The taxation rules for digital nomads depend on the country they reside in. In the United States, American citizens must pay self-employment taxes on their income regardless of their place of residence. Unlike most countries, the US taxes its residents based on citizenship rather than current location. Below is a guide to taxation for American digital nomads.
Do you need to file US taxes while living abroad?
US taxes must be filed and paid by both US citizens and green card holders, regardless of their residence and employment location.
Is there any way to stop having to file US taxes?
The sole option available is to expatriate, which essentially involves relinquishing your US citizenship or green card.
Do I have to pay taxes only on income from the US, or also foreign income?
It is required to pay taxes on all your income from around the world. Fortunately, there are certain exclusions that can be applied.
The Foreign Earned Income Exclusion (FEIE) enables numerous digital nomads and expats to earn up to $120,000 each year without being obligated to pay any US income tax.
In the event that you pay income taxes in the country where you are a current resident, on income that is not exempted by your Foreign Earned Income Exclusion (FEIE), you have the option to offset these taxes against any extra tax obligation in the United States.
FEIE (Foreign Earned Income Exclusion)
The tax-free amount through FEIE is adjusted annually based on the Chained Consumer Price Index. For the 2022 tax year (returns filed in 2023), the amount is $112,000, and for the 2023 tax year (returns filed in 2024), it is $120,000.
This statement only pertains to income that is earned.
- Salary & Wages
- Consulting income
- Professional fees
Unearned income, such as, does not apply to the given information.
- Interest
- Dividends
- Pensions
- Social security payments
- Capital gains
The exclusion does not cover income earned in the United States. If you are eligible for FEIE, any income received from work done while physically in the United States (for example, speaking fees earned at a conference in Austin) will still be subject to regular taxation.
To be eligible for FEIE, there are two methods available.
- The physical presence test
- The bona fide resident test
Now, let’s examine the two in a thorough manner.
Physical Presence Test
Meeting the easiest requirement for digital nomads is typically not a challenge, as they usually do not fulfill the criteria for the bona fide residence test.
To meet the physical residence test, you must spend at least 330 full days in foreign countries within a consecutive 12-month period, which can either start or end in the tax year in question.
When you are eligible for FEIE for a portion of the tax year, it is crucial to select the 12-month period wisely to ensure maximum deductions.
Bona fide resident of a foreign country
The bona fide resident test, which differs from the physical presence test, is based on the calendar year and may be applicable to long-term expats, but is seldom applicable to nomads.
You must meet these requirements in order to comply:
- You’re a US citizen (or resident alien/green card holder from a country the US has a tax treaty with)
- You must have moved to a foreign country and set up your residence there
- You must have your residence there for an entire tax year (i.e., calendar year)
- You can not have any immediate plans for moving away, either back to the United States or to another country
Simply spending a whole calendar year in another country does not automatically make you a bona fide resident of that country. For instance, if you are there on a temporary work assignment, such as a 2-year teaching job, you will not meet the requirements for residency status.
If you stay from November in one year to November the next, you will not qualify because you did not live there for a full calendar year. Nevertheless, you may still fulfill the Physical Presence Test.
If you stay from November in year one until April in year three, you can still be eligible for FEIE for the periods of November to December in year one and January to April in year three due to your complete stay in the second year.
The Duration of Stay Matters
If you choose to be a digital nomad, you have the freedom to work and reside in any part of the world. Almost all nations allow a certain period of time during which you can live and work without paying taxes. Nevertheless, if you stay in a particular country for an extended period, you may be liable to pay taxes.
Typically, this duration is mostly attributed to a stay of no more than 6 months. Consequently, it is advisable to choose a country that provides digital nomad visas, which allow you to avoid tax obligations in the host nation.
Tax filing deadline
If you are a digital nomad in the US, it is necessary to file your taxes by April 15th, but you have a built-in extension of two months that moves the due date to June 15th.
If you are a digital nomad or expat, you may have concerns about being taxed by both the US and your current country of residence. Fortunately, this occurrence is infrequent due to tax treaties between the US and most countries, which ensure that expats and digital nomads are not double taxed for amounts up to $100,000. All you have to do is submit your self-employment taxes.
Remember to expense and deduct other business costs
If you work as a digital nomad and travel blogger, earning money from travel trips, you have the option to deduct expenses such as flights, hotel costs, and any other business-related expenditures. These deductions can assist in reducing your tax liability by lowering your taxable income.
The deductions that you can claim when filing taxes as a taxable digital nomad depend on your activities. However, there are certain deductions that you can make, which include the following:
- Laptops and computer devices
- Internet services
- Coworking spaces payments
- Website hosting and domain fees
- Virtual assistants
- Payment transaction fees
To confirm your deductions, it is necessary for you to retain receipts, as you may already know.
Track your taxable income
If you work as a freelance digital nomad and receive payments in various currencies, you can simplify your tax filing process by converting all your income into a single currency. By doing so, you can better track the conversion rates of each currency and utilize them as deductible expenses.
Consider forming a separate legal entity
One way to protect your personal assets from legal disputes faced by businesses owned by nomads is to establish a distinct tax entity, such as an LLC or an S Corp.
By forming an LLC, which stands for Limited Liability Company, you can secure legal protection and avail the tax advantages associated with deducting expenses incurred for running your freelancing/self-employment business. However, paying 15.3% self-employment tax remains mandatory.
When you decide to establish a distinct entity in order to benefit from tax advantages, it is worth considering choosing an S Corporation as it enables you to save on self-employment taxes. This is because it allows you to divide your income equally into two parts, which can be beneficial.
- W-2 Salary- you still pay self-employment taxes
- Distribution- self-employment tax exemption
By becoming a digital nomad and owning a business that generates approximately $40,000 or more in annual net income, you have the opportunity to save a portion of your taxes.
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