US Taxes for American Digital Nomads – A Guide
Digital Nomads are a new breed of American hero, roaming the world while working remotely. The Nomad lifestyle allows Americans to explore far off lands and cultures without taking time off work, and it can also offer tax advantages, as well as providing an opportunity to live cheaply and save money. Understanding US tax rules is an important element of this though, so be sure to read our US tax guide and seek advice if you have any questions.
Do Digital Nomads have to file US taxes?
The US has an unusual tax system, in that it requires all American citizens and Green Card holders to file US taxes, reporting their worldwide income, whether they live in or outside of the US.
This means that American Digital Nomads are still required to file US taxes, wherever in the world they happen to be.
Americans living abroad receive an automatic filing extension until June 15th, and they can request a further extension until October 15th if they still need more time. This may be because they have to file taxes in another country through qualifying as a tax resident there, although many Digital Nomads move strategically from country to country and so avoid this. Nomads should check the tax rules in each country where they spend time to find out whether they have to file local taxes anywhere.
Up until just a few years ago, many Americans living abroad didn’t bother US taxes because they assumed they were beyond the IRS’ reach. Nomads should be aware though that the IRS now has global reach, in terms of access to financial information.
Are there ways to mitigate paying US income taxes?
While American Digital Nomads who earn over $12,000 (in 2018), or just $400 of self-employment income – worldwide – always have to file a US tax return, when they file they can claim an IRS provision to reduce their US tax bill, often to zero.
For example, Nomads who qualify as a tax resident in another country and pay income taxes there at a higher rate than the US income tax rate can claim the Foreign Tax Credit on IRS Form 1116. This allows them to claim US tax credits up to the same value as the foreign taxes that they’ve paid. For many people, this will eradicate their US tax bill completely.
Many Nomads claim another provision called the Foreign Earned Income Exclusion however, which allows them to exclude up to around $100,000 of their global earned income from US taxation. To claim the Foreign Earned Income Exclusion, they must either demonstrate permanent residence in another country, or (more usefully for many Nomads) demonstrate that they spent at least 330 days outside the US in a 365 day period that is either the tax year or coincides with the tax year. Digital Nomads can claim the Foreign Earned Income Exclusion by filing IRS Form 2555.
What about State Taxes?
“Digital Nomadism is a hot topic and a growing trend, especially among entrepreneurs. Being a digital nomad isn’t just about travelling the world and making everyone back home jealous on social media. Some of us on the road are doing it for the savings.” – Entrepreneur
Whether Digital Nomads have to pay State Income Taxes or not depends on the rules in the state where they last resided.
Some states only release you from having to file if you don’t retain significant ties in the state, such as having property, investments, bank accounts, dependants, or a driving license, so it’s prudent to familiarize with the rules in the relevant state.
What about US Self-Employment and Social Security taxes?
American Digital Nomads who work for a US firm will have to continue paying US employee social security taxes. Self-employed Nomads meanwhile will have to pay both employer and employee social security taxes, as well as Medicare tax.
Some self-employed Digital Nomads create a foreign corporation in a no-tax country and become employees of the new foreign registered firm, so avoiding US self-employment taxes as an employee of a foreign company. The foreign company will be liable to US reporting requirements though, and it may also be taxed in the US too. Not paying US social security taxes can also affect future social security benefits entitlement. Whether or not this sort of arrangement is beneficial depends on each Nomad’s situation, so always seek advice from an expat tax expert.
Are there any other US reporting requirements?
American Digital Nomads who have any foreign registered bank or other financial (e.g. investment) accounts may have to report them by filing an annual Foreign Bank Account Report (FBAR). Penalties for not filing FBARs (or for incomplete or inaccurate FBAR filing) are steep, even if the error wasn’t intentional, and the IRS is receiving information directly from most foreign banks and other financial firms, so FBAR filing important requirement. FBAR filing includes business bank accounts, even if registered in the business’, rather than the business owner’s name.
Nomads who have over $200,000 of foreign financial assets also have to report them by filing IRS Form 8938.
Always seek advice
To ensure that you are filing in your best interests and avoiding future penalties, it’s always best to seek advice from a reputable US expat tax specialist. If you’re behind with your US filing or reporting from abroad, it may be possible to catch up without facing penalties, so long as you do so voluntarily before the IRS contacts you.