I Paid No Income Tax for 2 Decades (Legally)

You’ve seen internet headlines promising that if you move overseas, you won’t have to pay US income tax anymore.

It’s true. For example, I didn’t pay any US income tax between 1984 and 2007—legally. 

That’s because during those 23 years, all my income came from work done outside the United States. Every year, my foreign income was below the threshold in the Foreign Earned Income Exclusion (FEIE).

Under the FEIE, I was able to exclude more than $200,000 of income from my taxable income altogether. It was as if I’d never earned it, so I never paid any tax on it.

But things aren’t as straightforward as the clickbait headlines suggest.

For example, many people assume that, since they don’t owe any US tax, they don’t have to file an annual return. That’s definitely not the case. If you don’t file, you’ll get hit with penalties, even if you don’t owe the IRS any money.

Another common mistake is to assume that the FEIE applies to all types of income.

As a lifelong expat, I know the drill. Here’s what you need to know: 

1. The FEIE only applies to earned income. That means salaries, wages, commissions, contracting work, or profit from a foreign business. Interest, dividends, and capital gains do not count as earned income. So, if you move overseas and live off the proceeds of investments in the US, or Social Security or other passive income, you must pay tax on that. The same applies to foreign passive income from investments like real estate.  

2. The FEIE refers to the place where you did the work, not where the company that’s paying you is. For example, I work for International Living, but I work from my home office in Cape Town. So, for the purposes of the FEIE, I work in South Africa, so my income is foreign sourced and therefore eligible for exclusion.

3. You must live outside the US. To be eligible for the FEIE, you must either be a bona fide resident of a foreign country for an entire tax year, or you must be physically present in one or more foreign countries for at least 330 days in a 12-month period. For example: 

1. Between 1984 and 2007, I lived full-time in South Africa. That made me a bona fide resident of the country, qualifying me for the FEIE. 

• Most countries only allow tourist visits for 90 days at a time, so “digital nomads” spend three months in one country, three months in another, and so on until they have spent a total of 330 days outside the US That makes them eligible for the FEIE, even though they weren’t a bona fide resident of any one country. 

4. You may not have a home in the US. If you have a house in the US, you should rent it out, let family use it or leave it empty. If the IRS thinks you have a US home for your use, they may reject your FEIE status. 

If you qualify for the FEIE, you’ll need to complete Form 2555 as part of your federal tax return. If you file taxes jointly with your spouse, you must both complete your own Form 2555.

You’ll need to know:  

• Which test are you using to qualify (bona fide residence or physical presence). 

• Dates you traveled internationally to/from the US during the tax year. The IRS will deny the FEIE if you spend more than 35 days in the US  

• Documentation of your foreign-earned income.  

For the 2025 tax year, the FEIE is $130,000 per person (i.e., $260,000 for a couple filing jointly).

The Foreign Tax Credit

What if your income is higher than that? That’s where the Foreign Tax Credit comes into play. It’s a tax credit—every dollar of tax paid to a foreign government reduces your US tax bill by one dollar.

If you live in a country where the income tax rate is higher than your US tax bracket, it’s simple. You paid more tax to the foreign government than you would owe the US, so you don’t pay any US tax. You must file your taxes, declare your taxable income, but then deduct all the taxes you’ve already paid, leaving you with no debt to the IRS. In a case like that, there’s no point using the FEIE. 

But let’s say you generate $500,000 in foreign earned income during the 2025 tax year. Assuming you’re married filing jointly, you can deduct $260,000 of that under the FEIE, leaving a US tax obligation of $240,000.

That’s a top US tax bracket of 32%, so you owe $53,863 to the IRS. (I’m simplifying here, of course—there may be other deductions and credits involved.) 

But let’s say you paid income tax at a 15% rate to a foreign government. That works out to $75,000 on your $500,000 income. You’ve already excluded $260,000 of that income under the FEIE, so you can’t claim a tax credit on foreign taxes paid on that amount. But you can claim the Foreign Tax Credit on the remaining $240,000 of foreign income. At a 15% foreign tax rate, that’s $36,000. 

That means your remaining tax obligation to the IRS is $53,863 – $36,000 = $17,863. 

This sounds complicated, but the key things to remember are the difference between earned and unearned (passive) income, and the rules for foreign residency. 

Obviously, if you have complex financial affairs, you’re better off using a tax accountant to help you figure out your US tax obligations. Fortunately, there are plenty of tax accountants scattered around the world specializing in helping US taxpayers deal with all of this. 

If you play your cards right and manage your financial and tax affairs appropriately, it’s possible to approach the Holy Grail of paying little or no income tax to anyone. But it isn’t automatic… that’s why I’ll be here to help you figure it all out as you diversify yourself beyond the US!