If you’re considering becoming a digital nomad this summer and taking advantage of your company’s work-from-home policy as borders start to reopen, before you are needed to return to the office, it is important to consider that various destinations have varying tax implications.
Take a look at how your take-home pay could be affected when working remotely from abroad.
No location without taxation
The tax structure in America is fundamentally incompatible with a nomadic lifestyle. In the entire world, there are only two countries, including the US, that impose taxes based on citizenship instead of residency. One of these countries is Eritrea, which is approximately the same size as Pennsylvania and located in East Africa.
Regardless of whether you have been working in Spain for ten years as a New Yorker or traveling through Asia for the next two years as a Californian backpacker, you must still report and file your taxes with the IRS.
“If you are an American citizen, you are required to file and report your taxes regardless of your work location or employment status, whether you are a freelancer or a salaried employee,” stated Adam Nubern, an accountant who operates a firm specializing in tax laws for individuals who lead a nomadic lifestyle.
If you are working abroad, you must also establish whether you are regarded as a tax resident in that country, and if you are, determine whether you qualify for any specific benefits available to you.
According to Nubern, there are benefits in the US that aim to prevent double taxation of income, like the foreign earned income exclusion. However, qualifying for these benefits is not as simple as remote workers often anticipate.
In order to begin, it is essential to spend a total of 330 days outside of the United States annually (and keep the necessary evidence to validate it).
In addition, establishing that your “tax home” and “abode” are in a foreign country requires more than just handling housing expenses or possessing a property. The IRS also factors in socio-economic elements, so seemingly minor actions such as having a storage unit, visiting a doctor, or participating in US elections may lead to disqualification from the advantages.
According to Nubern, it would be more favorable to have circumstances such as learning the language, having a bank account, having family and friends, and having doctors in that place, rather than moving countries on a monthly basis.
The intricate tax system for remote employees working in different states is not just limited to international travel. More than 24 states enforce non-resident withholding taxes after only one day of work within their borders, with different regulations for independent contractors and salaried employees.
Can I work from outside the United States for a few weeks or months without being double taxed?
When it comes to planning your trip, it is advisable to carefully consider the following steps, according to accountants. If your trip is intended to last only a few weeks, it is likely that you will not encounter any issues. Typically, it is recommended to depart before the six-month mark in order to avoid the requirement of filing a tax return in another country. However, it is worth noting that there can be exceptions to this general rule.
If your trip exceeds a few months, it would be wise to choose a location that provides digital nomad visas. These visas will allow you to be exempt from local taxes, on the condition that your employer is situated outside of the country you are visiting.
There are several beach destinations such as the Cayman Islands, Bermuda, Aruba, Costa Rica, Antigua and Barbuda, where individuals can stay and earn money abroad for a period of six months to two years without having to pay local taxes. Additionally, Estonia and Iceland provide visas that enable visitors to work remotely for six months to a year without the need to pay local income tax.
Brent Ozar, who is 47 years old, along with his wife, has been working in Iceland remotely since January. Their intention is to continue staying there until the fall, after which they will head back to their home in San Diego.
Sales tax is usually at a rate of 24 percent, which is one of the highest in the world. However, neither Mr. Ozar nor his wife are required to pay any local income tax, and their small computer consulting firm is exempt from corporate tax. When they are not working, Mr. Ozar and his wife enjoy activities such as hiking, visiting fjords and hot springs, and exploring the country’s glaciers. This week, they have plans to visit the Dynjandi Waterfall and observe Iceland’s puffins.
Despite the high cost of living in Iceland, Mr. Ozar is not saving money and still has to continue paying state, local, and federal taxes in California. However, if given the choice again, he would do it without hesitation.
But I’m still on the hook for U.S. taxes, right?
Indeed, the United States is among the limited number of countries that impose taxes on its citizens, regardless of their residency, based on their income earned worldwide. This implies that being a U.S. citizen necessitates ongoing payment of federal, state, and local taxes.
If you pay foreign income tax, you may receive a credit or deduction on your U.S. income tax return if the country you work in has a bilateral tax treaty with the United States. However, the rules for this vary, and this lack of uniformity is a major concern, according to Elke Asen, a policy analyst at the Tax Foundation’s Center for Global Tax Policy. Asen suggests seeking advice from an accountant before making any decisions.
Companies, businesses, and workers are all figuring out the borderless economy
In the past, digital nomads used to work abroad on 90-day tourist visas, which is technically illegal, but most governments choose to overlook this. However, in recent times, countries have sought to establish more defined tax regulations, travel guidelines, and minimum income criteria by introducing “digital nomad visas.”
Krystal Pino, founder of Nomad Tax and a digital nomad for six years, believes that although visas are seen as a significant advancement, many travelers who frequently move around do not consider the associated paperwork to be worth the effort.
Pino observed that the new programs have contributed to enhancing companies’ understanding of the legality of digital nomadism. However, there is still an excessive amount of regulatory ambiguity, which hinders businesses from feeling assured about permitting their remote employees to travel internationally.
“There’s not enough information in the space for employers to feel completely covered from a standpoint of not being liable for taxes,”. “So generally what we’ve seen is employers say ‘we don’t understand it, it’s not clear enough, so it’s just going to be a hard blanket no.'”
Can I avoid paying U.S. tax altogether?
If you meet the requirements for the Foreign Earned Income Exclusion, your initial $108,700 is not subject to U.S. income tax. However, it is important to note that this only applies to U.S. citizens who live in a foreign country for at least 330 days within a 12-month period, excluding time spent on planes, or those who are considered legitimate residents of a foreign country. (Please be aware that you will still be responsible for paying federal and state taxes on income that is not earned, such as interest, dividends, and capital gains.)
In order to provide evidence to U.S. tax authorities of your presence in a foreign country, it is crucial to keep a record of the duration spent abroad.
Paige Brunton, a Canadian website designer residing in Hanover, Germany, came to realize the intricacies of expat tax rules through firsthand experience. During a particular tax year, she found herself obligated to file tax returns in three different countries due to her residence and work history in Germany, Canada, and the United States. Although the circumstances were unavoidable, she strongly advises individuals facing similar complexities to promptly seek the assistance of an accountant specialized in international tax matters.
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