American Expat & Digital Nomad Taxes FAQ
After taking the plunge and starting an online business or working remotely, both digital nomads and expats are often under-prepared for tax season –one might even put it off for a few years with the intention of dealing with it later.
To provide our readers with correct, up-to-date information we reached out to Taxes for Expats (TFX) to fill in the blanks and answer the most common US tax-related questions by digital nomads and expats alike.
No fluff, promise.
Why We Focused on American Digital Nomad Taxes as Opposed to Canadians –You’re Canadian, right Mike?
We chose to focus on a digital nomad taxes FAQ for US expats because that’s where the majority of our readers are from.
And since I’m a Canadian, I needed backup if I was going to tackle the topic. That’s why I reached out to Taxes for Expats; a specialty tax firm that helps American expats stay compliant. And they’ll even help you file your taxes online.
In the very least, they’ll give you a free 30-minute consultation which you can learn more about in the article summary.
Living in one country and working online in another raises a lot of questions. And I’m not just talking about whether or not being a digital nomad is actually legal –I’m talking about the questions that surround the second of two certainties in everyone’s life, nomad or not; death and taxes.
With the US tax season officially wrapping up, I figured a US digital nomad taxes FAQ was in order because I’m guessing there’s a lot of us out there who are a little behind this year.
For those who aren’t in the know, the US tax season is the span of time between January 1 and April 15.
Digital Nomad Tax Deductions
Before I delve into the helpful information provided by TFX, there’s a few universal digital nomad tax points I’d like to make based on my own experience running a few businesses before and after I became an expat.
Any expense you incur in the name of your business is tax deductible.
However, there’s a caveat –paying these expenses with your own personal accounts –those in your name alongside non-business expenses is a big no-no.
It is possible to go back and sort everything later, but it really muddies things up and we suggest keeping your business finances completely firewalled from your personal expenses.
Deductible expenses may include:
- Gear related to your online business –the stuff you can’t operate without, along with related accessories (ie. Laptop, stand, case, mouse, smart phone, SIM cards, GoPro, podcast microphone, etc).
- Required services and subscriptions ranging from internet and phone service to autoresponders like Aweber, website hosting, et al.
- Financial service fees from PayPal, your bank, your accountant, even filing taxes online with TFX.
- Courses, paid forums, and education –yes, if you buy a course to expand your skills, it’s tax deductible.
- Any staff you hire; copywriters, Pinterest designers, virtual assistants, etc.
- Travel expenses –yup! This one is a bonus for those that rely on travel to make an income –videographers and drone pilots, review writers, travel bloggers, and so on.
As long as you keep it honest and are able to justify an expense as work-related, you can consider that expense tax deductible.
Be sure to track everything –income (and the currency it came in), expenses, and keep receipts.
And like I said, keep your personal finances separate from your business finances.
Do not omit any income sources from your records –you never know if your client is going to report it and no one likes to be audited.
US Expat & Digital Nomad Tax FAQ
Alright, let’s look at the wealth of information our friends at Taxes for Expats (TFX) shared with us to collaborate on this article.
For a little background on TFX; the firm is operated by Ines Zemelman and her team of professionals have been in the business for over a quarter of a century. They don’t work with junior staff, nor do they outsource, and they can help you file your US tax return online, no matter where you are –this made them an obvious choice for Hobo with a Laptop.
1. Do American expats need to file tax returns when they’re not even located in the United States?
You’re damn right you do. As an American expat, you do need to declare your income and file a US tax return –no matter where you earned it. As a Canadian, this applies to me as well.
2. Is there a difference in how I file taxes if I am self-employed vs working for an employer?
Choose your location wisely –the same amount of freelance income or any other income may have a different effect on your tax return.
If you work for a foreign employer you are not required to pay US self-employment taxes (Social security and Medicare).
However, if you’re self employed you may be liable for SECA (Self-Employed Contributions Act) tax.
Why is this important?
