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What American Digital Nomads Should Know About Paying Taxes

June 17, 2022
Moriah Costa
ABOUT THE AUTHOR

Even when you’ve achieved the full freedom of traveling the world while working remotely, there is one aspect of the nomad life that most people don’t like to think or talk about—taxes. Whether you’re a permanent expat, full-time nomad, or occasional workcationer, all American citizens have to declare their earnings to the IRS year after year. No matter how long you’ve been away, not doing so could land you in a lot of trouble.

If Uncle Sam comes knocking on your door because you don’t take the time to file correctly, you could face steep fines and even lose your passport. Nurall recommends consulting with an advisor before making any major moves, but there are some things all American digital nomads should be aware of before tax season comes along.

Digital Nomads Need to Pay Taxes

One of the most common misconceptions as a digital nomad is that you don’t need to pay taxes. But if you make over the minimum required amount to file, you will need to send in your U.S. tax return. That’s because the U.S. tax system is based on citizenship, not residency.  Even if you don’t earn any U.S.-based income, you’ll still need to file. The income you’ll need to declare includes wages, interest, dividends, and rental income. Some of the most common tax forms that digital nomads will need to fill out include: 

  • Form 1040: This is the form that all Americans use to report their income to the IRS
  • FBAR (FinCEN Form 114): The Foreign Bank Account Report is used to report any money or assets held in a foreign institution or bank to the U.S. Treasury. 
  • Foreign Earned Income Exclusion Form 2555: One of the ways digital nomads can avoid being double-taxed. 
  • Foreign Tax Credit Form 1116: Another form that digital nomads can use to lower their U.S. tax bill. 
  • FATCA Form 8938: This is used to report certain financial assets to the IRS. 
  • Form 5471, 8621, and 3520: These are forms used to declare returns from shares in a foreign company, or transactions in foreign trusts. 

Tax Benefits for Digital Nomads

Filing your taxes isn’t the same as having to pay taxes. Depending on your personal circumstances, you may not owe any U.S. taxes at all. That’s because of two key tax benefits that digital nomads can use to avoid double taxation: The Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC). 

  • The Foreign Earned Income Exclusion (FEIE) excludes a certain amount of foreign earned income from your U.S. taxes, lowering or even eliminating your tax bill. The amount is adjusted each year for inflation. For the 2022 tax year, the amount is $112,000. In order to qualify for this exclusion, you must be a bona fide resident of another country, or physically present in a foreign country or countries for at least 330 full days out of the year. 
  • The Foreign Tax Credit (FTC) allows you to reduce your U.S. tax bill if you pay taxes in another country. This credit gives you a dollar-for-dollar reduction.

Tracking Your Time Abroad

In order to reap these tax benefits, you need to be on foreign soil for a specific amount of time. The IRS counts a day spent on foreign soil as a full 24 hours beginning and ending at midnight, which doesn’t include the time spent traveling over international waters. If you’re short by an hour or two, you may not qualify for the Foreign Earned Income Exclusion or Foreign Tax Credit. That may mean you’ll have a bigger U.S. tax bill than you anticipated. As a digital nomad, it’s important to keep track of your travel hours to make sure you still qualify for tax benefits. 

Foreign Bank Accounts

If you live abroad you may need to file other paperwork besides your U.S. tax forms. If you have a foreign bank account (including digital accounts) and if the combined balance is more than $10,000 in it at any given time during the tax year, you may need to file Foreign Bank Account Report (FBAR). This is filed with the US Treasury department. If you have foreign assets and they exceed $300,000, then you’ll need to file FATCA Form 8938.

Filing Taxes in Another Country

Depending on how long you live in a country or how much money you make, you may also need to file taxes in that country in addition to the U.S. The tax obligations for each country are different. Some countries like Greece and Portugal have special digital nomad visas which can lower your tax bill. Other countries in Asia and South America may have different rates and reporting obligations as well.  If you are longing to become a digital nomad and travel the world, make sure you do your research before you decide to spend a significant amount of time in another country. The last thing you want is to end up with an unexpected tax bill.

Social Security Tax

If you’re a freelancer or have your own business, you may still need to pay U.S. self-employment tax on any foreign income. This is still the case even if you claim the Foreign Earned Income Exclusion.  However, there are exceptions for countries that have tax treaties with the U.S. Known as Social Security Totalization Agreements, these agreements are to prevent freelancers from having to pay social security in both countries. However, digital nomads who often move may have to pay the social security tax, especially if they are not tax residents in another country.  These tax agreements can be tricky to navigate, so Nurall recommends consulting a tax professional before you file your taxes.