Remote Worker. Digital Nomad. One is old school. One is new school. Both are terms for workers that aren’t confined to a physical location in order to do their job. The main difference between the two is that the advent of technology has morphed remote worker who may live in another state into an international traveler who connects via wi-fi to get the job done anytime, anywhere. For a remote worker that lives in the United States, the taxes are the same as their co-worker that lives in the same state as the business. US citizens residing abroad automatically receive a 2 month extension, making their tax return due date June 15. The only difference will be in state taxes. For the digital nomad, taxes are a little more complex. Let’s explore the tax implications with some Q&A.
Q: If I work in another country, do I have to file US taxes?
A: Yes! The US utilizes a citizenship-based tax system rather than a residence-based tax system. This means that if you’re a citizen of the United States, you are required to pay federal taxes to the IRS. In general, the requirements are the same for United States citizens, whether they reside in the country or not. Now when it comes to state taxes, you have 50 different scenarios. There is no one size fits all state tax ruling, but unless you have income earning rental property or other earned income in a state, you most likely won’t have to pay state taxes. To be sure, check your state tax website.
Q: Do I include all of my income?
A: No. There’s a foreign earned income exclusion, a foreign housing exclusion, and a foreign housing deduction.
- Foreign earned income exclusion – the amount of foreign earned income that can be excluded from one’s gross income. The deduction amount is adjusted for inflation annually. The maximum amount for 2018 was $103,900.
- Foreign housing exclusion – the amount of housing paid from employer-provided funds that can be excluded from one’s gross income. The maximum amount is generally 30% of the maximum foreign earned income exclusion, which roughly equals a maximum exclusion of $85.40/per day ($31,170/year). This is generalized and can vary depending on the location of the foreign tax home.
- Foreign housing deduction – the amount of housing paid from self-employment funds that can be excluded from one’s taxable income. This deduction uses the same maximum calculation as the foreign housing exclusion.
In order to get these perks, you have to either pass the bona fide resident test, meaning you essentially lived in a foreign country for an uninterrupted year, or the physical presence test, meaning you were physically present in a foreign country for a minimum of 330 full days out of 12 consecutive month period.
Q: Are there other tax savings that I can utilize?
A: Of course! There’s the foreign tax credit, which is a credit on your US tax return for foreign taxes paid to the foreign country where they reside. In the past, deductions were also another great way for digitall nomads to decrease taxes owed. While the higher standard deduction from the Tax Cuts and Jobs Act significantly increased the standard deduction, it’s still good practice to maintain a log of travel (air, road, and sea), meals, office/coworking space expenses, moving expenses, computer equipment, and any other expenses during the year that enable you to be a digital nomad.