Paraguay Taxes for US Citizens: Complete 2026 Guide

The Hard Truth: Paraguay Won't Reduce Your US Taxes

Let's start with radical honesty:

Moving to Paraguay will NOT reduce your US tax obligations.

The United States is one of only two countries in the world (along with Eritrea) that practices citizenship-based taxation. This means:

• You owe US taxes on your worldwide income regardless of where you live
• You must file US tax returns every year, even from Paraguay
• You must report all foreign bank accounts and assets
• Paraguay residency does NOT change your US tax status
• You'll pay the same federal income tax rates (10-37%) as if you lived in the US

Paraguay's territorial tax system (0% tax on foreign income) only applies to Paraguay taxes. It doesn't affect what you owe the IRS.

US Citizenship-Based Taxation Explained

Most countries tax based on residency. If you're a Canadian citizen living in Thailand, Canada doesn't tax you (with some exceptions).

The US is different. The IRS taxes based on citizenship. Even if you:

• Haven't lived in the US for 20 years
• Have no US income
• All your assets are abroad
• You've never even visited the US (born abroad to US parent)

You still owe US taxes on worldwide income.

The only ways to escape US taxation are:

1. Renunciation: Give up US citizenship (see section below)
2. Death: Not recommended

That's it. Those are your options.

Your US Tax Obligations from Paraguay

As a US citizen living in Paraguay, you must:

1. File Annual Tax Returns (Form 1040)

Due April 15 (automatic 2-month extension to June 15 if abroad, can extend further to October 15).

Report all worldwide income:

• W2 wages (US or foreign)
• 1099 income (freelance, contract)
• Business income (LLC, sole proprietor)
• Investment income (interest, dividends, capital gains)
• Rental income
• Pensions, retirement distributions
• Foreign bank interest
• Cryptocurrency gains

2. Pay Federal Income Tax

Same tax brackets as US residents (2026 rates):

• 10% on income up to ~$11,600 (single)
• 12% on $11,600-$47,150
• 22% on $47,150-$100,525
• 24% on $100,525-$191,950
• 32% on $191,950-$243,725
• 35% on $243,725-$609,350
• 37% on income over $609,350

Note: The Foreign Earned Income Exclusion (FEIE) can exclude up to ~$130,000 of earned income. See FEIE section below.

3. State Taxes (Depends on Domicile)

Some states claim you as resident even if you live abroad:

• Sticky states: California, Virginia, South Carolina, New Mexico
• Solution: Establish domicile in no-tax state BEFORE leaving (see State Taxes section)

4. Self-Employment Tax (15.3%)

If you're self-employed (freelance, business owner), you pay:

• 12.4% Social Security tax
• 2.9% Medicare tax
• Total: 15.3% on net self-employment income

This is IN ADDITION to regular income tax. The FEIE does NOT exclude income from self-employment tax.

See Social Security section below for double taxation issue.

FATCA & FBAR: What You Must Report

Beyond your tax return, US citizens abroad must report foreign financial accounts and assets. Failure to file these forms carries severe penalties.

FBAR (FinCEN Form 114)

What it is: Foreign Bank Account Report

Threshold: Required if your combined foreign account balances exceed $10,000 at ANY point during the year.

What counts:

• Bank accounts (checking, savings) in Paraguay
• Investment accounts at foreign brokers
• Foreign pension accounts (if you have signature authority)
• Cryptocurrency held on exchange with account number
• Combined total across ALL foreign accounts

Example: You have $6,000 in Banco Itaú (Paraguay), $3,000 in Banco Atlas, and $2,500 in Binance. Total = $11,500. You MUST file FBAR.

Deadline: April 15 (automatic extension to October 15)

Where to file: Filed separately with FinCEN (NOT with your tax return, NOT with IRS)

Form 8938 (FATCA)

What it is: Statement of Specified Foreign Financial Assets (part of FATCA - Foreign Account Tax Compliance Act)

Thresholds (higher than FBAR):

• Single living abroad: $200,000 on last day of year OR $300,000 at any time
• Married filing jointly (abroad): $400,000 on last day OR $600,000 at any time

What counts:

• All FBAR accounts (bank, investment)
• PLUS: Foreign stocks, bonds held directly
• PLUS: Interest in foreign entity (trust, partnership)
• Broader than FBAR

Deadline: April 15 (extension to October 15)

Where to file: Filed WITH your tax return (Form 1040)

Penalties:

• Substantial penalty per violation (failure to file)
• Additional escalating penalties per month after IRS notice
• 40% penalty on understatement of tax

FBAR vs Form 8938: Quick Comparison

Do I need to file both?

Many people with foreign accounts over $10,000 will file FBAR but NOT Form 8938 (if under $200k threshold). If you exceed both thresholds, you file BOTH.

