Digital Nomad Taxes - How to Avoid Double Taxation

MANAGING TAX DEDUCTIONS, EXPENSES, AND INCOME

Most digital nomads are either business owners or independent contractors. Even if you work from home, if you were hired as a contract worker (no tax advantages, retirement plan, or other lawful employment requirements), you have to pay taxes as an independent contractor.

Although this may be intimidating if you are fresh in the self-employee work life, running as a self-employed/freelancer lets you to capitalize on way more tax breaks than if you were a salaried worker.

Wherever you go, you’ll still have to pay US taxes

Numerous US citizens staying in foreign countries, including those who use technology to maintain careers, are unaware that they must still file annual income tax returns while being on a journey in a foreign country. Even if you have no tax liability, you must still submit a report to the Internal Revenue Service.

What is the reason you are still required to pay taxes even though you are not currently residing in the United States? The taxation system employed by the United States is determined by one’s citizenship. As long as you stay a citizen of the United States, you have to pay taxes no matter where you live.

Take into consideration that relinquishing your nationality will be a complicated procedure, and it is irreversible since you would not be allowed to be an American citizen again.

In order to forsake your taxes, they must be current, you will likely incur a charge, and usually you will need to be a national of another nation first. Before you come to a decision about this possibility, you must determine if it is suitable for your traveling lifestyle.

You get a 2-month extension on your taxes

April 15th is Tax Day in the US. U.S. citizens residing in foreign countries are given a two-month postponement in the filing of their taxes, so digital nomads must hand in their forms by June 15th.

This extra period means that digital nomads will not receive any late filing or delayed payment penalties. No matter what, if you owe taxes, interest will still start to be added after the April deadline.

If you make use of this extension, you should include an announcement when sending back your form so that the IRS knows you were abroad on April 15th. If filing taxes is something digital nomads are still in the process of taking care of, they should submit Form 4868 by the June 15th cutoff in order to get an extra extension time period until October 15th.

Digital nomads might have to pay state taxes, too

Depending on what state they left, digital nomads may have to submit a state tax return.

Generally, it depends on what US state you come from and whether you continue to have affiliations with that place – for example, if you keep your place of residence, possess a driver’s license, or go back to the state when visiting the US.

Ensure you are knowledgeable about the tax regulations and due dates for your state.

Don’t want extra taxes? Location matters

Are you looking for ways to avoid paying taxes in both the US and the country where you are residing? Be mindful of the tax regulations of the countries you plan to travel to. It is usually determined that you are a citizen of a certain country for taxation reasons after around a half-year has passed.

Overall, you can prevent double taxation by keeping your journey to a couple of months. However, this may not always be accurate – so it’s important to research the tax regulations for each foreign nation before you venture there.

Location is particularly important for self-employed digital nomads. Many digital nomads take advantage of their autonomy by working as freelance and contract-based employees. If you fit into this group, the place of residence you choose will heavily influence your taxes. The amount of taxes businesses and independent workers pay can differ drastically from one country to the next.

For example, there are no corporate taxes in the United Arab Emirates. In certain parts of Europe, digital nomads could be facing taxes as high as 40% of their self-employment income.

Digital nomads can avoid being taxed twice by visiting a nation that has a tax agreement in place with the United States. Be sure to research the US tax implications before you set off on your next journey.

Take advantage of tax savings for digital nomads

Although digital nomads who are living abroad must continue to submit taxes, certain tax-reducing methods exist to help them. You can minimize your tax bill using tax credits, exclusions, and deductions, such as:

The FEIE is frequently used by American expats to reduce their US tax burden. It allows them to exclude a certain amount of money earned outside of the country, with the limit at $105,900 for the 2019 tax year and $107,600 for 2020.

Have you incurred any taxes while working in a country that is outside of your own? If this is the case, you can decrease the amount owed on your US tax due to the foreign income tax already paid. If you opt to take advantage of both the FEIE and Foreign Tax Credit, you should start by excluding the applicable amount with the FEIE, followed by applying the Foreign Tax Credit to any residual earnings.

Digital travelers have the ability to omit certain housing costs incurred while living overseas from their taxable income. This is especially beneficial to those who work remotely and live in high-cost cities such as Hong Kong, Tokyo, or Moscow.

Tax Deductions for Digital Nomads

Any costs associated with making a living can be deducted as long as you are not a salaried employee but instead a freelancer, contractor, or self-employed. For most digital nomads, this will include things like:

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-workingspace 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, even more expenses are deductible, such as:

Website hosting and domain fees (such as Host Gatorfor 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

Tracking Income

Filing taxes for digital nomads necessitates more than just monitoring and organizing allowable deductions; it also demands keeping track of and arranging your income!

Manually record the following income information in a spreadsheet:

Income Category (eg: affiliate payment, website advertising, book sales, freelance writing)
Payor
Date of Payment
Currency of Payment
Amount

Convert payments to home currency for ease of understanding.

