Digital Nomad Taxes for US Citizens: FEIE, FBAR, and Compliance - Part 2

common FEIE audit issue. IRS computers easily identify returns claiming exclusion while showing US address or employer information. Passport stamps rarely suffice as sole documentation—prepared nomads maintain calendars, flight records, accommodation receipts, and credit card statements proving foreign presence. Borderline day counts invite scrutiny. Conservative planning maintaining 340+ foreign days provides cushion against calculation disputes. Foreign corporation structures attract automatic IRS attention, particularly single-member entities potentially classified as controlled foreign corporations. Form 5471 filing requirements apply even to dormant companies, with penalties starting at $10,000 per form per year. Subpart F and GILTI provisions can create current taxation on foreign profits, eliminating deferral benefits. Many nomads discover foreign corporations create more problems than solutions without substantial business purposes beyond tax planning. Cryptocurrency transactions by nomads face heightened scrutiny as IRS focuses on digital asset compliance. Foreign exchange reporting requirements apply to overseas crypto accounts. Every transaction potentially triggers capital gains calculations at increasingly complex basis tracking. DeFi participation and staking rewards create additional reporting challenges. The intersection of crypto and international taxation remains unsettled, inviting conservative positions to avoid becoming test cases. Documentation strategies prevent most audit issues through proactive record keeping. Maintain comprehensive travel records beyond minimum requirements. Save all foreign tax documents with certified translations. Document business purposes for all structures and transactions. Create contemporaneous logs for business versus personal activities. Organize records assuming eventual IRS review. While audits remain relatively rare, international returns face higher scrutiny. Preparation prevents problems while enabling confident positions defending legitimate tax strategies. ### Frequently Asked Questions for US Digital Nomads Q: Can I avoid US taxes by renouncing citizenship? Renunciation eliminates future US tax obligations but involves complex processes and potential exit taxes. Covered expatriates (meeting wealth or tax liability thresholds) face mark-to-market taxation on worldwide assets. The $2,350 renunciation fee pales compared to professional fees and exit tax liabilities. Consider long-term implications beyond tax savings—loss of US passport, voting rights, and potential immigration restrictions. Q: Do I need to pay state taxes if I'm a permanent nomad? It depends on maintained state connections. Successfully severing state residency eliminates obligations, but requirements vary dramatically. Some states pursue former residents aggressively while others release claims easily. Establishing domicile in no-tax states before going abroad provides cleanest solution. Document severance thoroughly and consider professional guidance for high-tax state departures. Q: How does marriage to a non-US citizen affect my taxes? Marriage creates opportunities and complications. Filing jointly often provides benefits but requires spouse obtaining US taxpayer identification numbers. Non-resident alien spouses can elect US tax treatment, enabling joint FEIE claims potentially excluding $240,000. However, this subjects spouse's worldwide income to US taxation. Consider implications carefully with professional guidance before making elections. Q: What happens if I haven't filed US taxes while living abroad? The Streamlined Foreign Offshore Procedures provide penalty relief for non-willful non-compliance. File three years of returns and six years of FBARs with explanation of non-willfulness. Success requires genuine lack of knowledge rather than intentional avoidance. Criminal prosecution remains rare but possible for egregious cases. Professional assistance strongly recommended navigating disclosure programs. Q: Can I contribute to US retirement accounts while abroad? Yes, but FEIE complicates contributions. Excluded income doesn't count as compensation for IRA purposes. Self-employed individuals can contribute to SEP-IRA or Solo 401(k) based on net earnings after FEIE. Foreign tax credit users face fewer restrictions. Consider Roth conversions during low-income years abroad. Coordinate US retirement planning with foreign pension entitlements and tax treaties. US citizens face unique challenges as digital nomads, navigating citizenship-based taxation while building location-independent lives. Success requires understanding complex rules around foreign income exclusion, international reporting, and state obligations. While compliance costs and complexity exceed those faced by other nationalities, proper planning enables tax-efficient nomadic lifestyles. The key lies in accepting rather than avoiding US tax obligations while optimizing available benefits. Professional guidance often proves essential given the stakes involved and rapidly evolving international tax landscape.