How Digital Nomads can Catch Up with their US Expat Taxes
Digital Nomads are expats who take advantage of the global proliferation of fast internet to roam the world while working remotely, often hopping from one exotic hotspot to another rather than settling in one place (although some do choose to stop in one place like regular expats).
Digital Nomads often work for a US employer, or earn the equivalent of a US wage as an entrepreneur.
So being a Digital Nomad can offer great savings too, as many popular Digital Nomads destinations have lower costs of living than the US.
All Americans however have to file US taxes, even if they don’t live in the US, Digital Nomads included.
Fortunately, there are a number of exemptions available that expats can claim when they file that mean most won’t end up paying any US taxes, even though they still have to file.
The danger comes though if Digital Nomads don’t file, as if the IRS realizes that they are should be filing (which it definitely can, having access to financial trails globally), they will be liable to not just pay back taxes, but potentially penalties for not having filed too.
There is though a way for Digital Nomads to catch up with their US tax filing that allows them to claim the available exemptions without paying any fines, an IRS amnesty program called the Streamlined Procedure.
US filing requirements for expats
As is the case for all Americans, Digital Nomads who earn over $10,000, or just $400 of self-employment income are required to file a US tax return.
“While U.S. taxes are rarely easy or fun, especially as an entrepreneur, they can be minimized by understanding all the potential loopholes available to digital nomads or the use of a great CPA.” – Entrepreneur
Americans who live abroad are also required to report any overseas bank or other financial (e.g. investment) accounts that contain over $10,000 at any time during the year by filing an FBAR (Foreign Bank Account Report).
Americans who live abroad have until June 15th to file, although any tax owed should still be paid by April 15th. A further filing extension until October 15th is available on request.
Digital Nomads who spend more than 330 days outside the US in a tax year (or in a 365 day period that overlaps with the tax year) can claim the Foreign Earned Income Exclusion when they file, which allows them to exclude around $100,000 of their income from US tax liability. As such, Digital Nomads should plan their trips back to the States carefully.
Digital Nomads who live in just one foreign country and pay taxes there however may benefit from claiming the Foreign Tax Credit instead, which allows them to claim a $1 tax credit for every dollar of tax paid abroad. If they pay more in taxes abroad than they pay in the US, this will give them excess US tax credits which they can use in the future.
How Can Digital Nomads catch up with their US tax filing?
Expats who have just one or two missed tax returns can simply back file them. Expats who have missed their last 3 or more tax returns can catch up with their US tax filing without facing any penalties using the Streamlined Procedure amnesty program. To catch up using the Streamlined Procedure, Digital Nomads must file their last 3 tax returns and lasts 6 FBARs (as applicable), pay any back taxes due (often nil once they claim the exemptions available for expats), and self-certify that they’re previous non-compliance was non-willful (e.g. they weren’t purposefully evading US taxes).