8 Things US Expats Need to Know About Digital Nomad Taxes
Even just a decade ago, the term “digital nomad” would likely have been met with looks of confusion. Flash forward to today, though, and it’s become a household phrase.
With the COVID-19 pandemic leading to an explosion in remote work, more Americans than ever are taking advantage of this newfound flexibility to travel the world while still working. But before you buy your plane tickets, it’s worth considering some of the practicalities, such as digital nomad taxes.
Thinking about heading out on an adventure of your own? Here are some of the most important things you’ll want to know about digital nomad taxes.
1. Digital Nomads Are Not Exempt From US Taxes
Just because you’re out of the country doesn’t mean that you’re off the hook when it comes to taxes. Under the US tax system, all citizens and residents must file a federal tax return, no matter if they are residing or have earned income in another country (or countries). But what exactly do digital nomad taxes include? That will depend a lot on your individual circumstances — below, we’ll go over a few of the most common scenarios.
Read more: Digital Nomad Taxes: A Complete Guide
2. You May Have to Pay State Income Taxes
So you know that digital nomad taxes include federal income taxes — but what about state income taxes? That depends on where you last resided and/or where you have financial ties (property, a business, etc.). The vast majority of states do require you to pay income taxes. The only ones that do not are:
- – Alaska
- – Florida
- – Nevada
- – South Dakota
- – Tennessee
- – Texas
- – Washington
- – Wyoming
*Additionally, New Hampshire residents do not need to pay tax on any W-2 income — just on interest and dividend income.
If you’re a tax resident of any other state, you should expect to pay a state income tax. The exact rate varies from state to state, but you can check yours here.
3. Employees Are Taxed Differently Than the Self-Employed
If you’re a W-2 worker — which is the case for most part-time and full-time employees — income taxes are typically withheld from your paycheck automatically by your employer. But if you’re self-employed, as many digital nomads are, you don’t have an employer to withhold those taxes for you.
Because of that, you’ll be responsible for making payments directly to the federal (and possibly state) government. The self-employment tax rate is 15.3% of your earnings, 12.4% of which goes to Social Security and 2.9% of which goes to Medicare. You’ll pay this money through estimated quarterly tax payments, with any necessary adjustments made at the end of the tax year — requiring you to be more proactive about your taxes than W-2 workers.
4. You May Owe Taxes to the Countries You Stay in
Depending on which country (or countries) you’re working out of, how long you stay, and the type of visa you have, you may be obligated to pay taxes to their government(s) as well. Usually, if you’re just visiting a country, you won’t be on the hook for taxes. But if you stay there for a significant amount of time — often 183 days or more — you may need to pay taxes on the income you earn while there.
Some countries have lower digital nomad taxes than others — for example, the digital nomad visa in Georgia (the country, not the state) only requires holders to pay 1% of their gross income up to $155,000. Croatia’s digital nomad visa, on the other hand, offers a 0% income tax. Wherever you decide to set up shop, make sure that you research their tax obligations first to avoid unpleasant surprises.
5. You May Need to Report Foreign Assets
Most people associate taxes with income taxes specifically — but wages aren’t the only thing that can be taxed. When it comes to digital nomad taxes, anyone with a combined total of $10,000 or more in foreign bank accounts must file a Foreign Bank Account Report (FBAR).
If your foreign investments total more than $200,000, meanwhile, you will have to file IRS Form 8938. Some people even have to file both. Of course, this isn’t an exhaustive list of filing obligations, so work with your tax professional to make sure you’re on top of everything.
6. Penalties for Non-Compliance Can Be Steep
No matter how much of a pain taxes might be, neglecting them is never the answer. There are serious consequences to things like failing to pay what you owe or failing to file your taxes entirely, like late penalties, liens on your property, and wage garnishment, among others.
And don’t think that being out of the country means the government can’t enforce these penalties — laws like the Foreign Account Tax Compliance Act require foreign financial institutions and governments to provide the US government with information on anyone with financial ties to the US.
7. You May Be Able to Catch Up Penalty-Free
If you do still owe back taxes, taking action as soon as possible will prevent the situation from snowballing any further. With the Streamlined Foreign Offshore Procedures program, you may not even be hit with a fine. Generally, to qualify for this program, you must be a non-resident, declare that your failure to file was non-willful, and critically apply for it before the IRS reaches out to you about back taxes.
8. You May Be Able to Reduce What You Owe
Digital nomad taxes don’t have to drain your bank account — if you make use of the tax credits and exclusions available to you, you can significantly lower your taxes.
A few of the most relevant examples:
- – Totalization Agreement: Exempts expats who have contributed to another country’s social security system from paying US social security taxes
- – Foreign Earned Income Exclusion: Exempts expats from taxes on the first $112,000 of their income
- – Foreign Housing Exclusion: Provides tax breaks for foreign housing expenses like rent, utility, and repairs
- – Foreign Tax Credit: Allows expats to deduct the amount they have paid in taxes to a foreign government from what they owe the US government
Consult a qualified tax professional, and they could find even more ways to reduce your bill.
Set Your Digital Nomad Taxes to ‘Easy Mode’
Feeling a little overwhelmed by all of this information? We don’t blame you. Taxes are confusing enough when you’re living in the US — factor in foreign residence or financial ties, and they become even tougher.
Fortunately, the Bright!Tax team is full of experts with years of experience handling digital nomad taxes to help clients streamline their filing and make sure they don’t have to pay any more than they need to.
Want to learn how we can help you? Contact us today to find out about our services.