The United States tax code is complicated, and it can be especially confusing for digital nomads who often travel or live abroad. To bring some clarity to this complicated topic, let’s take a look at the basics of tax filing for nomads.
- Like all US citizens, digital nomads must file a tax return every year regardless of where they live.
- Depending on how long they live abroad, digital nomads may also have to pay taxes in foreign countries.
- The IRS provides tax credits and deductions that digital nomads can use to avoid double taxation and reduce their tax burden.
Do Digital Nomads Have to Pay US Taxes?
Even though you’re a digital nomad (someone who works remotely and has moved abroad), you are required to file your taxes with the United States as long as you have a social security number. This requirement even applies if you live abroad.
Do Digital Nomads Have to Pay State Taxes?
State taxation laws differ on whether a digital nomad must file or pay state taxes, depending on where they last resided and how long they lived there. Typically, you only need to file a State Tax Return if you lived in that state for a certain amount of time during the tax year or earned income there.
However, some states are notorious for trying to maintain tax jurisdiction over their former residents. These states include:
- New Mexico
- South Carolina
If you moved out of these states, they may impose state taxes on you if:
- They issued your current driver’s license or ID card
- Your spouse and/or children live there
- Your vehicle is registered there
- You’re registered to vote there
- You have a bank account open there
- You own property there
- You maintain a mailing address there (even if you’re using a friend or relative’s address)
Due to the complications of state residency laws, some digital nomads who originally hail from states like California and Virginia will establish residency in a less difficult state before traveling abroad. Once you’ve left the country, it can be very hard—or even impossible—to sever ties with your home state from overseas.
If you do opt for that strategy, remember that some states don’t tax income at all, such as:
- South Dakota
Do Digital Nomads Have to Pay Self-Employment Taxes?
Many digital nomads are self-employed. When this is the case, they are liable for the US Self-Employment tax. This consists of two parts: Social Security and Medicare. The Social Security portion is 12.4% of income and Medicare is 2.9%. Together, these taxes amount to 15.3% of your self-employment income. Unfortunately, you cannot exclude either of these taxes through the Foreign Earned Income Exclusion (FEIE) or Foreign Tax Credit (FTC). However, if you live in a country with a Totalization Agreement with the United States, you may be exempt from paying Social Security taxes in your home country and only subject to Medicare taxes there.
Do Digital Nomads Have to Pay Taxes in Foreign Countries?
As noted above, digital nomads must file a US Federal Tax Return even if they live in a foreign country. But do you have to pay taxes to the government of that foreign country? That will depend on the tax policies in place in whatever country you’re living in. While the US has a citizenship-based tax system, most countries have residence-based or territorial systems. Residence-based taxation means only income sourced from within the country will be taxed; territorial-based taxation means all income—sourced from within or outside the country—is taxed.
What Tax Deductions Are Available for Digital Nomads?
The biggest three tax exclusions available to digital nomads are the Foreign Earned Income Tax Exclusion (FEIE), the Foreign Housing Exclusion and the Foreign Tax Credit.
What Is the Physical Presence Test?
To qualify for the Foreign Earned Income Exclusion—and, by extension, the Foreign Housing Exclusion—digital nomads must pass either the physical presence test or the bona fide residence test. The physical presence test requires that you spend more than 330 days outside of the US during any consecutive 12-month period. You may accumulate those days in a single foreign country or several—though you must be in each country legally.
What Is the Bona Fide Residence Test?
To qualify for bona fide residence, you must reside in a foreign country for an uninterrupted period that includes at least three tax years. Tax haven countries sometimes allow digital nomads to pass.
What Tax Forms Do Digital Nomads Need to File—and When Are They Due?
The tax forms that digital nomads must file vary widely depending on their circumstances. In some cases, it can be difficult to keep track of what you are and aren’t required to file.
IRS Form 1040: Individual Income Tax Return
The 1040 Form is your personal tax return. You must file this form if you are a US citizen, including digital nomads. The due date to file Form 1040 is April 15 each year, though you can apply for an extension in certain situations.
IRS Form 2555: Foreign Earned Income
If you are planning to claim the Foreign Earned Income Exclusion and/or the Foreign Housing Exclusion, you must complete Form 2555 and attach it to your Form 1040.
IRS Form 1116: Foreign Tax Credit (Individual, Estate, or Trust)
Form 1116 is used to claim the Foreign Tax Credit. Attach it to your Form 1040 and submit it at the same time you submit your 1040.
FinCEN Report 114: Report of Foreign Bank and Financial Accounts (FBAR)
American expatriates with bank accounts in excess of $10,000 must file an FBAR. This form is filed separately from your Form 1040, but does have the same standard due date: April 15. (However, if you miss that deadline, there’s an automatic extension to October 15.)
IRS Form 8938: Statement of Specified Foreign Financial Assets (FACTA)
If you’re an expat, digital nomad, or other U.S. person living abroad and own foreign assets worth more than $200,000 at the end of the tax year (or $300,000 at any point during the tax year), you have to file Form 8938 with your 1040.
Get Help With Your Digital Nomad Taxes
Hopefully, after reading this guide, you understand how digital nomads are taxed.
But if you still have questions, don’t worry. Digital nomad taxes are complicated. There are mountains of details to juggle, with countless nuances and qualifications for each—it can be easy to get a little lost!
If you need advice on your specific situation, we can help.
At ExpatTaxRelief, we’ve spent years helping expats and digital nomads understand—and fulfill—their US tax obligations. Just contact us and let’s get started!