Nowadays, it’s not uncommon for US expats to have a job that allows telecommuting. With endless new technologies and a shift in thinking by some corporations and small businesses, the ability to work from wherever is gaining momentum. Because of the flexibility in how people work, they are now able to move more freely around the world, adopting the true meaning of a “digital nomad” – but you must still consider American expat taxes when moving abroad!
Tax Effects of a Digital Nomad Lifestyle
The great thing about becoming a digital nomad is the ability to work from anywhere in the world, which gives you the freedom to travel to every end of the Earth if you so desire – while still earning an income. This gives you many opportunities to learn new things, meet new people and gain experiences that you may not have otherwise. However, there are still some American expat tax implications that you must be aware of if you remain a US citizen or permanent resident while traveling the world.
As you may know, all US persons (citizens and permanent residents) are subject to US taxes on their worldwide income. You must report all sources of income on your annual tax return, even if the income was earned outside of the States or if all of your assets are held in a foreign country. As long as you’re a US person, you remain subject to US tax law. Fortunately, there are ways to reduce or eliminate your tax obligations to the US – read on for details.
The IRS actually offers several credits, deductions and exclusions for US expats living abroad. One of the largest tax breaks you could utilize is the Foreign Earned Income Exclusion, and there is also the Foreign Tax Credit. Here’s a breakdown of both:
1. Foreign Earned Income Exclusion (FEIE): For the 2015 tax year, this allows you to exclude up to $100,800 of your foreign earned wages from US taxation ($101,300 in 2016). So, if your income is less than that amount, you won’t owe any income taxes to the IRS. You also have a housing deduction to take advantage of, using the expenses you pay for foreign housing rent and utilities. In order to utilize the FEIE, you must qualify in one of the following ways:
- Physical Presence Test – You must be present in a foreign country at least 330 out of a 365-day period. You will need to keep an accurate calendar of all of your travel, as you must count the number of days within the actual tax year to determine what portion of the FEIE you qualify for.
- Bona Fide Residence Test – You must have been a ‘bona fide’ resident of a foreign country for an entire year, and you must demonstrate intent to stay in the country indefinitely. As a digital nomad, being able to utilize this test is ideal, as it allows you to take advantage of the FEIE without having to keep close count of days when traveling back to the US.
2. Foreign Tax Credit (FTC): This is a dollar-for-dollar reduction in your US taxes, utilizing the tax amount you’ve paid to your resident country. This prevents you from being double taxed on your foreign earned income. However, it’s important to note that you cannot use this against income claimed with the FEIE. It can only be used on income above the FEIE maximum of $100,800, if you intend to use both the FEIE and FTC.
You can learn more about ways to save money on your American expat taxes by downloading a US expat tax guide for your specific tax situation.
Foreign Financial Account Reporting for Digital Nomads
The US government also requires reporting of foreign financial accounts that exceed certain thresholds. In some cases, you’ll need to file Form 8938 to satisfy the Foreign Account Tax Compliance Act (FATCA), which requires reporting of interests in foreign bank accounts and financial assets. The filing thresholds for Form 8938 are as follows:
Single taxpayers living abroad – $200,000 on the last day of the tax year or $300,000 at any point during the year
Married filing jointly taxpayers living abroad – $400,000 on the last day of the tax year or $600,000 at any point during the year
Single taxpayers living in the US – $50,000 on the last day of the tax year or $75,000 at any point during the year
Married filing jointly taxpayers living in the US – $100,000 on the last day of the tax year or $150,000 at any point during the year
Form 8938 is due at the same time as your American expat taxes, which happens to be June 15th for US expats, unless you filed an extension until October 17th (usually the 15th, but this date falls on a weekend in 2016).
If you have foreign bank accounts with an aggregate balance of $10,000 or more, you will also be required to file Foreign Bank Account Reporting (FBAR), also known as FinCEN Form 114. This form is filed separately from your US tax return, as it goes to the US Treasury Department. For the 2016 reporting year and beyond, it will be due April 15th, with an automatic two-month extension for US expats. You will also be able to request an additional extension until October 15th.
Living the digital nomad lifestyle can be the adventure of a lifetime – and American expat taxes, FATCA and FBAR don’t have to take away any of the enjoyment. By taking the time to learn what’s required of you when it comes to tax obligations, you’ll be well prepared when tax time rolls around!
Need Help With Your American Expat Taxes?
Greenback can help. Our team of expat-expert CPAs and IRS Enrolled Agents can help make filing American expat taxes a more hassle-free process, so you can get back to your adventure abroad. Get started today!