somewhere versus being an extended tourist is less clear these days), but it’s important to make sure you’re being compliant in your arrangement.

For those planning to “get out” for a few years and return to the U.S. later, many countries offer pathways for stays ranging from six months to several years.    

Employer/Client Relations 

Once your visa and location are sorted, it’s essential to ensure your work arrangements align with your move.

• Time Zones: Latin America offers the most overlap with U.S. work hours. In Europe or Asia, you’ll need to establish boundaries, such as scheduling meetings before 2pm EST. This allows for considerable overlap with your colleagues to continue to allow for collaboration.

• Employer Policies: Every employer is different, so confirm policies around IT security and legal requirements.

Working abroad can significantly improve productivity. By establishing clear work boundaries, you can shift from the idea of being “green on Slack” all day to measuring success by value and output.

The Good Stuff: Tax Savings

1) FEIE Federal Tax Savings

• Exclude up to $126,500 in 2024, saving up to $23,402 in federal tax.

• If you make less than this, you could owe $0 in federal income tax.

2) State Tax Savings

• States like California, New York, Maryland, and D.C. often impose high state income tax. As an expat, you can typically break state tax residency and owe zero state income tax.

• You may need to still file a non-resident return in the state, even if you don’t owe  tax.

3) Foreign Housing Deduction

• Foreign housing expenses over $20,400 annually can also be excluded under FEIE rules.

• If you're self employed, but haven't been able to quality for the Home Office, the Foreign Housing Deduction is available. If you qualify for both deductions, take care to not double dip.

Beyond Taxes: Everyday Cost Savings

1) Lower Living Costs

• In many Asian countries, combined phone and internet plans cost less than $50 a month.

• Rent in major international cities is generally more affordable than the U.S., and often comes fully furnished.

2) Cheaper Dining Out

• Without the U.S.’s tipping culture, a meal out can be very reasonable in most parts of the world. 

• Food delivery in the U.S. has many surcharges, but in most developing countries it’s cheaper and faster to order delivery than going out to eat.

3) Healthcare and Wellness

• Routine visits (e.g., sore throat, sprained ankle) are much cheaper and more accessible outside of the U.S., even if paying out of pocket. However, it’s recommended to purchase an international health plan for major incidents (e.g., accidents or hospitalizations). Generally, U.S. health insurance plans do not cover you while living outside of the U.S., or only provide coverage after a very high deductible.

• Wellness visits for physical therapy and massage are often more accessible due to lower costs of labor. Additionally, some countries offer advanced treatments that may not yet be FDA-approved in the U.S. (e.g., sports injury recovery machines from Korea).

For many, the tax savings from the FEIE can nearly cover an entire year’s living expenses in countries like those in Latin America or Southeast Asia. The maximum federal tax savings of $23,402 could cover a modest condo and food expenses in these regions, effectively making your life abroad subsidized by your tax savings.    

By embracing life abroad, you can break free from the high costs of living in the U.S., enjoy significant tax benefits, and discover a new level of financial freedom.

This is not tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.