Some countries have signed a ‘Totalization Agreement’. If you reside in a country that has signed this agreement, you are exempt from SECA tax and pay Social Security taxes only in the country where you live.
If the only source of income is self-employment in a country with a Totalization Agreement, please be aware that the IRS may request a Certificate of Coverage from the resident country Social Security administration.
If you are not covered in the country you’re residing in, the U.S. SECA tax cannot be exempt.
If you are self employed and live in a country without Totalization Agreement, the U.S. SECA tax must be paid even if you paid into the Social Security system of the non-US country.
However, you may still utilize this amount as ‘Foreign Tax Paid’ and use it for calculation of the foreign tax credit. If you choose to reside in a low-tax country like Hong Kong or Singapore, this is especially important.
3. What is the Foreign Earned Income Exclusion and how does it relate to US expats and digital nomads? Does it mean those of us who earn under $100k while abroad don’t need to file taxes?
This is often misunderstood. The foreign earned income exclusion (FEIE) is the amount you can deduct from your taxable income, during the course of filing your tax return to reduce the tax you may owe. For example, if you make 75k USD you likely don’t owe tax, but you still have to file.
Until you file and properly utilize the FEIE – it is not granted to you.
4. Are all states ‘created equal’ when it comes to my mailing address, from a tax perspective?
Related: PO Box Zone
PO Box Zone is like a PO Box on steroids. It has everything you’d expect from a PO Box, with additional services such as letter scanning and forward –all via a handy online interface. Scanned mails can also be easily updated to your Dropbox or any other cloud service.
5. How do recent tax reform changes under Trump affect digital nomads?
TFX has written quite a bit about recent US tax reform and how it affects expats and digital nomads.
The biggest changes that specifically relate to US expats and digital nomads are in corporate tax changes which require individuals who own foreign corporations to repatriate their deferred, untaxed income.
- Tax Reform & US Expats – Winners & Losers
- Mandatory Repatriation of Deferred Foreign Income for Owners of Foreign Corporation
6. I’m saving for retirement with a US brokerage firm –what do I need to know?
It’s getting harder for US expats and digital nomads to maintain brokerage accounts back home in the United States when they live abroad.
Digital nomads may experience difficulties if they are moving funds to a different US money market fund if they inform their broker they’re living outside the country. Every broker has their own policy on this.
Once a decision is made, that’s pretty much it. There isn’t much you can do if you get the short end of the stick. It doesn’t mean you account will be closed, that usually comes down to the country you’re residing in.
Here’s where TFX proves they understand us —in this article they state that there’s no law in place at the time of writing that requires you to actually inform your broker you’re living outside of the country.
If you’ve got a US mailing address, that should be enough. Don’t ask, don’t tell.
7. What about Bitcoin and other cryptocurrencies? How does that work in terms of my US tax return? Can TFX help me file an online tax return if I’ve been buying, selling, or trading crypto?
Yes they can, although it’s worth noting that the IRS currently treats virtual currency as property. As such, general tax principles applicable to property transactions apply to transactions using virtual currency.
Think capital gains: Taxation rules are the same that for capital gains from stock transactions. Also, note that 3.8% Net Investment Income tax (NIIT) may apply.
If you trade cryptocurrency or receive earnings in cryptocurrency – this is all reportable on your US tax return.
TFX has written two articles about Bitcoin and taxes:
Well, that was a mouth full. While I won’t pretend I can personally add much value here because it’s a regulated industry and I’m not qualified, I will say that TFX appears to be on their game and they’ve been mighty helpful.
To file your US tax return online with TFX you can create an account here.
Once you sign up you will receive access to related personal documents and their tax questionnaire. Your answers to the questionnaire will provide TFX with an overview of your situation and be used to prepare your US tax return.
After that, you can schedule your free intro 30-minute consultation with them to answer any questions this US tax FAQ for digital nomads didn’t cover. Free, free, free.
Have anything to add from your own personal digital nomad tax experience? Let us know in the comments.