Digital nomads, who are remote employees, are able to work from any location thanks to the use of technology.
Despite the current popularity of the digital nomad lifestyle, employers frequently express apprehension about the taxation of individuals engaging in this lifestyle due to the complexities arising from varying tax regulations across different countries and states.
This blog post will cover a wide range of topics related to digital nomad tax, including the process of filing taxes, useful tax tips, deductions available for digital nomads, and additional information.
Let’s begin by rephrasing the text step by step, without adding or removing any information, while maintaining the same meaning. Here we go!
Where do Digital Nomads Pay their Taxes?
Digital nomads are required to pay taxes in either their tax residence country or in their home country, which is determined by the employee’s place of residence.
In addition, individuals might also need to report their tax liabilities for residing in multiple countries within a given tax year, with the possibility of being subject to state, province, local, or territorial taxes.
How is a Country of Tax Residence Determined for Digital Nomads?
When considering digital nomad taxes, it is taken into account that the employee’s official residence country is determined by their permanent physical address. It is also possible for the employee to have multiple residences.
However, it is common for most digital nomads to have a permanent physical address for purposes of taxation, as well as legal and administrative tasks.
In order to comprehend the tax implications for digital nomads, employers need to have sufficient knowledge about the criteria and qualifications that pertain to the country of tax residence, as tax regulations differ based on the country, state, province, and city.
Employers should be aware of two aspects.
- Where a digital nomad has filed an official residence address with the government; and
- The digital nomad tax regulations of the country where they spend most of their time during the taxation year and visa requirements.
When determining the country of tax residence, other factors, such as the location of bank account(s) maintained by digital nomads, are also taken into account. Furthermore, visa-holders have additional considerations, as some are permitted to stay in a particular country for a restricted duration.
Regardless of their place of residence, US citizens or green card holders must file US tax returns in the United States.
The US (United Kingdom, Canada, and Australia) takes into consideration the requirement of spending 183 days in determining tax residency for digital nomads. This means that an individual can be a resident of a country but not be considered a tax resident. To be considered a tax resident, the individual needs to spend at least 183 days at their physical address within a year.
In order to become a tax resident of the country, it is not sufficient to reside there for 183 or more days. The individual must inform the authorities in their country of citizenship in writing that they are no longer eligible for tax residency. Along with this application, the employee should include their personal information and the date.
In order for the new tax residency to be considered valid, the employee needs to inform the country where they currently reside about the change in residence. To acquire their tax number, employees must officially register their new permanent residence with the taxation authorities. This tax number is required for various tasks, such as opening a bank account in the new country of residence.
For digital nomads, being a tax resident in a specific country holds significance as it allows them to selectively generate global income in a country that does not impose income tax, thus enabling them to circumvent tax obligations on such earnings.
What digital nomads should know about U.S. taxes
1. Yes, American digital nomads must file U.S. taxes, even when working remotely abroad
The question we frequently hear is whether digital nomads need to file U.S. taxes.
Digital nomads are required to file a U.S. tax return if they earn more than the minimum amount necessary for filing.
The U.S. taxes individuals who are citizens, regardless of their place of residency. This implies that your current location is irrelevant — if you are considered a legal U.S. citizen and earn above the minimum global income threshold, you are required to pay taxes. This rule applies even if you have no income originating from 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 who has never filed a U.S. tax return, you might have the opportunity to get up to date without facing penalties. The IRS offers a program that assists unintentionally non-compliant filers in catching up without incurring any penalties.
In order to be eligible, it is necessary 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 U.S. tax responsibility can have severe repercussions, as it is relatively effortless to be apprehended. Due to FATCA, numerous global financial institutions share U.S. citizens’ financial account details 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, your passport may also be revoked.
Even if you are a digital nomad, it is essential to file your U.S. taxes every year as it is beneficial.
4. There are two tax benefits available to reduce digital nomads’ U.S. tax bill
If you’re concerned about paying excessive taxes, there are two options available for digital nomads to reduce their tax burden and prevent being taxed twice: the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC).
If you meet the requirements of either the Bona Fide Residency test or the Physical Presence Test, as a digital nomad, you can qualify for the Foreign Earned Income Exclusion (FEIE). This exclusion allows you to exclude your foreign earned income from being subject to U.S. income tax, thereby reducing or eliminating your U.S. tax liability.
The FTC is an important tool for reducing your U.S. tax liability because it allows for a dollar-for-dollar decrease in your U.S. tax obligation for each foreign tax paid.
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 to ensure a smooth tax return. In order to qualify for tax benefits such as the FTC or the FEIE, you must have been physically present in a foreign country for a specific number of full days, meaning 24 full hours. It’s important to note that even a slight difference of 30 minutes can lead to disqualification. For instance, time spent during a 12-hour trans-oceanic flight might not be considered as full days since it technically falls under international airspace.
Tracking hours accurately becomes more complex when traveling across different time zones.
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