Foreign Earned Income Exclusion (FEIE): Your Main Tax Benefit

The Foreign Earned Income Exclusion (FEIE) is the primary tax benefit for US citizens living abroad.

What It Is

The FEIE allows you to exclude a certain amount of earned income from US federal income tax.

2026 Exclusion Amount: Approximately $130,000 (indexed for inflation annually)

2025 was $126,500. Exact 2026 amount TBD by IRS.

What Income Qualifies

Earned income only:

• ✅ Wages (W2 or foreign employment)
• ✅ Self-employment income (freelance, consulting)
• ✅ Business income (sole proprietor, LLC)

Does NOT apply to passive income:

• ❌ Interest, dividends
• ❌ Capital gains (stocks, crypto, real estate)
• ❌ Rental income
• ❌ Pensions, retirement distributions
• ❌ Social Security

How to Qualify

You must meet ONE of two tests:

Test 1: Physical Presence Test

Be physically present in a foreign country (or countries) for 330 full days in any 12-month period.

• Days in US don't count (max 35 days in US)
• Travel days over international waters don't count
• Can be split across countries (not just Paraguay)

Test 2: Bona Fide Residence Test

Be a bona fide resident of a foreign country for an entire tax year (Jan 1-Dec 31).

• Requires intent to stay indefinitely
• Can visit US briefly
• More flexible but harder to prove

Most expats use Physical Presence Test (simpler to track).

FEIE Examples with Math

How to Claim FEIE

File Form 2555 with your tax return (Form 1040).

You'll need to:

• Report all foreign earned income
• Indicate which qualification test you're using
• Track your days abroad (keep travel records)
• Provide foreign address

The US LLC + Paraguay Structure

You may have heard about the "US LLC + Paraguay = 0% tax" strategy. Here's how it works, and why it's complex.

How It Works

The structure:

1. Form a US LLC (Wyoming, Delaware, or New Mexico popular)
2. Become a Paraguay tax resident
3. Invoice clients through the LLC
4. Live in Paraguay (meet FEIE physical presence test)

Tax treatment:

• US side: Single-member LLC is pass-through ("disregarded entity"). No US corporate tax on foreign-sourced income earned by foreign tax resident.
• Paraguay side: LLC is foreign entity. Income invoiced by foreign LLC = foreign source. 0% Paraguay tax.
• Personal return: You still file Form 1040 and claim FEIE to exclude earned income up to $126,500.

Result: If structured correctly, can achieve 0% US + 0% Paraguay = 0% total tax on income up to FEIE limit.

Critical Caveats

When It Makes Sense

Good fit:

• Self-employed high earners
• Willing to pay significant annual fees for professional setup and compliance
• Can meet FEIE physical presence test (330 days abroad)
• Income is truly foreign-sourced (not US clients = US source in some cases)

NOT a good fit:

• W2 employee (can't invoice through LLC)
• Low income (costs exceed savings)
• Frequently in US (can't meet FEIE test)
• Want simplicity

Source of Income Rules

A critical issue: Where is your income "sourced"?

• Foreign source: Services performed abroad, clients abroad = 0% US tax possible
• US source: Services performed in US, or US clients = US tax regardless of LLC

This gets complex. A US LLC serving US clients while you're abroad is a gray area. Hire a CPA.

Bottom Line

The US LLC + Paraguay structure can work, but it's not a magic bullet. It requires:

• Professional setup and ongoing compliance
• Significant income to justify costs
• Commitment to living abroad (330+ days)
• Acceptance of complexity and uncertainty

For most people, simply claiming FEIE as a self-employed person or remote employee is simpler and sufficient.

Breaking State Tax Residency (Before You Leave)

Federal taxes aren't your only concern. Some US states will try to tax you even after you move to Paraguay.

"Sticky" States

These states may claim you as a resident even if you live abroad:

• California: Very aggressive. Claims residency based on "intent to return"
• Virginia: Domicile-based. Hard to break if born there
• South Carolina: Similar to Virginia
• New Mexico: Can claim non-residents with NM income

No-Tax States (Safe Havens)

These states have no personal income tax:

• Texas
• Florida
• Wyoming
• South Dakota
• Nevada
• Washington
• Tennessee
• Alaska
• New Hampshire

How to Establish Domicile in No-Tax State

Do this BEFORE leaving the US:

1. Get driver's license in new state (surrender old state license)
2. Register to vote in new state
3. Get mailing address (UPS store, friend, family)
4. Open bank account with new state address
5. Update IRS address (Form 8822)
6. File final part-year return with old state showing move
7. File first part-year return with new state
8. Update will, passport, vehicle registration to new state

Popular choice: Florida or Texas (large, easy to establish ties, no questions asked)

This avoids state tax while living in Paraguay.

