How do US taxes work if I live in Paraguay?
US citizens must file taxes worldwide, even living in Paraguay. But FEIE excludes up to $126,500 of earned income, and FTC credits foreign taxes paid.
Key Takeaways
- US citizens must file taxes even living abroad
- FEIE excludes up to $126,500 of earned income
- Self-employment tax still applies (~15%)
- Investment income fully taxable regardless
- FBAR required for $10K+ in foreign accounts
As a US citizen, you must file taxes regardless of where you live. Here's how it works when living in Paraguay.
The Basic Rule
US taxes citizens on worldwide income - one of only two countries that do this (the other is Eritrea). Living in Paraguay doesn't change your filing requirement.
The Good News
Several provisions reduce or eliminate US tax for expats:
**1. Foreign Earned Income Exclusion (FEIE)**
- Exclude up to $126,500 (2024) from US taxation
- Covers salary, freelance income, self-employment
- Must meet presence or residence test
- Form 2555
**2. Foreign Tax Credit (FTC)**
- Credit for taxes paid to foreign governments
- Since Paraguay taxes little to nothing on foreign income, limited benefit
- Useful if you have Paraguayan-source income
- Form 1116
**3. Foreign Housing Exclusion**
- Exclude or deduct housing costs above base amount
- Especially useful in expensive cities
- Paraguay housing is cheap, so benefit limited
- Included in Form 2555
Qualifying for FEIE
Two tests (meet either one):
**Physical Presence Test**
- Present in foreign country 330 days in 12-month period
- Days can be in any country, not just Paraguay
- Most expats use this
**Bona Fide Residence Test**
- Establish residence in foreign country
- Intent to remain indefinitely
- Usually requires full tax year abroad
What's Taxable
| Income Type | Paraguay Tax | US Tax Treatment |
|---|---|---|
| Foreign salary | 0% | FEIE excludes up to $126.5K |
| Freelance income | 0% | FEIE + SE Tax (~15%) |
| Investment income | 0% | Fully taxable in US |
| Crypto gains | 0% | Fully taxable in US |
| Rental income | 10% (if in Paraguay) | Taxable with possible credits |
Self-Employment Tax
FEIE doesn't exclude self-employment tax:
- Still owe ~15.3% SE tax on net self-employment income
- Up to Social Security wage base
- Can be significant for freelancers
- Explore S-Corp structure to minimize
Investment Income
NOT covered by FEIE:
- Capital gains
- Dividends
- Interest
- Crypto gains
These are taxed normally by US regardless of residence.
FBAR Requirements
If you have $10,000+ in foreign accounts at any time:
- File FBAR (FinCEN 114)
- Due April 15, automatic extension to October
- Includes Paraguayan bank accounts
- Significant penalties for non-filing
FATCA Form 8938
If you meet thresholds:
- Single abroad: $200K end of year or $300K any time
- Report foreign financial assets
- Filed with tax return
Practical Strategy
- **Keep Good Records**: Income by source and location
- **Track Days**: Physical presence for FEIE
- **File On Time**: June 15 auto extension for expats, request October 15
- **Consider Professional**: Expat tax specialists know the rules
- **Plan Investment Income**: May want to minimize while abroad
Common Mistakes
- Not filing at all (you still must file)
- Missing FBAR deadline
- Not claiming FEIE
- Assuming Paraguay's 0% applies to US
- Ignoring SE tax on freelance income
Recommended Tax Professionals
Look for expat specialists:
- Greenback Expat Tax Services
- Bright!Tax
- Online Taxman
- Local CPAs with international experience
Cost: $300-800 for straightforward returns
State Taxes
Some states tax residents worldwide:
- California, New York especially problematic
- Establish domicile in no-income-tax state before moving
- Florida, Texas, Nevada, Wyoming, etc.
Have More Questions?
Explore our comprehensive guides to Paraguay