The digital nomad lifestyle is growing in popularity, as more and more professionals are taking advantage of technology to work remotely from anywhere in the world. As an American digital nomad, it’s essential to understand your tax obligations to the U.S. government while living and working abroad. This guide will outline ten key considerations for American digital nomads when it comes to managing their taxes.
U.S. Citizens and Residents are Taxed on Worldwide Income
The United States is one of the few countries that taxes its citizens and residents on their worldwide income, regardless of where they live. This means that as an American digital nomad, you must report all income earned, both in the U.S. and abroad, on your annual tax return. Failure to do so can result in penalties and interest.
Foreign Earned Income Exclusion (FEIE)
To alleviate some of the tax burden on U.S. citizens living and working abroad, the IRS provides the Foreign Earned Income Exclusion (FEIE). This allows qualifying taxpayers to exclude a certain amount of their foreign earned income from their U.S. taxable income. For the 2021 tax year, the maximum exclusion was $108,700, but this amount is adjusted annually for inflation.
To qualify for the FEIE, you must meet one of two tests: the Bona Fide Residence Test or the Physical Presence Test. The Bona Fide Residence Test requires that you are a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year. The Physical Presence Test requires that you are physically present in a foreign country or countries for at least 330 full days during a 12-month period.
Foreign Tax Credit
If you pay income taxes to a foreign government, you may be eligible for the Foreign Tax Credit, which can help prevent double taxation on your income. This credit allows you to offset the taxes you paid in a foreign country against your U.S. tax liability. To claim the Foreign Tax Credit, you must file Form 1116 with your tax return.
Self-Employment Taxes
As a digital nomad, you are likely considered self-employed. This means that you are responsible for paying self-employment taxes, which include Social Security and Medicare taxes. These taxes are calculated on your net earnings from self-employment, and you must file Schedule SE with your tax return.
However, if you work in a country with a Totalization Agreement with the U.S., you may be exempt from paying Social Security and Medicare taxes. These agreements are in place to prevent double taxation of income with respect to Social Security taxes. In such cases, you will be required to pay the equivalent taxes in the foreign country instead.
Foreign Bank Account Reporting (FBAR)
If you have foreign financial accounts, you may be required to report them to the U.S. Department of the Treasury. The Foreign Bank Account Reporting (FBAR) requirement applies if the aggregate value of your foreign financial accounts exceeds $10,000 at any time during the calendar year. This includes bank accounts, investment accounts, and certain foreign retirement accounts.
To file an FBAR, you must electronically file FinCEN Form 114 through the BSA E-Filing System. The deadline for filing the FBAR is April 15th of the following year, with an automatic extension to October 15th if needed.
Foreign Account Tax Compliance Act (FATCA)
The Foreign Account Tax Compliance Act (FATCA) requires certain U.S. taxpayers holding financial assets outside the United States to report those assets to the IRS. You must file Form 8938, Statement of Specified Foreign Financial Assets, with your The Foreign Account Tax Compliance Act (FATCA) requires certain U.S. taxpayers holding financial assets outside the United States to report those assets to the IRS. You must file Form 8938, Statement of Specified Foreign Financial Assets, with your tax return if you meet the reporting threshold. For the 2021 tax year, the reporting thresholds are as follows:
Single or married filing separately and living in the U.S.: $50,000 in total foreign assets on the last day of the tax year, or $75,000 at any time during the year.
Married filing jointly and living in the U.S.: $100,000 in total foreign assets on the last day of the tax year, or $150,000 at any time during the year.
Single or married filing separately and living abroad: $200,000 in total foreign assets on the last day of the tax year, or $300,000 at any time during the year.
Married filing jointly and living abroad: $400,000 in total foreign assets on the last day of the tax year, or $600,000 at any time during the year.
These thresholds are subject to change, so it is essential to check the current requirements when preparing your tax return.
State Tax Obligations
In addition to federal tax obligations, you may still be required to file and pay state taxes, depending on your state of residence. Some states have specific rules for residents who live and work abroad, while others do not. It is essential to research the tax requirements for your state of residence to ensure compliance.
Tax Treaties
The U.S. has tax treaties with several countries that may affect your tax situation as a digital nomad. These treaties often provide relief from double taxation and can help determine which country has the right to tax specific types of income. It is essential to familiarize yourself with any applicable tax treaty provisions to ensure that you are not overpaying taxes.
Tax Planning for Digital Nomads
Effective tax planning is crucial for digital nomads to minimize their tax liabilities and ensure compliance with U.S. tax laws. Consider working with a tax professional who specializes in expatriate taxation to help you navigate the complexities of international tax law.
Deadlines and Extensions
As an American digital nomad, you must be aware of tax deadlines and any applicable extensions. The deadline for filing your U.S. federal tax return is typically April 15th. However, if you are living abroad on that date, you are granted an automatic two-month extension to file, making your deadline June 15th. If you need additional time, you can file Form 4868 for a further extension until October 15th.
Conclusion
Understanding and managing your tax obligations as an American digital nomad can be challenging. However, by being aware of the ten key considerations outlined in this guide, you can better navigate the complexities of international taxation and ensure that you remain compliant with U.S. tax laws. As a digital nomad, it is essential to stay informed about changes in tax laws and requirements, as they may directly impact your tax situation.
