How to Legally Avoid U.S. Income Tax While Living in Paraguay
Did you know, the U.S. is one of the few countries in the world that taxes its citizens based on citizenship, not residency? This means that even if you move abroad, you still owe income tax to the IRS.
Still, many Americans choose to live overseas for financial freedom, and there’s a perfectly legal loophole to avoid U.S. income tax while enjoying a low-cost, high-quality lifestyle in Paraguay.
1. Foreign Earned Income Exclusion (FEIE) – The Legal Loophole
If you earn less than $130,000 per year (2025 limit) in foreign income, you can exclude it from U.S. taxation using the Foreign Earned Income Exclusion (FEIE).
- Live in Paraguay and pay ZERO U.S. income tax
- Qualify by spending 330 days per year abroad or establishing a tax home overseas
To qualify for the Foreign Earned Income Exclusion (FEIE), U.S. citizens must meet one of two tests:
- Physical Presence Test – You must be physically present in a foreign country for at least 330 full days in a 12-month period. These days don’t have to be consecutive, but they must add up within any rolling 12-month period. This is ideal for digital nomads or people who travel frequently but stay abroad most of the year.
- Bona Fide Residence Test – You must prove that you have established a tax home in a foreign country and are a bona fide resident for at least one full tax year. This means you have a permanent residence, strong ties (like residency, a lease, or business operations), and no immediate plans to return to the U.S. This is the better option for those who settle in Paraguay.
So, if you live in Paraguay full-time, you likely qualify under the Bona Fide Residence Test. If you travel a lot but stay outside the U.S. for 330+ days, you qualify under the Physical Presence Test. It does not matter which or how many countries you stay in, just that you’re not in the U.S. (Learn more on the IRS website.)
2. Paraguay Is a Tax-Friendly Country
Paraguay operates on a territorial tax system, meaning you’re only taxed on income earned inside Paraguay. If your income comes from the U.S. or other foreign sources, Paraguay doesn’t tax it.
- No tax on foreign income
- No wealth tax, no inheritance tax
- Easy residency process and low cost of living
Why Paraguay Is a Top Tax Haven for U.S. Expats
Paraguay’s territorial tax system means you are only taxed on income earned inside the country. If your income comes from U.S. sources, foreign investments, or remote work for a foreign company, Paraguay won’t tax it. This makes it a perfect destination for entrepreneurs, retirees, and digital nomads who earn their money abroad.
In addition to its tax-friendly income policies, Paraguay has no wealth tax and no inheritance tax. This means your savings, investments, and assets remain yours, without the government taking a percentage each year. Unlike in the U.S., where estate taxes can be as high as 40%, Paraguay allows you to pass on your wealth freely to your heirs.
Obtaining residency in Paraguay is straightforward compared to other countries. The process is relatively quick, and once approved, you can enjoy permanent residency with flexible minimum stay requirements (i.e. be present once every three years.) Paraguay’s low cost of living is another major advantage—housing, food, and services are significantly cheaper than in the U.S., allowing for a comfortable lifestyle on a much lower budget.
3. Invest in Paraguay – Modern Apartments at $1,200/m² ($111 per square ft)
Paraguay isn’t just a tax haven—it’s a growing economy with strong investment potential. You can buy modern studio apartments for $1,200 per square meter (~111 USD per square foot) in prime locations like Asunción.
- Affordable real estate with increasing rental demand
- Low property taxes and simple ownership rules
- High rental yields compared to the U.S.
Development of Paraguay until 2030
Now is an especially strategic time to invest, as Paraguay is preparing for FIFA World Cup 2030 developments. Infrastructure and modernization projects are underway, meaning property values are expected to rise significantly. Investors can buy now, earn rental income, and sell before 2030 for potentially triple the price. Read more about FIFA-driven development here.
- Prices start at $34,500 for a 30 m² (~323 ft²) studio in central Asunción
- Property management services handle rentals for you
- Projected Airbnb rental income: $500/month = 17% return on investment
If you want to learn more about investment opportunities in Paraguay? Read this article.
Want to Know More?
I help Americans relocate to Paraguay and structure their finances legally. Book a call with me to explore your options and learn how to maximize your financial freedom in South America.
My partner Alexandra and I have been researching and investing in Latin America for years, and Paraguay remains one of our top choices for its low taxes, affordable residency, and business-friendly climate. If you’re considering investing, relocating, or simply want to learn more, we offer Zoom calls to share our experience and answer your questions—including how we got residency, found investment properties, and built a sustainable lifestyle here.
I look forward to your questions!
Paul Trausner
Lived on 4 continents and visited 60+ countries
Specializes in expat consultation for Latin America,
including residency coaching, US LLC formation, and tax optimization strategies
