How to File Taxes as a Digital Nomad

As a digital nomad, what is the process for filing taxes? The growing population of digital nomads choosing to live a nomadic lifestyle has made this issue more common. It can be challenging to understand without assistance.

The guide has everything you need to know about filing international and local taxes, so the good news is, you don’t have to learn from experienced digital nomads.

Managing tax deductions and expenses

The majority of digital nomads are entrepreneurs or freelancers. If you have a remote telecommuting job but are hired as a “contract” employee without tax benefits or employment standards act requirements, you will file taxes as if you are self-employed.

If you are new to the world of self-employment, it may seem challenging, but being a self-employed freelancer allows you to benefit from a greater number of tax deductions compared to being a salaried employee.

Tax Deductions for Digital Nomads

For entrepreneurs, freelancers, and contract employees (as opposed to salaried employees), any expense incurred in the name of earning a living is deductible. This typically applies to most digital nomads, who will have deductible expenses such as:

Laptop, and all computer-related equipment, including laptop bags and accessories
“Office Expenses”, like notebooks, pens, and other supplies used in your work
Internet service
Phone expenses, including your cell phone, as well as SIM cards and service
Co-working space membership
PayPal fees and other banking fees incurred in the process of getting paid (keep your fees minimal by using Wise!)
Legal and accounting expenses
Professional fees, including licenses or insurance you need to operate in your line of work
Memberships and subscriptions, including association fees
Courses or education expenses related to your field

If you have a blog or website as part of your digital nomad career, you can deduct even more expenses, including:

Website hosting and domain fees (such as Host Gator for smaller sites, or for larger websites managed hosting like Big Scoots)
Newsletter programs (like Aweber/MailChimp/Convertkit/BirdSend, click funnels, operating platforms (for selling digital products), and other marketing expenses
Advertising expenses, including boosting posts on Facebook
Blogging courses, or any educational expense incurred to help you run your business effectively
Affiliates you pay to help you sell your products
Employees or virtual assistants

If you happen to be a travel blogger, there is good news for you – your travel expenses (in general) are also eligible for tax deductions!

Tracking Expenses, Managing Receipts

To make filing your tax bills easier as a digital nomad, it is crucial to maintain meticulous records. Avoid the temptation to hastily store everything in an unorganized manner, as this will only complicate your financial preparation and tax filing process. Taking the time to organize and be attentive to details from the start will save you significant time and prevent unnecessary hassle later on.

What digital nomads should know about U.S. taxes

1. Yes, American digital nomads must file U.S. taxes, even when working remotely abroad

“Do digital nomads have a requirement to file U.S. taxes?” is the most frequently asked question we receive.

Digital nomads must file a U.S. tax return if they earn more than the minimum amount needed to file.

The U.S. imposes taxes on Americans based on their citizenship rather than their place of residency. Therefore, regardless of your current place of residence, if you are recognized as a U.S. citizen and earn more than the minimum worldwide income, you are required to pay taxes. This rule applies even if you do not earn any income within the U.S.

Digital nomads’ taxable foreign income comprises:

Wages
Interest
Dividends
Rental Income

2. Remote workers can catch up on U.S. taxes with Offshore Streamlined Compliance Procedures

If you are a digital nomad and have not filed a U.S. tax return before, there is a possibility of getting caught up without facing penalties. The IRS offers a program called Streamlined Foreign Offshore Procedures to assist individuals who unintentionally failed to comply with filing requirements and want to catch up on their taxes without incurring penalties.

In order to be eligible, it is necessary for you to:

Have lived in a foreign country for at least 330 days during one of the last three years and not maintained a U.S. abode.
Confirm that your failure to file U.S. tax returns and FBAR was not willful.

3. Not filing taxes as a digital nomad can result in steep penalties and fines

Attempting to avoid your tax responsibility in the United States carries severe repercussions, and evading detection is relatively straightforward. Financial institutions globally, thanks to FATCA, share the financial account details of American citizens with the U.S. government.

The penalties for expat tax can vary from a small fine to penalties exceeding $10,000, and in severe cases of non-compliance, there is a risk of losing your passport.

Even if you are a digital nomad, it is worthwhile to file your U.S. taxes every year.

4. There are two tax benefits available to reduce digital nomads’ U.S. tax bill

If you are concerned about paying excessive taxes, you can take advantage of two methods as a digital nomad to minimize your tax expenses and prevent being taxed twice: the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC).

To break it down, the Foreign Earned Income Exclusion (FEIE) allows you to exclude your foreign earned income from being subject to U.S. income tax, effectively reducing (or potentially eliminating) your U.S. tax responsibility. As a digital nomad, you can meet the requirements for eligibility by successfully passing either the Bona Fide Residency test or the Physical Presence Test.

The FTC is another valuable tool to reduce your U.S. tax obligation. It provides a one-to-one decrease in your U.S. tax liability for each foreign tax paid.

Begin working on your U.S. taxes at this moment.

5. Americans working overseas must track time carefully to claim certain tax benefits

Accurately tracking your time in each country is crucial for digital nomads who want to ensure a smooth tax return. In order to claim tax benefits such as the FTC or the FEIE, it is necessary to have spent a specific number of full days (which means 24 full hours) on foreign soil. Even a small deviation of just 30 minutes can lead to disqualification. For instance, time spent on a 12-hour trans-oceanic flight might not be considered as part of your full days since you are technically in international airspace during that period.

Tracking hours accurately becomes more challenging when you move across different time zones.

Even if you’re self-employed outside the U.S. and can claim the foreign earned income exclusion, you will still be required to pay U.S. self-employment tax on your foreign earned income. However, Social Security Totalization Agreements between the United States and several foreign countries may exempt you from paying self-employment taxes in both countries.

Digital nomads may face a difficulty when transitioning between countries due to the residency requirements of totalization agreements. If one is not considered a resident and taxed in another country, the totalization agreement does not have any effect. Therefore, it is beneficial to seek the assistance of a tax professional to manage the necessary paperwork.

If you are self-employed and residing in another country without paying self-employment taxes, it is necessary to pay them in the U.S.