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Digital Nomad Taxation for US Citizens; How To Manage

Believe me, I know that Digital Nomad Taxation can be completed. Digital nomads are a new breed of the American worker who doesn’t rely on the typical nuances of an office to do their work. Rather, they use technology to work remotely — usually from a home office — telecommuting as opposed to being physically inside an office or complex. The digital nomadic lifestyle has allowed Americans to explore foreign lands while still being able to productively tend to their online business. However, one crucial issue that often crops up is digital nomad taxes. Do digital nomads get to live tax free? Or do they still have to file United States taxes? 

Getting a solid understanding of US tax rules is key to getting the answers to these questions. Fortunately, this article is here to show you the way. Let’s start with the most common question that digital nomads ask. 

Digital Nomad Taxation; Do digital nomads need to file US taxes while living abroad?

With the digital nomad lifestyle gaining popularity, the US has an extraordinary tax system that lets it collect taxes from American citizens and Green Card holders, wherever they may be outside of the United States. This means American digital nomads still need to file US taxes and report their worldwide income.  

Americans filing their tax returns get an automatic filing extension until the 15th of June and can even ask for a stay until October 15th, should they need more time to complete their paperwork. This may be since they have to file taxes in another country by qualifying as a tax resident there, although plenty of digital nomads have learned to move from one country to another to avoid the tax burden.

Not too long ago, lots of Americans who were residing in other countries did not even bother to file US taxes since they assumed that since they were out of American soil, they were out of the Internal Revenue Service’s (IRS) reach. However, they were wrong as the same technological advances that allowed them to enjoy the digital nomadic lifestyle also gave the IRS global reach.

Do digital nomads have to pay US income taxes?

While American digital nomads who make more than $12,400 — for the tax year 2020, or $12,550 for 2021 — or just $400 of global self-employment income, always have to file a US tax return. When they file, they can often claim an IRS provision to lessen their US tax bill, regularly to zero.

One good example is digital nomads who qualify as tax residents in a foreign country and pay income taxes there at a much higher rate than the US income tax rate can claim the Foreign Tax Credit on IRS Form 1116. This essentially lets them claim US tax credits up to the same value as the foreign taxes that they’ve paid. For a lot of digital nomads, this will erase their US tax bill.

However, plenty of other digital nomads elect to claim another provision called the Foreign Earned Income Exclusion or the FEIE. This arrangement lets them exclude up to an estimated $107,600 — which is the 2020 figure for filing in 2021 — of their global earned income from US taxation. 

For a digital nomad to claim the FEIE, they must either prove permanent residency in a foreign country or demonstrate that they spent at least 330 days outside of the US in a 365 day period that is either the tax year or corresponds with the tax year. Digital nomads can claim the FEIE by filing IRS Form 2555.

Are there strategies to lessen digital nomads’ US tax bill?

American digital nomads can sometimes pay little to no tax, depending on where they live and how much they make. One good example is a digital nomad who makes under $100,000 could hypothetically elect to create a corporation in a country that has a tax system that only taxes residents or even does not tax at all. They can then move to other nomad tax free states, spending just enough time there to qualify for tax residency.

The company they created would then invoice their clients and the company would pay them as an employee. With this tactic, since they’re an employee of a foreign company, they wouldn’t be compelled to pay US Social Security taxes, and as an ex-pat, they could claim the Foreign Earned Income Exclusion to exclude their income from US tax.

Always seek expert advice about Digital Nomad Taxation

If you want to make sure that you are filing the right tax returns while in a foreign country, you must always seek the help of experts, lest you want to incur unnecessary and costly penalties. If you need any sort of assistance with your taxes, get in touch with TFX, a reputable company that has been doing taxes for US ex-pats for more than 25 years.

Author: Veronica Rhodes from TFX

TFX is a women-owned Digital Nomad Taxation that offers all U.S. tax services — for both American citizens and non-citizens with U.S. tax filing requirements. From straightforward expat tax preparation to complex cases involving multiple factors — we’ve handled it all for over 25 years.