Remote working is a growing global trend, particularly working remotely for a foreign company as a digital nomad. Although living in different places around the world while working from a laptop may sound great in theory, there are certain practical matters to bear in mind before embarking on this journey. Many people don’t realize that even if they leave the US and live and work outside the country, they still have a responsibility to file taxes every year with the IRS. Failing to do so can result in penalties, so it’s best to fully educate yourself on expat taxes well in advance of needing to file.
In ordinary circumstances, taxes can be confusing. Add in the complications that come with living and working abroad, and they can get even more complicated. While the US expat tax process might be intimidating, it’s certainly not impossible. After all, millions of Americans do it every year. And with a bit of smart tax planning, it can be a whole lot smoother.
Below, we’ve rounded up a handful of essential tips for expats who will be filing taxes abroad for the first time. Read on to learn what you might owe, what breaks you qualify for, and more.
1. Understand Federal Tax Obligations
The United States is one of the few countries in the world where citizens and residents are subject to taxation regardless of where they reside. So just as you’ve (hopefully) done your whole adult life, you’ll need to file a federal income tax return if you’re living abroad. This includes both active and passive income, along with any gifts, bonuses, and other forms of payment you’ve received.
Regular income and short-term capital gains
These are taxed at a marginal rate between 10% and 37%, depending on which tax bracket you fall into. Long-term capital gains, on the other hand, are taxed at a marginal rate of 0% to 20%. And certain types of special income may be subject to different tax rates, such as gifts (18% to 40%), bonuses (22%), and gambling winnings (24%).
You’ll also be subject to payroll taxes, which fund social security and Medicare. In total, this tax rate is 15.3%: 12.4% for social security, and 2.9% for Medicare. If you’re a W-2 employee — as is the case for most people working for an employer on a part- or full-time basis — 7.65% will be automatically withheld from your paycheck, while your employer pays the other 7.65%. If you’re self-employed, however, you’ll be responsible for the full 15.3%, and you’ll have to make these payments yourself (more on that later).
You may also be subject to special US expat tax obligations. Those with foreign bank accounts totaling $10,000 or more must file a Foreign Bank Account Report (FBAR) using FinCEN form 114, while those with overseas assets exceeding a certain amount (typically $200,000 when you’re abroad) must file Form 8938.
2. Understand State & Local Tax Obligations
You may also be subject to additional taxes if you most recently lived, or maintain a permanent address, in one of the 41 states where state income taxes apply (plus Washington, DC). State tax rates vary significantly from place to place, from as low as 1.1% in North Dakota’s lowest tax bracket to as high as 13.3% in California’s highest tax bracket.
In addition, there are 17 states that allow local governing bodies to levy additional income taxes (consult this list for reference). Typically, however, these are significantly lower than federal or state income, ranging from as low as $2 per month in Aurora, Colorado to up to 3.876% in New York City.
3. Understand Foreign Tax Obligations
Unfortunately, US expat tax obligations often include foreign income taxes as well. However, this will depend on where you live, how much time you’ve spent there, and what type of visa you hold, among other factors. This doesn’t necessarily mean that you’ll be double-taxed, though. The US government has a number of different tax treaties with foreign countries designed to prevent US persons living abroad from paying taxes on the same income to more than one government. This effectively means that you are able to get tax breaks for working remotely, if your taxes are done correctly.
4. Learn About Different Tax Breaks for US Expats
There are several important tax implications of working remotely. You probably already know that the US offers tax credits, exclusions, and deductions in certain circumstances. Some of the more well-known ones include the child tax credit, the student loan interest deduction, and charitable donation deductions.
But in addition to these standard tax breaks, there are a few special US expat tax breaks available
This includes the:
- Foreign Tax Credit (FTC): Allows qualified US persons to subtract what they’ve paid in taxes to a foreign government from what they owe to the US government.
- Foreign Earned Income Exclusion: Allows qualified US persons to exclude a certain amount of foreign income from US taxation ($120,000 as of 2023).
- Foreign Housing Exclusion/Deduction: Allows qualified US persons to exclude/deduct reasonable housing expenses from taxable foreign income.
5. Track All Income & Expenses
It might seem tedious to track all of the money that goes in and out of your accounts, but it’s an essential part of tax planning. Tracking your income, for example, can save you major time, money, and effort in the event of errors and audits. W-2 employees should double-check that their paychecks are correct and properly deposited, while self-employed individuals should record and review all of the client payments they receive.
Tracking expenses, meanwhile, will come in handy when it comes to claiming tax breaks. A detailed log of your purchases and payments will help ensure that you don’t miss out on any potential deductions, exclusions, or credits. This is especially important for people who are self-employed, as they often rack up significant deduction-eligible business expenses.
Fortunately, tracking income and expenses is easier than many people think. There are many apps and tools that automatically track cash flow in and out of your accounts, and allow you to categorize them according to type (e.g. business vs. personal), expense category, and more.
6. Pay Attention to Tax Deadlines
When you’re busy with so many other things in your life, tax deadlines often sneak up on you. But paying on time is critical to avoiding fines. While federal taxes are typically due April 15th (or, if it falls on a weekend or holiday, the first regular business day afterward), the US expat tax deadline has an automatic extension until June 15.
Self-employed individuals usually have to make quarterly estimated tax payments as well, since taxes aren’t withheld from their paychecks. These are typically due on April 15, June 15, September 15, and January 15 (or again, the first regular business day afterward if they fall on a weekend or holiday). If you find yourself scrambling to come up with the money each quarter, consider creating a separate bank account. Divert about 30% of each client payment you receive to this account. Then, you should be all set for the next tax deadline.
If you’re just now realizing you’re behind on your taxes, however, it’s worth checking out the IRS Streamlined Procedure. This program is designed to help US persons who unknowingly accrued back taxes on foreign income catch up, sometimes with no penalty at all.
7. Work with a Tax Consulting Firm Specializing in US taxes
Even with thoughtful tax planning, filing your taxes can be time-consuming and complex — especially if you don’t live in the country. So if you want a little help, don’t be afraid to reach out to a professional tax consulting firm like Bright!Tax.
Partnering with a professional firm helps ensure that your tax liability is minimized as much as possible. It also assures that your returns are filed accurately and on time. And with us doing the heavy lifting, you can spend less time stressing about your taxes and more time doing what you love.
Reach out to Bright!Tax today to get started, or speak with one of our specialists to learn how we can help!