Hey guys! I hope everyone is doing well. Since there has been such a big change towards remote work, we could discuss taxes for digital nomads today!
I decided it's best to have an expert in the field write this as a guest post.
Veronica Rhodes from Taxes For Expats (TFX), will be breaking down everything that goes into optimizing your taxes from an ex-pat perspective. TFX is a women-owned tax firm that offers U.S. tax services for both American citizens and non-citizens with U.S. tax filing requirements.
From straightforward ex-pat tax preparation to complex cases involving multiple factors, they've handled it all for over 25 years.
When you're a digital nomad, the very last issue you want to think about is taxes. You have work and maybe even a family to care for, so your spare time would be better spent traveling or learning about a new culture. This is particularly true if you are frequently on the road.
However, if they are not attentive, digital nomads may find themselves in a difficult tax scenario. While US citizens and permanent residents must still submit a US income tax return on international income earned.
To give you more clarity about nomad tax and help you avoid substantial penalties, here are five things a digital nomad must know about taxes:
1. American Digital Nomads Still Have To File US Taxes
The United States is one of the countries that use a citizenship-based taxation system. That implies that regardless of where you live or work — whether you’re a nomad living in Mexico or a digital nomad with a Singapore visa—you must file annual US income tax forms to reflect all of your worldwide earnings. This is true as long as you maintain your US citizenship, which is why nomads are required to pay taxes.
There are a few options for reducing digital nomad income taxes when working abroad. The Foreign Earned Income Exclusion, Foreign Housing Exclusion, and Foreign Tax Credit are all examples of foreign tax credits.
2. Missed Paying Taxes? Use The Offshore Streamlined Compliance Procedures To Catch Up!
If you are a digital nomad who has never filed a tax return in the United States, you may be able to catch up without penalty. Streamlined Foreign Offshore Procedures is an IRS program that helps erroneously non-compliant filers get caught up penalty-free.
To qualify, you must:
- Have spent at least 330 days in a foreign country in the last three years without residing in the United States.
- Ascertain that your failure to file U.S. tax returns and the FBAR was not intentional.
3. The Foreign Earned Income Exclusion and The Foreign Tax Credit Are Two Options For Nomads Who Want To Reduce Their Tax Bills In The United States.
Worried about paying tax as a digital nomad in the UK? You're in luck: digital nomads can use the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit to reduce their tax bills and prevent double taxation (FTC).
The FEIE exempts your foreign earned income from U.S. income tax. This lowers or even eliminates your tax liability in the United States. You can qualify as a digital nomad if you pass either the Bona Fide Residency or the Physical Presence Test.
The FTC is another significant instrument for reducing your tax liability in the United States. The FTC reduces your U.S. tax burden by a dollar for dollar for foreign taxes paid.
4. In The United States, Self-Employed Nomads May Be Required To Pay Social Security Taxes.
You'll still owe US self-employment tax on foreign earned income if you're self-employed outside the US. Even if you qualify for the foreign earned income exclusion, this is true. However, Social Security Totalization Agreements between the US and several other countries may exempt you from paying self-employment taxes across both nations.
The residence restrictions of the totalization agreements may pose a difficulty for digital nomads moving from country to country. If you are not taxed as a resident in another nation, the totalization agreement would not apply.
5. In Addition To Submitting US Taxes, Nomads With Money In Another Country May Have Financial Reporting Duties.
Other than your tax return, you may have further documentation to file as a digital nomad, such as your Foreign Bank Account Report (FBAR) and FATCA Form 8938 if you have a foreign bank account. This applies to digital bank accounts as well. In the case of digital bank accounts, the country in which the bank is registered is referred to.
If the total balance of all your foreign accounts was more than $10,000 at any point throughout the calendar year, you'd need to file an FBAR (FinCEN Form 114).
For example, if you had a $5,000 balance in a Hong Kong bank account and a $6,000 balance in a Singapore bank account, your total balance in all foreign accounts would be more than $10,000, requiring you to file an FBAR.
If your total combined value of foreign assets exceeds $300,000 at any point throughout the year (or at least $200,000 on the last day of the year), you must file FATCA Form 8938. The thresholds are $600,000 at any time during the year or $400,000 on the last day of the year if you're filing a combined return.
Are You a Digital Nomad Needing Help With Your Taxes?
TFX (Taxes for Expats) is a great resource to get in contact with if you're looking for more information on taxes as a digital nomad. They provide tax advice, help, and insight into the world of ex-pat taxation.
For more information on taxes, you can also check out my episode with guest Sean Mullaney also known as the FI Tax Guy. We had a whole discussion about The Power Of The Roth IRA.