US Taxes for Digital Nomads

The rise of the internet brought a new job description РDigital Nomads. These people work from anywhere and everywhere without the need to have a permanent residence. However, digital nomads still have to pay taxes on their income, and this is where things get complicated. This is also why so many digital nomads seek the best tax debt help available to them. When it comes to US Taxes for Digital Nomads, determining residency is the name of the game. In this article, we will explain exactly how the U.S. tax system works for (and against) digital nomads, as well as provide some tips on how you can get the most out of your tax situation.

Digital nomads and the U.S. tax system

The first thing you need to know about the U.S. tax system as it pertains to digital nomads is that these people pay taxes in their “tax residence country”, also referred to as “home country”. Basically, this is the place that digital nomads call their place of residence. However, digital nomads may also be required to pay territory, state, province, local, and state taxes. To be perfectly honest, it can all get quite complicated really fast. If you are looking to avoid IRS penalties due to not paying your taxes properly, the first thing you will need to understand is how the U.S. determines tax residency for digital nomads.

person being confused by their tax return
US taxes for digital nomads can be quite confusing at times.

Determining tax residency status for digital nomads

If you are living and working in the U.S., you will be required to file tax returns as a US citizen, regardless of where you might actually live. There are two factors that are important for tax calculations:

  • The official residence address of the digital nomad
  • The tax regulations of the country in which the digital nomad spends most of their time

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To be considered a tax resident of the United States, a digital nomad needs to stay at a physical address in the US for a minimum of 183 days per calendar year. Furthermore, the digital nomad will need to inform the proper citizenship authorities in writing that they qualify for tax residency. Lastly, the digital nomad will also need to register their new permanent residence with the proper taxation authorities. By doing so, they will be able to obtain their tax number. This number is crucial for digital nomads, as it allows them to open a bank account in the U.S. There are several other tax considerations when moving to another state that might influence the process further, but these rules apply to all of them.

Aside from sorting out the tax residency, digital nomads also need to understand how to report their foreign-earned income correctly. Failure to do so might have considerable legal repercussions.

An Overview of Taxation on Foreign Earned Income

If you are considered to be a tax resident of the U.S., you will be required to pay taxes on any and all foreign income that you earn. This includes any wages you garner from your employer(s), interest, dividends, and rental income. Normally, you will need to file all this income in your yearly report, but there is a way to reduce the amount that you pay through FEIE (Foreign Earned Income Exclusion).

a person holding several euro bills representing US taxes for digital nomads
Your income, foreign or not, will always be taxed by the IRS.

Foreign Earned Income Exclusion

The FEIE allows digital nomads to exclude up to $120,000 of their foreign earnings. Furthermore, it is possible to exclude the amount of money paid for meals and lodging.

To qualify for FEIE, you will first need to establish a tax residency in at least one foreign country. Unfortunately, this means that you can’t benefit from this exclusion if you are a tax resident of the U.S. This is due to the fact that the IRS considers your tax residency to be the primary place of your employment/business. Secondly, you will need to pass either the Bona Fide Residence test or the Physical Presence Test. You will meet the requirements for the latter if you are physically present in (at least) one foreign country for 330 days per year.

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You can pass the Bona Fide Residence test if you happen to be a bona fide resident of a foreign country for an uninterrupted period of time that equates to one tax year. Being a bona fide resident basically means that you have set up a proper residence for yourself and your family for an indefinite period of time. If you are not actually living on the property, however, you might have difficulties passing this test. Furthermore, there are tax implications of converting your primary residence to a rental property to consider, as well. All in all, if you want to have the least problems with the IRS, you will want to make sure that you actually live at the place of your tax residency.

Even though US Taxes for Digital Nomads are quite complex, there are a few things you might be able to take advantage of. There are numerous tax deductions for digital nomads that might reduce your overall tax bill.

blocks spelling "tax deductions"
Everyone loves tax deductions!

Common Tax Deductions for Digital Nomads

Being a digital nomad means having access to a variety of specific tax deductions. Here are some of the most common tax deductions that you might be able to take advantage of:

  • Foreign tax credit
  • Computer-related equipment (laptop, accessories, laptop bags, etc.)
  • Internet service costs
  • Phone expenses
  • Membership/subscription fees
  • Home office deductions
  • Travel expenses deductions
  • Deductions for health insurance premiums
  • Legal/accounting expenses
  • Education expenses that relate to your field
  • PayPal fees and other banking fees that you incur

As you can see, there are quite a few deductions that you may use to boost your tax refund amount. If you want to maximize your tax return, however, you will need a professional to explain the US taxes for digital nomads to you. The US tax code is incredibly complex, after all, and most of the time, it works on a case-by-case basis.

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If you want to find the best tax professionals near you, all you need to do is take advantage of the information you can find in the Consumer Opinion Guide. We’ve already compiled all the information for your perusal, allowing you to find the best tax help in no time!


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