Tax tips for digital nomads
Unfortunately, “out of sight, out of mind” doesn’t apply to your taxes. Even if you travel extensively throughout the country or even outside of the country, you may still be liable for taxes back home. Understanding your United States tax obligations can prevent many problems down the line, so you can focus on all the advantages that made you choose to be a digital nomad in the first place.
For Americans, there’s practically no escape from taxes, and the codes and regulations that govern those taxes are complex. Things only get more complicated for those who travel frequently or live abroad.
A digital nomad's life already has many aspects to navigate. These include learning local customs, applying for traveler visas and passports, and arranging transportation and lodging. If your adventures or ambitions have you living and working overseas for extended periods, you’ll also need to sort out your taxes.
Much like a traveler needs a good map and sense of direction, we’ve got some wayfinding to help you sort out the taxes that can affect you and your business no matter where you are in the world.
Log your travels .. and your expenses
You’re on the road, and that’s awesome. Of course, you want to remember all of your amazing adventures. Come tax time, you’ll want to remember all of your expenses so you can itemize some deductions. Solid bookkeeping, accurate accounting, and keeping track of your receipts will make it easier to back up your deductions when it’s time to claim them.
Your ability to claim deductions will vary depending on why you’re traveling. If you’re traveling for business or an influencer and traveling is your business, then you probably have a lot more you can claim. Adventures for the sake of adventure mean finding savings elsewhere. You can still claim deductions on the job that funds your fun, and if you work remotely or run your own business, there are plenty of write-offs you should know.
Living outside of the United States isn't an escape from taxes
The American federal tax system uses a citizen-based requirement. This means that no matter where you live on the planet, you must pay taxes as long as you are a citizen. Having a citizenship status system can be complicated, for sure. If you’re living in a country with residency-based taxation, you could be taxed twice if you become a resident.
Of course, to be required to file, you must make more than the minimum required amount to file. This amount can vary depending on your circumstances, such as age and filing status. The IRS has a tool to help determine if you will be required to file. Note that the money you make does not have to be made from employment in the United States. Taxable foreign income can include wages, interest, dividends, and any rental income you may collect.
| Digital nomads can seize every opportunity for adventure without taxes holding them back.
Digital nomads abroad may qualify for a few extra deductions
So you can’t run from your taxes, but it’s not necessarily all bad news. Digital nomads living outside the United States may qualify for specific tax exclusions.
Foreign Earned Income Exclusion
The Foreign Earned Income Exclusion allows digital nomads to reduce their taxable foreign income. The amount they can exclude varies year-to-year. In 2022, income up to $112,000 could be excluded from taxes, and in 2023 the amount has been increased to $120,000. Note that this exemption only applies to foreign-earned income, such as wages, salaries, and commissions. To qualify, digital nomads must pass one of two tests:
- The physical presence test - To pass, you must have spent more than 330 full days in the last 12 months outside of the United States. You do not have to be in a single country during this time.
- The bona fide residence test - To pass, you must be a United States citizen and maintain a place of residence in a foreign country. You must live within that country for an entire tax year and have no plan to return to the United States soon.
Foreign Housing Exclusion
Americans can use the Foreign Housing Exclusion to reduce their tax bills. Simply put, they can deduct some of their housing expenses from their taxes while living abroad. However, you can only claim this deduction if you already claimed the Foreign Earned Income Exclusion. There are other requirements for this exclusion. For example, only qualified housing expenses can be applied and must exceed a base amount.
Foreign Tax Credit
The Foreign Tax Credit can be used if you pay income tax to the foreign country where you reside. This helps offset the expense of being double taxed by obligations you owe to the United States and the country where you live. This deduction doesn’t allow you to double up your savings, however. You can’t exclude income you’ve already excluded in the FEIE, and not all foreign taxes apply.
You may have to pile on the paperwork
For digital nomads, there could be a few different forms to file at tax time. In addition to your personal return, you’ll need to file Form 2555 for your foreign income. If you need to file for a foreign tax credit, you’ll also need Form 1116.
How you plan to bank your money while you travel can also affect your tax paperwork. Any American with more than $10,000 in foreign bank accounts must file a Report of Foreign Bank and Financial Accounts (FBAR) with the Financial Crimes Enforcement Network. Similarly, if you have foreign assets worth more than a set amount, you’ll be required to file Form 8938. Currently, the threshold is $200,000 for individuals and $400,000 jointly at the end of a tax year.
Make sure you don't lose sight of your taxes
Digital nomads have made travel a priority. Don’t let taxes interfere with the wanderlust. A free account on ComplYant’s platform will help you manage your taxes and keep you from missing a deadline.