How can US Expats and Digital Nomads Pay Low or No Taxes?
The global proliferation of wifi over the last few years has enabed the rise of the Digital Nomad, expats who roam the world between exotic locations working remotely. Digital Nomad communities have now sprung up across the globe.
One of the advantages of the Digital Nomad lifestyle is that it reduces living costs, often providing a US income but with the lower living expenses more typical in Asia or Latin America.
This allows young people to keep more of their hard-earned money and potentially save it for later.
Arguably the best money saving strategy for US expats and Digital Nomads though is to minimize the amount of tax paid on their remotely earned income. In this article we look at ways to do this.
Minimizing foreign taxes
American expats and Digital Nomads are still required to file US taxes, leaving them in the uneviable position of potentially having to file taxes in both the country where they’re living and working and the US.
With a bit of planning and knowledge however, it’s possible to pay either very little or no taxes in either.
To minimize foreign taxes, it’s necessary to understand the way different countries tax systems work.
Most countries’ tax systems (the US excluded) are one of two types: residence based, or territory based.
Residence based tax systems typically tax residents on their worldwide income. This means that if you qualify for residence, you have to pay tax.
The only way to avoid this is to ensure that you don’t qualify for residence. While residence requirements vary from country to country, often this will mean not owning a home and spending less than six months present in the country each year.
Territorial based tax systems on the other hand only tax income that is sourced within the country, so that as long as you aren’t paid from clients or an employer in that country or receive your payment into a bank account in that country, you won’t be liable to pay tax there. As such, if your income is from abroad, you can become a resident in a country with a territorial based tax system without paying income tax there.
“Digital Nomadism is a hot topic and a growing trend, especially among entrepreneurs. Being abroad can save us thousands of dollars every year in taxes, especially as an entrepreneur.”
So in general, if Digital Nomads either live in a country with a territorial based tax system and are paid outside that country, or move between countries with residence based taxation systems without becoming a resident in any of them, they won’t be liable to pay foreign taxes on their remotely earned income.
Minimizing US taxes
Expats and Digital Nomads who earn less than around $100,000 and can prove that they spend at least 330 days outside the US in a year (or a 365 days period that conincides with a tax year), they can claim the Foreign Earned Income Exclusion when they file their US tax return and they will be able to exclude their income from US taxes.
Expats who spend over 330 days in a year outside the US are also exempted from compulsory US health insurance.
Expats and Digital Nomads who earn over around $100,000, as well as those self-employed, may benefit from other strategies however, such as setting up an LLC.
Setting up an LLC
Expats and Digital Nomads who are self employed or who earn over the Foreign Earned Income Exclusion limit of around $100,000 (the exact amount rises a little each year) can consider setting up an LLC in a country that only taxes on income earned in that country (e.g. Belize).
Although this creates additional filing requirements (relating to the LLC), it means that instead of being paid directly, Digital Nomads and expats can invoice through the LLC. This income won’t be taxable, and if the LLC employs the expat, they can take a salary from the LLC at under the Foreign Earned Income Exclusion limit, preventing taxation on income above the threshold.
This arrangement also means that the expat or Digital Nomad won’t be liable to pay US self-employent (social security and medicare) taxes, as they are employed by a foreign company, representing another saving, though of course not paying social security taxes can affect future social security entitlement.
Furthermore, the arrangement must be set up by a qualified expert, to ensure that it is done properly.
In summary, using one or more of the above strategies will reduce most expats and Digital Nomad’s tax liability to zero.
It’s important to remember though that even if you don’t owe any US taxes, you are still required to file a US tax return, or you will be liable to fines. There are other US filing requirements to be aware of too, such as foreign bank account (FBAR) reporting.
US expats and Digital Nomads who haven’t been filing US taxes from abroad because they weren’t aware that they had to can catch up without facing any penalties under an IRS amnesty program called the Streamlined Procedure. The Streamlined Procedure also allows expats to claim the Foreign Earned Income Exclusion in retrospect.