Traveling and living outside the USA can be quite exciting. I definitely understand the appeal. However, it doesn’t matter where you go, because the US government still expects you to file a tax return and pay taxes as a US citizen. This is true even if you become a resident of another country and live there full time. You will have income tax requirements as a digital nomad and US citizen.
Hello, digital nomads living outside the US! This is for you!
The United States might be the only country in the world that does this.
If you were a citizen of Italy but living and working in Argentina, Italy wouldn’t expect you to pay any taxes! You would have to pay them in Argentina, though. Unfortunately, the US would expect you to pay both.
Hear me out though. It’s not all bad. There are provisions.
For your peace of mind, it’s important to become familiar with the income tax rules that apply to you as a citizen of the United States living outside the country.
Yup. That’s right. I’ll say it again. Do your research and know your income tax requirements as a digital nomad.
Income Tax Requirements as a Digital Nomad
First and foremost, no matter where you live, you must file a tax return as a US citizen.
It’s entirely possible that you won’t owe any taxes, but you must file an income tax return each year if you make above the filing threshold or over $400 as a self-employed individual.
Remember, you’re still subjected to all US tax laws. This includes income tax rates and the same credits and deductions.
While the United States has a reputation for double taxation, in practice that only applies above certain income limits.
How about we go over how you reduce your taxes owed in the US?
Yes. There are a couple of ways that are available to digital nomads living outside of the US.
1. Foreign tax credit
This credit is intended to protect American citizens from paying taxes twice on the same income. In essence, the foreign tax credit allows a taxpayer to deduct any income taxes paid in a foreign country from taxes owed in the US. There is a limit, however.
If you pay $12,000 in foreign taxes, you could reduce your US tax bill by $12,000. Simple enough.
This helps to eliminate some double taxation.
2. Income Exclusion
The other option is using the income exclusion or foreign-earned income exclusion.
However, you can’t claim both. The foreign earned income exclusion (FEIE) allows you to reduce your gross income by up to $112,000 in 2022 and $120,000 in 2023!
As an example, if you earned $115,000 in a foreign country in 2022, your taxable income would be only $3,000. Not bad, right?
If you are self-employed, then you’ll still owe self-employment taxes which are calculated separately from income taxes. Regardless, this is a nice tax benefit for those spending time outside the US during the year.
There are rules you must follow to help you calculate the total amount of your foreign-earned income exclusion. The number one rule which I find most digital nomads use to help them qualify for the foreign-earned income exclusion is the physical presence test.
This states that a US citizen who is physically present in a foreign country for at least 330 days during any 12-month time frame can qualify for the FEIE.
This doesn’t need to be a calendar year (January to December). It could be April to April. The important factor here is that you don’t spend more than 30 days in the US.
That’s good news for those starting out mid-year or coming home to visit family for a week or two.
Lastly, it’s important to file your US tax return if you earn wages or self-employment income.
Why? Because much of that will be reported to the IRS and they can create a return using the information they are provided. Trust me. You don’t want this.
If you’re under the income limit, your US tax bill is likely to be zero. The cost of filing and possibly paying a tax professional proficient in these rules will be worth it.
Regardless, file your US tax return, no matter where you reside! You still have income tax requirements as a Digital Nomad.