Foreign Taxes for Digital Nomads: When & How Much to Pay

When you’re a digital nomad, the last thing you want to worry about is your taxes. You’ve got your career and (perhaps) a family to take care of, and your extra time would be best spent sightseeing or taking in a new culture. When you are on the move constantly, this is especially true. But digital nomads can find themselves in a tricky tax situation if they are not careful. US citizens and permanent residents are still required to file a US income tax return on worldwide income while working abroad, but when do foreign taxes for digital nomads come into play?

Should Digital Nomads File US Tax Returns?

First the bad news: the US is one of those countries (there’s only two!) that uses a citizenship-based taxation system. That means no matter where you live or work you must file annual US income tax returns to report your worldwide income no matter where you earned that income. This fact remains valid as long as you retain your US citizenship.

Now for the good news: there are a couple of ways to mitigate US income taxes while working overseas. Enter the Foreign Earned Income Exclusion, Foreign Housing Exclusion, and Foreign Tax Credit.

Should Digital Nomads File Foreign Tax Returns?

Every country has its own taxation system. While the US levies tax based on citizenship, most other countries around the world vary between residential and territorial taxation systems. Countries that impose residential taxation generally tax income earned by residents of their county no matter where that income is earned. Those countries that operate on a territorial tax system typically assess tax only on income earned in their country.

While the tax rules vary, a common trigger point for taxation in a foreign country is spending more than 183 days (i.e., six months) in that country. This is common for residential taxation countries such as Australia, China, Japan, and Mexico. Countries that impose tax only on income earned in their jurisdiction include Costa Rica, Hong Kong, and Singapore, to name a few.

The United Kingdom is somewhat of a mix between residential and territorial tax systems. Generally, tax residents of the United Kingdom are taxed on their worldwide income, while nonresidents are taxed only on income earned in the United Kingdom.

It’s important to note that where you are being paid from does not necessarily matter when it comes to where you could owe tax. Generally, it boils down to where you are when you are earning that income. In other words, merely being paid by a US company does not preclude you from potential tax exposure in various foreign countries.

Don’t Get Caught Paying Extra Foreign Taxes

As you can see, the tax rules vary widely. For that reason, it’s imperative that digital nomads consult with a local tax advisor in each foreign country you intend to travel to, preferably prior to your travel there. We strongly recommend tax consultations in advance of your move with expat specialist accountants so that you have a full understanding of your tax exposure and to ensure you remain in compliance in all jurisdictions you plan to work in. Greenback accountants specialize in tax for digital nomads, so get started with us today.

Free Guide: 25 Things Every Expat Needs to Know About Taxes

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