Caution! In case you attempt to be deceptive and leave out some of your sources of revenue, remember that certain ones may give your payments to you as deductions on their taxes, for which you would have had to fill out a form, like a W9 or W8-BEN for US payers; as such, this income could be traced back to your name, and if you were to be inspected, you would be in a difficult position.

Tracking Expenses, Managing Receipts

It is wise to document all relevant information as it will be very useful when you have to submit your taxes as a digital nomad. Having a plan for dealing with all of one’s work necessitates organizational skills and careful thought, so stockpiling everything in one folder or container to figure out at the end of the year is not recommended. It will take a great deal more effort and time to organize your financial matters, and filing taxes will be far more difficult and cumbersome than it should be.

Here are a few different ways to manage receipts and expenses:

The Expense Spreadsheet

This strategy can be personalized to fit your lifestyle and comfort level, as much or as little tech integration as desired.

STEP 1: Stuff Tax-Deductible Receipts in Your Wallet

Whenever you make a purchase that can be claimed as a tax deduction, don’t forget to keep that receipt in your wallet. Once you have gathered a few slips of paper, or at whatever established point you choose (for instance, every week or month), remove the receipts and….

STEP 2: Log Your Receipts

Enter the day of the expense, name of the vendor, classification of cost, sum of money and applicable details.

If you are a digital nomad, it is critical to keep track of the currency you have spent your money on; if you have an itinerant lifestyle, you may accrue costs in different money types. Change these costs to your home currency to have an idea of how much money I am spending.

You can include outlays with no physical proof (like virtual payments) in your costs as well. Record the data accurately in the spreadsheet, and make a folder on your computer to contain digital invoices.

STEP 3: Store Your Receipts

If you are undergoing a financial audit, or if you are examining all of your expenditures, you must be able to present the original receipts of your costs. I don’t take any risks when it comes to certain countries or tax authorities potentially accepting digital images of paper receipts. Keep the original receipts that you acquire and attach them together then put them in a plastic covering.

Some purchases, like those made online, will only ever generate an electronic receipt; put these in a folder on your computer for safe storage.

STEP 4: Organize the Spreadsheet

Organize all the data in the expense spreadsheet into distinct categories and sub-categories (including expense detail). Break the information down quite extensively.

Certain tax attorneys like to log expenditures in the money generated and work with an overall exchange rate provided by the tax officials for that tax period, while others favor utilizing pre-exchanged amounts.

Find an Accountant/Tax Preparer in Your Home Country

It’s advisable to do this prior to beginning your existence and jobs as a digital nomad, but it’s okay if you didn’t as there’s no requirement for concern. The population of digital nomads and ex-pats is steadily increasing, which means that more and more tax preparers and accountants are becoming experts in devising tax plans for those of this demographic.

Alternate Expense-Tracking Methods

It is not essential that you keep track of all your expenses that can be claimed as tax deductions in a spreadsheet during the course of a year. Many digital nomads opt to keep track of expenses and store their receipts electronically.

Various mobile applications that use your phone’s camera for scanning are available. People employ programs such as Freshbooks, Quicken, Quickbooks, or financial management software to manage their finances.

Certain advanced apps can recognize the pertinent info from bills and rearrange it in a spreadsheet layout. This function usually doesn’t work with receipts that are not in English and are in different currencies.

How you qualify for tax breaks depends on what type of digital nomad you are

To claim tax breaks like the FEIE, digital nomads will need to qualify by passing one of two tests:

The Physical Presence Test

Did you stay in a different nation (or multiple countries) for at least 330 days during a 12-month time-frame (not necessarily a year)? If so, you pass the test! Once you have determined the time frame for qualification, you will be able to determine what percentage of the Foreign Earned Income Exclusion you are eligible for by counting the amount of days during the tax year (the span of one calendar year).

The Physical Presence Test is exceptionally demanding, so digital nomads need to monitor their voyages meticulously. If you fail to meet the requirements for the Foreign Earned Income Exclusion before the given deadline, you will not be able to receive any part of the benefit.

The Bona Fide Resident Test

This test is less straightforward. To successfully meet the qualifying criteria of a genuine resident, you must fulfill the legitimate requirements of living in a foreign country for a full tax year (12 months from January 1 to December 31). It is dependent on an individual’s situation as to if a digital nomad is considered a genuine inhabitant. To determine this, the IRS asks questions like:

Do you intend to return to the USA to live in the foreseeable future?
Have you integrated yourself into society?
Have you made any statements or declarations to the foreign government that you are not subject to their taxes or laws?

As a digital nomad, although you may be ever-changing your country of residence, you will still have to demonstrate that you are a true resident in each nation that you call home in order to meet the criteria set in place by the bona fide resident test.