What are the US tax implications for digital nomads? No matter which country you are located in, as a US citizen, it is necessary to report all of your incomes from all over the world annually. As a digital nomad from America, it’s no different. In this article, we will provide the must-know facts about US taxes for digital nomads.
Do Digital Nomads Have to File US Taxes?
Yes, American digital nomads must file U.S. taxes, even when working remotely abroad
What is the most frequently asked inquiry we get? “Do digital nomads need to submit their American taxes?”
If digital nomads make more than the minimum amount necessary to file, they must submit a U.S. tax return.
Americans living in the U.S. are taxed based on their citizenship, not where they reside. No matter where you are living, if you are legally a U.S. citizen and earn more than the global income minimum, you are required to pay taxes. It doesn’t matter if you don’t make any money in the United States.
Taxable foreign income for digital nomads includes:
- Wages
- Interest
- Dividends
- Rental Income
It can be a challenge to take care of taxes when working as a digital nomad, however, H&R Block has made it very easy no matter your location. Whether you prefer to file your taxes as an expatriate by yourself or you’d rather get assistance from an expert, they have you covered.
Accidental Americans
Even if you have acquired US citizenship through your parents but have never resided in the United States, you may still be required to submit a tax return. People who attained American citizenship by virtue of their parents or by being born in the United States but then moved out of the country are referred to as Accidental Americans.
US citizens who are digital nomads may be unaware that they need to report their income from all sources worldwide to the Internal Revenue Service annually. Expats and tax service providers need to spread knowledge about the importance and requirement of filing taxes in the United States.
Collecting the Right Forms
Once you realize you need to file US taxes as a digital nomad, you’ll have to collect the following materials:
- Documents including sources of your income (e.g., invoices, payslips, receipts, etc.)
- Your US Social Security Number (it’s okay if you have it memorized)
- Monthly or end-of-year bank account statements to determine whether you need to file the FBAR (see FBAR section below)
Do Digital Nomads Have to Pay US Income Taxes?
It is likely that you will not be required to pay taxes due to the tax deductions and exemptions that digital nomads are able to assert. The Foreign Earned Income Exclusion and Foreign Tax Credit enable expats to reduce the amount they must pay in taxes and avoid any potential fines annually. There is a possibility of being charged 15.3% in self-employment taxes in some circumstances, but MyExpatTaxes can provide assistance with this and reduce the amount.
State Taxes
The potentiality of paying US state taxes as an American living abroad depends on the following two factors:
- The US state you last resided in
- The US state you recently left
Generally, a person only has to submit a state tax form if they earned money in that state or resided there for a certain period.
Certain states require their residents to submit and even pay taxes to the US government as a result of their particular tax regulations. If you are a resident or are making money in California, New Mexico, South Carolina, or Virginia, you may be subject to taxation. You might have to pay taxes in certain countries if you possess a bank account or driver’s license from that country.
In order to prevent having to register and pay taxes in the specified states, you can move, on a short-term basis, to a state with a less complex tax system before going abroad to work.
In Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming, citizens are not taxed on their income.
Prior to relocating to a US state for the purpose of tax optimization, be sure to investigate the particular regulations and statutes concerning taxation in that particular state. This will assist you in deciding if you should submit US state taxes as a digital nomad.
There are three types of tax systems between countries around the world:
- Citizen-Based: A country taxes its citizens regardless of their status and location as a resident. The US is a perfect example of utilizing citizenship-based taxation.
- Residential: No matter where a citizen of that country earns money, they pay income tax to that country. Japan, Australia, and China use this tax system, for example.
- Territorial: Here, tax is on income citizens earn within the country only. Countries like Hong Kong and Costa Rica use this tax system.
Where you make money as a digital nomad is the key factor when it comes to paying taxes on foreign income. Ensure you are up-to-date with the taxation regulations of the nation you are visiting to be sure you are following the law.
Many nations use a residence-based tax system, which generally requires an individual to stay in the country for a minimum of half a year or 183 days. If a digital nomad had this situation, they would be obligated to submit their taxes and possibly pay to the government of the country.
Not filing taxes as a digital nomad can result in steep penalties and fines
Attempting to dodge your U.S. tax obligation comes with severe penalties – and it is relatively simple to be discovered. Due to FATCA, various banks worldwide provide the U.S. government with data regarding the financial accounts of American citizens.
The consequences for expats who don’t pay taxes can be anything from a small fine to a large amount of money up to $10,000, and in extreme cases you could even be deprived of your passport.
In conclusion, filing taxes in the United States annually is beneficial, even if you are a remote worker.
Americans working overseas must track time carefully to claim certain tax benefits
If you lead a digital nomadic lifestyle, keeping a precise record of the amount of time you have spent in each nation will be essential for a hassle-free tax return. You must have stayed outside of the country for a specific amount of entire days (each day comprising of 24 hours) in order to receive tax perks such as the Foreign Tax Credit or the Foreign Earned Income Exclusion, and you may be disqualified if you are off by just half an hour. For instance, the hours you spend on a 12-hour cross-continental journey by plane may not be taken into account as a full day since you are actually in international airspace.
Self-employed digital nomads may have to pay Social Security tax in the U.S.
If you are working for yourself in a country other than the United States, you are still obligated to pay U.S. self-employment tax on income earned outside of the United States. It doesn’t matter if you can get the exclusion of foreign earned income. Nonetheless, Social Security Totalization Agreements between the U.S. and a lot of foreign countries could keep you from needing to shell out self-employment taxes in both countries.