Social Security Tax: Double Taxation for Self-Employed

Here's an unpleasant surprise: Self-employed Americans in Paraguay may pay social security taxes twice.

The Problem: No Totalization Agreement

The US has "totalization agreements" with many countries to prevent double social security taxation. These agreements let you pay social security tax in ONLY one country.

Paraguay and the US do NOT have a totalization agreement.

Who This Affects

Self-employed individuals:

• US self-employment tax: 15.3% (12.4% Social Security + 2.9% Medicare)
• Paraguay IPS (social security): 16% (if you register as professional/business)

Combined: Up to 31.3% in social security taxes alone (before income tax)

Who Is Exempt

W2 employees: Your employer handles this. Usually not double-taxed.

Passive income: No self-employment tax (but also no social security benefits accrued)

Workarounds (Consult CPA)

1. Don't register with Paraguay IPS: If you're a foreign resident earning foreign income, you may not be required to pay Paraguay social security. Gray area.
2. Structure as corporation: Potentially avoid self-employment tax (complex, CPA required)
3. Accept it: Pay both, build benefits in both systems

This is a known issue with no great solution. Consult a cross-border CPA.

Why Paraguay Still Makes Sense for Americans

After all this bad news, you might wonder: Why bother with Paraguay?

Here's the honest answer: It's not about tax savings. It's about lifestyle arbitrage.

Your After-Tax Dollars Go Further

Even if you pay the same taxes, your money stretches 60-70% further in Paraguay.

Other Benefits Beyond Taxes

• Plan B: Second residency if US situation deteriorates
• Path to citizenship: 3 years residency → Paraguayan passport (then can renounce US if desired)
• Quality of life: Lower cost of living, warm climate, less stress
• Geographic diversification: Assets, residency, options in multiple countries
• Banking diversification: Access to Paraguayan banks (though US FATCA compliance required)
• Ease of residency: One of the easiest residency programs in the world
• No minimum stay: Unlike many residency programs, no requirement to live in Paraguay X days/year
• Family benefits: Bring spouse, children under your residency

Bottom Line for Americans

Don't move to Paraguay expecting to escape US taxes. You won't.

Do move to Paraguay if:

• You want lifestyle arbitrage (same money, better life)
• You want geographic diversification
• You want a Plan B
• You want an easy path to second citizenship
• You can claim FEIE (living abroad 330+ days)

With FEIE, you can exclude up to $126,500 of earned income. Above that, you pay US taxes same as US residents. But your after-tax dollars go further.

The Renunciation Option (For High Net Worth Only)

The ONLY way to fully escape US taxation is to renounce US citizenship.

This is a drastic, irreversible decision. It makes sense for very few people.

How Renunciation Works

1. Obtain second citizenship: You can't be stateless. Get Paraguay citizenship first (3 years residency required).
2. Become tax compliant: File and pay all US taxes for prior 5 years.
3. Schedule appointment: At US Embassy in Asunción (or any US embassy).
4. Oath of renunciation: Formally renounce citizenship in front of consular officer.
5. Pay government fee: Non-refundable processing fee required.
6. File final tax return: Form 1040 and Form 8854 (expatriation statement).
7. Exit tax (if applicable): See below.

Exit Tax: Who Pays

You're subject to exit tax if you meet ANY of these criteria:

• High net worth threshold (worldwide assets), OR
• High average annual income tax for prior 5 years, OR
• Haven't certified 5 years tax compliance

Exit tax calculation: Mark-to-market tax (all assets deemed sold on day before expatriation).

• Stocks, real estate, business interests valued as if sold
• Pay capital gains on unrealized appreciation (with exclusion amount)
• Can be massive for high-net-worth individuals

After Renunciation

What you lose:

• US passport (must use Paraguay passport)
• Right to live/work in US without visa
• Can only visit US 90 days (ESTA, if eligible)
• Social Security benefits (may lose depending on years paid)
• Irreversible (can't get citizenship back easily)

What you gain:

• Freedom from US worldwide taxation
• No FBAR, FATCA, or foreign reporting
• Privacy from IRS
• Paraguay territorial tax (0% foreign income)

Reed Amendment (Potential Ban)

The Reed Amendment allows US to deny entry to anyone who renounced citizenship "for tax avoidance purposes."

Rarely enforced, but could theoretically ban you from visiting US forever.

Who Should Consider Renunciation

• High net worth individuals (can afford exit tax)
• Permanent expat (never returning to US)
• No US business ties
• No US family needing care
• Strong second passport (Paraguay or better)
• Philosophically opposed to US citizenship-based taxation

For most people: Keep US citizenship, pay US taxes, use FEIE, enjoy Paraguay lifestyle. Renunciation is extreme.

Frequently Asked Questions