Understanding Tax Obligations When Working Internationally: A Practical Overview

The digital revolution and remote work boom have made it easier than ever for Americans to live and earn abroad. But here’s a reality that catches many expats off guard: working in another country doesn’t automatically free you from U.S. tax obligations. In fact, the U.S. maintains one of the world’s most comprehensive tax systems—and do other countries have income tax the same way? Generally yes, though their approaches vary significantly.

The U.S. Tax System Works Differently Than Most Nations

Here’s the uncomfortable truth: the United States taxes its citizens on worldwide income, regardless of where they live or work. Only two other countries operate this way—Eritrea and North Korea. So if you relocate to Thailand, Australia, or anywhere else, you’re still required to file a U.S. tax return and report every dollar earned globally.

The challenge intensifies when your country of residence also demands income taxes on the same earnings. This double-taxation scenario is precisely why understanding your options matters.

Three Legal Pathways to Reduce Tax Burden

The U.S. Tax Code provides three main mechanisms to prevent or minimize double taxation:

Strategy One: Exclude Your Foreign Earnings

The Foreign Earned Income Exclusion allows qualifying individuals to exclude a substantial portion of foreign-sourced income from U.S. taxation. For 2023, you can exclude up to $120,000 (this was $112,000 in 2022 and adjusts annually for inflation).

To qualify, you must meet one of three conditions: (1) be a U.S. citizen living abroad as a bona fide resident for a full tax year, (2) be a resident alien from a country with a U.S. tax treaty and similarly resident abroad for a full year, or (3) spend at least 330 full days outside the U.S. within any 12-month consecutive period.

Strategy Two: Deduct Housing Costs

Beyond the income exclusion, qualifying individuals can deduct reasonable foreign housing expenses—rent, utilities, property insurance, and more. However, this comes with strict limitations: housing costs cannot be lavish, and the total deduction cannot exceed your foreign income exclusion amount. This works best in high cost-of-living countries.

Strategy Three: Claim Foreign Taxes Paid

The Foreign Tax Credit is often the most powerful tool. It allows you to credit the taxes you actually paid to another country against your U.S. tax liability, dollar-for-dollar. If you paid $15,000 in foreign income tax, you can reduce your U.S. taxes by that same amount. One critical rule: you cannot combine this credit with the foreign income exclusion or housing exclusion on the same income.

Special Considerations for Remote Workers

If you’re a digital nomad earning U.S.-based income while living overseas, complications arise. Many assume that working for an American employer means they only owe U.S. taxes. Not necessarily.

Most countries define tax residency as spending 183 days or more annually in their territory. Once you cross that threshold, that country will typically tax your worldwide income—including U.S.-sourced salary—unless the country has a territorial tax system (which taxes only income earned within its borders).

Your remote work location matters enormously. Spending a year in Portugal? Portugal will likely tax your income. Bouncing between countries every two months? You might avoid residency in any single location, but this strategy carries risks and requires careful documentation.

Choosing the Right Approach for Your Situation

The optimal strategy depends on several factors: your income level, the tax rates in your host country, how long you plan to stay abroad, and your citizenship status. Someone earning $90,000 in Singapore might benefit from the Foreign Earned Income Exclusion, while a high earner in Spain might gain more from the Foreign Tax Credit. An expat in a territorial tax system pays taxes only on locally-earned income—a completely different calculation.

This complexity is precisely why consulting a tax professional specializing in international income isn’t optional—it’s essential. Tax codes change, treaty provisions vary by country, and one miscalculation can trigger audits or penalties.

The Takeaway

U.S. citizens working internationally face genuine tax complexity. The good news: the system isn’t designed to punish expats—it’s designed to prevent tax avoidance. By understanding the Foreign Earned Income Exclusion, housing deduction, and Foreign Tax Credit options, you can structure your tax affairs legally and strategically. The key is planning ahead and getting expert guidance rather than discovering surprises during tax season.