US Taxes for Digital Nomads: A Guide

April 25, 2022 | , |
Expat Tax Blog. Tax Tips for US Americans abroad.

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How do US taxes for digital nomads come into play? No matter where you are in the world you’re living, being a US citizen means you need to report your worldwide income every year. As a digital nomad from America, it’s no different. In this guide, we’ll share the essential information regarding US taxes for digital nomads.

Do Digital Nomads Have to File US Taxes?

If you’re a digital nomad with US citizenship AND your worldwide income has reached the tax filing threshold, then yes – you’ll need to file a US tax return. Filing a US tax return extends beyond the American border. For this matter, the IRS and US government taxes their citizens according to citizenship, not where they live.

Therefore, Americans abroad who work and travel as digital nomads need to follow the same US tax rules as their fellow Americans back home.

Accidental Americans

Even if you have US citizenship through your parents but never lived in the United States, you still may need to file. Accidental Americans acquired US citizenship through their parents or for being born in the US and then moved out of the country. 

Some digital nomads with US citizenship may not know they have to report worldwide income every year to the IRS. In this case, fellow expat tax services and individuals must bring more awareness to the necessity and obligation of US tax filing.

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)

Then you can easily walk through our best US expat tax software to become fully compliant and abide by IRS law!

Do Digital Nomads Have to Pay US Income Taxes?

Chances are you won’t actually pay taxes thanks to tax deductions and exclusions digital nomads can claim. Tax benefits like the FEIE and FTC (see more below) allow expats to save money and unnecessary penalties every year. However, there is a risk of being subject to 15.3% self-employment tax in certain cases (more below), which we at MyExpatTaxes can help you and help minimize.

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

Usually, an individual only needs to file a state tax return if they earned income there or lived in a state for a specific amount of time.

Some states make their citizens file and even pay US state taxes due to their unique tax jurisdiction. Taxes may be imposed on you if you live or earn income in one of the following states: California, New Mexico, South Carolina, or Virginia. In other cases, you could face taxation from some countries for having a bank account or driver’s license from there.

To avoid filing and paying state taxes from the above states, you can temporarily move to a less complicated tax state before working abroad. 

A few states don’t tax their citizens on income: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.

As always, before moving to a US state for tax reasons, check the specific rules and laws regarding taxation in the state. It will help you determine whether you will file US state taxes as a digital nomad.

Filing and Paying Foreign Taxes

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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.

When it comes to foreign taxation as a digital nomad, what matters is the location where you are earning the income. You must check with your host country’s tax laws and rules to ensure you are tax compliant.

Many countries have residence-based taxation, which usually means a person spends at least six months or 183 days in the country. If this were the case for a digital nomad, they would need to file and possibly pay the country’s taxes.

Self-Employment Taxes for Nomads

Many US digital nomads are self-employed. Making them liable for paying US self-employment taxes. To prepare, set aside about 15.3% of your income to pay your US taxes. This will cover:

  • Social security taxes of 12.4%
  • Medicare taxes of 2.9%

Unfortunately, self-employment taxes aren’t excludable through the FEIE and FTC. However, suppose you are living and working in a country with a Totalization Agreement with the United States. In that case, you only need to pay into Social Security in the foreign country you’re living in.

Here are some more rules regarding Social Security taxes for American expats and digital nomads:

“If an American citizen or resident alien is sent to a foreign country for five years or less to work for the same American-based employer, they would generally remain covered by the US Social Security system.

If the same taxpayer were sent abroad for longer than five years, he or she would pay social security taxes to the foreign country.

If the taxpayer is employed by a foreign employer or was hired by an American-based employer while living overseas, he or she would pay social security taxes to the foreign country. (If the foreign employer is an affiliate of an American employer, the American employer can enter into an agreement under section 3121(l) to have United States social security coverage for the services of United States citizens and United States residents performing services for the foreign employer.”

IRS Totalization Agreements

What are the Digital Nomad Tax Deductions?

In simple terms, a tax deduction happens when a person’s taxable income is lower, thus lowering tax liability. The US has provided certain digital nomad tax deductions and exclusions to reduce tax liability and overall stress.

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

Known as the FTC, the Foreign Tax Credit is a dollar-for-dollar tax reduction on your foreign earned income. As an example, you paid €300- about $350 USD – to the German government because you’re a resident of a foreign country. Thus, you can tclaim that ¢350 as a credit. It’s then applicable against any US taxes you may 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

Also known as the FEIE, or Form 2555, digital nomads can utilize this exclusion on their US tax return by excluding around $100,000 of foreign earned income. It’s imperative though, to first convert your foreign earned income into US dollars. Conveniently, file with MyExpatTaxes and it’s done for you.

For nomads to be eligible for the US Foreign Earned Income Exclusion, pass one of these two tests:

Bona Fide Residence test: Were you a registered resident and subject to local income taxes in your host country for at least a full calendar year? Then you can claim the FEIE for up to the maximum amount ($108,700 for Tax Year 2021).

Physical Presence Test: You will need to be outside of the US for 330 full days in a consecutive 12 month period that begins or ends in the tax year. If yes, you qualify for the FEIE. Depending on your qualifying period, you may have to prorate the maximum FEIE amount you can take.

Expat Tax Benefits

Foreign Bank Accounts and FBARS

A lot of travelers with US citizenship have online or foreign bank accounts. But did you know that if you have over $10,000 in foreign financial assets from these accounts at any one time of the year, you need to file an FBAR? 

Known as the Foreign Bank Account Report, expats need to inform the US Treasury Department by October 15th how many assets they have in their foreign financial accounts every year if they reach the filing threshold.

The MyExpatTaxes software has an easy-to-use online FBAR form that makes your asset reporting affordable and straightforward.

After you File your US Taxes as a Digital Nomad:

Get Set for next year! Yes, there is no time like now to plan ahead. It will make filing your taxes as a Digital Nomad next year even simpler. Here are five things you should do now, to make filing next year even easier.

Digital Nomad Support

All in all, digital nomadism is a great way to live, but the US government does make sure their citizens adhere to their tax regulations no matter where they live and work. As always, reach out to our trusted expat tax professional team with additional digital nomadism support. If you want even more support, you could look into our Premium Plans which include step-by-step support from an Expat Tax Professional.

We’ve never turned down an expat because of how complicated their situation was!

Written by Michelle H.

April 25, 2022 | , |

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