It is possible that digital nomads who are often on the move between nations may face difficulties due to the terms of totalization agreements, which state that one must be taxed as a local resident in order to be eligible for the agreement. It is beneficial to have a tax specialist do your paperwork for you.
In conclusion, if you are a self-employed individual living in another country, you must pay self-employment taxes in the United States.
Americans (including digital nomads) may have financial reporting obligations in addition to filing U.S. taxes
As a digital nomad, in addition to your tax return, there is a possibility of more paperwork to be completed. If you possess a foreign bank account, you may need to submit your Foreign Bank Account Report (FBAR) and FATCA Form 8938.
This includes digital bank accounts. When talking about digital bank accounts, you should indicate the nation in which the bank is registered.
You would have to fill out a FinCEN Form 114 (FBAR) if the total amount in all of your overseas accounts was equal to or exceeded $10,000 in any given calendar year. If you had a bank account in Hong Kong with a balance of $5,000 and an account in Singapore with another $6,000, the sum of the two accounts would be greater than $10,000, necessitating the filing of an FBAR.
If you possess foreign assets that are valued at more than $300,000 at any point during the tax year, or if the total is at least $200,000 on the final day of the year, then you need to submit FATCA Form 8938. If you and your partner are filing a joint return, the amounts that must be exceeded are $600,000 at any point in the year or $400,000 on December 31st.
If you’re uncertain about your FBAR and FATCA reporting obligations, it is recommended that you get help from experienced professionals who can assess your individual tax situation and identify all your filing needs.
Digital nomads may still have to file U.S. state taxes
It is conceivable that you might still be obligated to submit state taxes although you are a digital nomad – this is contingent upon the state you resided in prior to relocating overseas. We suggest that you speak to an expat tax expert if you are not sure if you have an obligation to pay state taxes in the United States in order to make sure you comply with the law.
There are hundreds of IRS forms and schedules — but these are the most used by remote workers abroad
- Form 1040: The form each American files during tax season to report income to the IRS.
- FBAR (FinCEN Form 114): Your Foreign Bank Account Report, used to report any assets in foreign financial institutions to the Financial Crimes Enforcement Network of the U.S. Treasury.
- Foreign Earned Income Exclusion Form 2555: One of two methods digital nomads can use to avoid being double taxed on income earned abroad.
- Foreign Tax Credit Form 1116: One of two methods digital nomads can use to avoid being double taxed on income earned abroad.
- FATCA Form 8938: The form U.S. citizens file to report certain foreign financial assets to the IRS.
- Form 5471: Informational return for U.S. citizens who are also shareholders, officers, or directors of a foreign corporation.
- Form 8621: Informational return for U.S. citizens who are also shareholders of a passive foreign investment company, including owners of foreign mutual funds.
- Form 3520: Informational return digital nomads use to report certain transactions with foreign trusts, ownerships of foreign trusts (including certain private pensions), or large gifts from certain foreign persons.
Digital nomads may still have to file taxes in foreign countries
You could be liable to pay taxes in a foreign country if you have spent a considerable amount of time there, or earned more than a certain sum of money.
It’s not one-size-fits-all, either. As an illustration, digital nomads in the United States who are based in either Canada or the United Kingdom will have distinct tax requirements when compared to those located in Mexico or Thailand. Before you arrive in a foreign nation for business purposes, become familiar with their taxation on income and residency regulations as these will determine what you owe in taxes.
What are the Digital Nomad Tax Deductions?
A tax deduction reduces the amount of income subject to taxation, therefore decreasing the amount of tax owed. The US has given certain tax reductions and exclusions to digital nomads to decrease their tax burden and lessen the stress associated with it.
As a self-employed digital nomad, naturally, you can deduct certain business expenses from US taxation like:
- Mobile and internet service
- Office equipment like a laptop, stand, blue-light protective glasses
- Marketing and social media advertisement expenses
- Fees for website hosting and domain purchasing
- Home office space
- Educational courses and costs related to your business
- and more
Additionally, you may be able to apply the following credits and exclusions on your digital nomad US tax return:
Tax Credits and Exclusions Available
Foreign Tax Credit
The Foreign Tax Credit, also referred to as the FTC, is a tax reduction for the amount of foreign income earned, which is an equal amount to the taxes paid. As an illustration, you gave €300 – equivalent to $350 in US dollars – to the German government since you are an inhabitant of a foreign nation. Thus, you can claim that $350 as a credit. This can be used to pay any US taxes you owe.
You can avoid double taxation with the Foreign Tax Credit in the following ways:
- Identify which of your income comes from foreign sources.
- Check if your income is general, passive, or falls into another foreign tax credit category.
- Calculate the maximum amount of foreign tax credit you can claim on your federal tax return through Form 1116.
- Keep records of all unused foreign tax credits for the next tax year. These credits are available to carry over for ten years.
Foreign Earned Income Exclusion
This form, often referred to as the FEIE or Form 2555, enables digital nomads to avoid taxes on up to $112,000 of their foreign-earned income when filing their US tax return. It is extremely important to change your foreign earned money into US dollars first.
For nomads to be eligible for the US Foreign Earned Income Exclusion, pass one of these two tests:
Did you live in your host country and pay local taxes for a full 12 months? You can get the Foreign Earned Income Exemption for a maximum of $112,000 for the 2022 Tax Year.
You will have to stay outside of the US for 330 full days in a row across a 12 month period that is encompassed by the tax year. If yes, you qualify for the FEIE. The amount of FEIE you can claim may need to be adjusted depending on the length of time for which you are eligible.
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