How Taxes Work When You Earn US Income While Living Abroad

The US taxes you on worldwide income no matter where you live — that part never changes, and it’s the single most misunderstood fact in every expat forum thread on this topic. What changes is how much of that income is actually taxable, and that’s where the Foreign Earned Income Exclusion does real work. But the FEIE has a specific, well-documented blind spot that catches a huge number of freelance and self-employed expats off guard, and it’s worth understanding before you assume the exclusion means you owe nothing.

Here’s how this actually works.

The Foreign Earned Income Exclusion: what it does

The FEIE lets qualifying US citizens exclude a set amount of foreign earned income from federal income tax each year. For the 2025 tax year, that amount is $130,000. For 2026, it rises to $132,900. (You’ll see older articles online citing $126,500 or other figures — those reflect prior tax years; the exclusion is inflation-adjusted annually, so always confirm the current year’s figure rather than trusting a number from an undated source.)

To qualify, you need to pass one of two tests: the Physical Presence Test (330 full days outside the US in any 12-month period) or the Bona Fide Residence Test (established residency in a foreign country for a full tax year). Most people in this audience qualify through physical presence, since it doesn’t require the more involved residency documentation the second test does.

Married couples who both work abroad and both qualify independently can each claim the exclusion, effectively doubling the sheltered amount between them.

What the FEIE does not do, and why this catches people

This is the part that surprises the most people, and it’s specifically relevant if you’re self-employed or freelancing rather than drawing a W-2 salary: the FEIE excludes income from federal income tax, but it does not exclude self-employment tax.

Self-employment tax is a separate 15.3% tax — 12.4% for Social Security, 2.9% for Medicare — assessed on net self-employment earnings, calculated on Schedule SE. It exists independently of Form 2555, the form you use to claim the FEIE, and claiming the FEIE has no effect on this separate obligation. A freelancer earning $80,000 a year, fully excluded from income tax via FEIE, can still owe over $12,000 in self-employment tax on that same income. This is consistently the single most common surprise reported by newly self-employed expats, and it’s the detail most casual “am I taxed abroad” conversations skip entirely.

The filing threshold for this is low: if your net self-employment earnings are $400 or more in a year, you generally need to account for self-employment tax, regardless of how much the FEIE shelters on the income-tax side.

One thing that can change this: a totalization agreement between the US and your country of residence can, in some cases, prevent this double Social Security obligation. Whether one applies depends on the specific country and your specific situation — this is a detail worth confirming with a tax professional rather than assuming either way.

What the FEIE covers, and what it explicitly doesn’t

The exclusion applies only to earned income — wages, salaries, and self-employment income for services actually performed. It does not apply to passive income: dividends, interest, rental income, or capital gains. If part of your income abroad comes from investments rather than active work, that portion isn’t shielded by the FEIE at all and gets taxed under normal US rules regardless of where you live.

How this interacts with the country you’re actually living in

FEIE and self-employment tax are US-side obligations — they apply regardless of what country you’re in. But both the Philippines and Thailand layer their own local tax rules on top, and those interact with the visa framework covered elsewhere in this pillar.

In the Philippines, foreign-sourced income for non-residents generally falls outside Philippine tax obligations, with most liability remaining tied to your home jurisdiction rather than triggering local filing.

In Thailand, tax residency is triggered by spending 180 or more days in the country within a calendar year — cross that threshold and you become a Thai tax resident, which can create Thai tax obligations on income depending on how and when it’s remitted into the country, under rules that have shifted meaningfully since a 2024 reform to how foreign-sourced remittances are treated.

Neither of these local rules changes your US filing obligation. You still file with the IRS regardless of what you owe or don’t owe locally — this is the part people occasionally get wrong, assuming that if they don’t owe anything after the FEIE, they don’t need to file at all. Filing thresholds are separate from tax-owed thresholds, and they’re often lower than people expect.

Where this gets genuinely complicated

The general framework above holds for most straightforward cases. Where it gets specific to you: whether a totalization agreement applies to your situation, how the Physical Presence Test interacts with a year where you’re mid-transition and haven’t hit 330 days yet, how Thailand’s remittance-based tax rules apply to money you bring in from savings versus current income, and whether restructuring how you’re paid (contractor versus owning a foreign entity, for instance) changes your actual tax exposure.

This is genuinely the point where a blog post reaches its limit — tax situations are specific enough that generic guidance either oversimplifies or gets outright wrong for your particular case.

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References

• IRS Form 2555 instructions and IRC Section 911 — Foreign Earned Income Exclusion
• TaxesForExpats — Self-Employment Tax on Foreign Income: 2026 Guide
• Bright Tax — Thailand Digital Nomad Visa, US tax-side implications for American expats
• Thailand foreign-income remittance rule (Por. 161/2566), effective January 1, 2024

This article explains general US and local tax frameworks as currently published; it is not tax advice. Individual tax situations vary significantly. Consult a CPA or tax professional experienced in expat taxation before making filing decisions.