As a US digital nomad, what are the tax issues that you need to be aware of? How is income reported, what provisions are there for full-time travelers, and what are the pitfalls? While location-independent work is on the rise, tax regulations struggle to keep up with it and there are still a lot of grey areas in the matter. Regulations also vary greatly from country to country, so it’s always recommended to do some research of your own or talk to a tax professional.
However, if you are a US citizen digital nomad you’re in luck! We spoke with Krystal Pino, seasoned accountant, digital nomad and founder of Nomad Tax, a firm dedicated serving the nomad community when it comes to small business and personal tax issues.
Keep reading to find out Krystal’s recommendations when it comes to dealing with taxes for US digital nomads.
Making a Federal Case Out Of It
First and foremost: the foreign earned income exclusion (FEIE). The tax code provision states that if you are outside of the United States for either a set number of days, or you’re considered a resident of another country, you could be exempt from paying federal income taxes on a portion of your income ($103,900 for 2018 and $104,100 for 2019). Hold your horses though, it’s not automatic simply because you’ve decided to travel. There are tests that need to be met.
First is either the bona fide resident test or the physical presence test. Under the bona fide resident test, you’re considered exempt should you qualify as a resident of another country for a full calendar year. For those of us constantly on the move, there’s the physical presence test (PPT). Under the PPT, you need to be outside of the United States for 330 out of 365 rolling days (which means you can use any 365 day period, not just January-December).
Once you pass the PPT, the next thing the Internal Revenue Service wants to know is where your tax home is. For our FEIE purposes, this tax home is not your residence, or abode (discussed later), but rather refers to how and where you make your money. If you’re self-employed, you make your money wherever you are. Congrats, you’ve passed the second test!
W-2 employees take a little bit of an extra look at the nature of their work and assignment. You’re going to have to convince the IRS that your remote work is for the benefit of your employer and not only personal. Not impossible, but it weakens your case for the FEIE.
But wait! We’re not done yet! The last thing the IRS takes a look at is what is called your ‘abode’. This is a referral to your social, family, and economic ties to the United States. Own a home in the US and not renting it out? Still voting in local elections? Have a car registered? Strong family ties? While none of these automatically disqualify you from the FEIE, they could potentially weaken your case that the US is not your permanent home, and this lifestyle of travel is only temporary for you and you’re trying to get out of paying taxes for a bit.
Self(ish) Employment Taxes
Another important thing to note when considering the FEIE is that it only applies to FEDERAL income taxes. None of us are exempt from paying social security and Medicare taxes. Good news for W-2s: you get to split this with your employer, and it is already taken care of for you. Those of us who are self-employed are responsible for the full burden (12.4% for Social Security and 2.9% Medicare), although a credit is offered for half. Self employed and don’t want to deal with SE tax? You can mitigate your SE tax by setting up your business as an S Corporation, but this does subject you additional tax filings.
State of Affairs
So, what about state taxes? While some states do have foreign earned income exclusion provisions, most of the time you’ll still be subject to state taxes. Traveling full time? CA, CT, DE, ID, MN, MO, NY, OK, OR, and WV all offer safe harbor provisions, provided you’re out of the state for a number of days and subject to other residency requirements.
State residency is another hot topic among US digital nomads and something my firm looks at intently. Residency can be both hard to break and to establish, especially when trying to do it from overseas. Thus, consider it before you leave or talk to someone who’s already done all the leg work.
Finally, another frequent question I get is “what can I deduct?” If you’re a W-2 employee: nothing. Sorry. The Tax Cuts and Jobs Act basically got rid of anything you could previously deduct. For self-employed individuals, the answer is: it depends. First, consider the nature of your business and the nature of your travel. The IRS states heavily that business expenses must have a clear business purpose, and nothing that is considered personal is allowed. What you can deduct include coworking space fees, trips made specifically for client/business work, meals with clients, and professional fees, which are still deductible simply as if you were sitting still.
Congratulations, you made it this far! Dealing with taxes can be daunting, but it should be on your top priority list when planning your life on the road.
If you still have questions or doubts feel free to reach out to Krystal for a consultation.