8 Things a Digital Nomad Should Know About Taxes

When you’re traveling the world as a digital nomad, the last thing you want to worry about is taxes. After all, you’re probably more concerned about having a good time than thinking about your tax return and the accompanying bill.

However, your tax responsibilities will still follow you wherever you go, and it’s better to stay on top of your obligations rather than ignoring them. It’s also important to note that working abroad can complicate an already tricky tax situation.

Here are 8 things you need to know about U.S. taxes for digital nomads.

Do digital nomads have to file a U.S. tax return?

If you are a digital nomad and have retained your U.S. citizenship, then you are required to file a U.S. tax return and pay U.S. income tax.

The United States is one of two countries in the world that has adopted citizenship-based taxation (the other is Eritrea). This means that all U.S. citizens and permanent residents are required to report their income and file an annual tax return, even if they live and work outside the country.

8 Things a Digital Nomad Should Know About Taxes

Are the tax rules different for digital nomads?

One of the saving graces of the U.S. tax code is its uniformity. The tax rules should mostly be the same for Americans abroad. For instance, the standard income thresholds remain unchanged.

For tax year 2021, the minimum income for single filers under age 65 is $12,400. If your income is below that amount, you may not need to file a federal tax return. Always remember that most forms of income, including wages, interest, dividends, and rental income, are taxable.

Do I need to pay tax if I’m self-employed?

Self-employed individuals are also required to file a U.S. return. The minimum income for self-employed individuals remains at $400. 

You are also required to pay a 15.3% self-employment tax (for Social Security and Medicare) on top of your regular income tax. Please note that the self-employment tax is calculated before any tax deductions.

Do I still have to file a foreign tax return?

That depends on the tax rules of your host country. Every country has a different tax system, and it pays to familiarize yourself with your host country’s rules to avoid any complications.

While the rules differ, you may want to check your residency status to determine whether you are liable for foreign taxes. In many cases, you become a tax resident of that country if you have spent more than 6 months within its borders. Talk to a tax professional if you need to clarify your tax status.

8 Things a Digital Nomad Should Know About Taxes

How do I avoid double taxation?

Many digital nomads worry about double taxation, but with careful planning, you may be able to avoid paying tax on the same income tax.

One way to avoid double taxation is to ensure that you do not stay long enough to meet the country’s residency requirements. Another option is to look for a country with low income tax rates or special tax rules for digital nomads.

How do I catch up on my back taxes?

If for one reason or another you haven’t been able to file your U.S. tax return, you may take advantage of an IRS amnesty program to settle your obligations without being penalized. The Streamlined Foreign Offshore Procedure allows non-compliant filers to report past income.

How do I reduce my digital nomad tax bill?

There are two ways for digital nomads to lower their tax bill: the Foreign Earned Income Exclusion and the Foreign Tax Credit.

The Foreign Earned Income Exclusion allows American expat taxpayers to exclude up to $108,700 (for tax year 2021) of foreign-earned income from U.S. federal tax. Meanwhile, the Foreign Tax Credit allows you to claim a credit on foreign income taxes imposed on the same income.

To qualify for these programs, you need to pass the Physical Presence Test or the Bona Fide Residence test.

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How do I file taxes as a digital nomad?

Living and working abroad can complicate an already messy tax situation. You would be subject to the tax rules of multiple countries, and you could face a potentially hefty bill if you are not careful. The best way to solve this problem is to talk to an expat tax service.

TFX (Taxes for Expats) has been preparing U.S. tax returns for digital nomads for over 25 years. Our expert tax professionals can help you clarify your situation and save you thousands of dollars on your tax bill.

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