Digital Nomad Taxes for US Nomads & Expats: Full Guide10

Digital nomad taxes are taxes levied on remote workers who travel to different countries across the globe and use technology and the internet to work.

Since the United States is among the few countries that levy taxes on their residents’ global or foreign income, digital nomads are still required to file their U.S. taxes even while they are freelancing overseas.

The tax implications for digital nomads are quite intricate, considering the specific regulations and considerations that come with it.

This article will explain the fundamentals of digital nomad taxes, including the different types of taxes, tax deductions, and essential documents that digital nomads and US expats must prepare and adhere to when filing their taxes. Let’s dive into it!

Key Takeaways

• Digital nomad taxes are taxes levied by the IRS on US freelancers working overseas. These taxes may comprise federal and state income taxes and self-employment one
• The US is one of the few countries that impose citizenship-based taxation, which levies taxes on the country’s residents regardless of their location or current residency across the globe.
• Some examples of digital nomad tax deductions include the Foreign Tax Credit (FTC), Foreign Earned Income Exclusion (FEIE), Foreign Housing Exclusion, and self-employment tax deduction.
• To file digital nomad taxes, US residents freelancing or working remotely abroad must prepare Form 1040, Form 1116, Form 2555, and Form 1099-DIV.

Do American Digital Nomads and Expats Have to Pay Taxes?

Yes, they do, particularly if their earnings exceed the minimum income requirement for filing taxes in the US

Digital nomads and expats both work overseas or outside of their home country. The main distinguishing factor between the two is that digital nomads work remotely while expats work onsite.

It is important to point out that digital nomad taxes and US expat taxes overlap in such a way that both US citizens working overseas pay federal income taxes and state income taxes (if applicable).

However, digital nomads may have to pay self-employment taxes since they are independent contractors or freelancers. Additionally, they may also have to pay sales taxes and VAT taxes if they sell products or own a small business.

Meanwhile, expats may still have to pay FICA taxes if any of the following employer-employee arrangements apply to them:

• They work for an American employe
• Their employer is a foreign employer considered or treated as an American employer, as specified in IRC 3121 (z), Treatment of Certain Persons as American Employers
• Their employer is a foreign affiliate or associate or an American employer

When it comes to taxation, there are key considerations, such as citizenship-based and income-based factors, that digital nomads must keep in mind when paying digital nomad taxes.

Citizenship-Based Factors

Citizenship-based taxation means that the citizens and permanent residents of a country are taxed no matter where they reside and work in the world.

For example, if a digital nomad is an accidental American or someone who was born in the US but raised in a different country, they are still required to file their annual US tax returns.

In contrast, other countries like China, Japan, and Australia follow a tax residency or residence-based taxation. That said, citizens pay taxes to the country where they work or earn income.

A third type of tax system that applies to digital nomads and expats is called territorial taxation, which taxes citizens living and earning income within the country.

Income-Based Factors

The income-based factors that govern digital nomad taxes include the minimum income thresholds of the current tax year—that’s $14,600 for 2024. These income thresholds are based on a digital nomad’s filing status and tax brackets.

Digital nomad taxes may also come in the form of self-employment taxes for digital nomads who are sole proprietors or part of an LLC or partnership.

Do Digital Nomads Have to Pay US Income Taxes?

When it comes to paying US income taxes, there is a higher probability that you may not have to pay the said tax when you’re a digital nomad. That’s because you are primarily taxed on your foreign-earned income.

On the other hand, you might have to fulfill state tax obligations depending on the US state where you last lived. The only states that do not impose state taxes include:

• Alaska
• Nevada
• Wyoming
• Florida
• Texas
• Washington
• South Dakota

However, if you used to live in Virginia, California, New Mexico, or South Carolina, then you must pay state taxes since the said states maintain their tax regulations on both current and former residents.Virginia, California, New Mexico, or South Carolina, then you must pay state taxes since the said states maintain their tax regulations on both current and former residents.

Given their continuous and unyielding state tax rules, these states are also otherwise known as sticky states.

Not to mention, if you meet any of the following criteria in any of the so-called ‘sticky states’, you’re likely to still pay digital nomad state taxes:

• You own property or have opened a bank account
• Your children, spouse, or both currently reside there
• You continue to use a mailing address in one of the ‘sticky states,’ even if the said address is owned by a relative
• You’re a registered voter there

Do Digital Nomads Have to Pay Self-Employment Taxes?

Digital nomads must pay self-employment taxes if they are not paying the said tax in the country where they are currently located. Self-employment taxes are levied on top of a digital nomad’s regular income tax liabilities.

In that regard, digital nomad taxes in the context of US self-employment taxation rules comprise the combined 15.3% Medicare and Social Security taxes.

If a digital nomad’s net earnings exceed $200,000 for single filers or $250,000 for joint filers, then they may have to pay an additional 0.9% Medicare tax.

Meanwhile, digital nomads based in Portugal or Spain may take advantage of the existing Social Security Totalization Agreement between the two countries and the United States.

The treaty enables digital nomads to choose in which country they would prefer to pay self-employment taxes.

5+ Essential Digital Nomad and Expats Tax Deductions

Digital nomads and expats must take advantage of applicable tax deductions to reduce their digital nomad taxes. After all, having to pay US taxes on top of the tax liabilities that they must shoulder in another country makes filing taxes an arduous task.

Here are some examples of tax deductions that digital nomads or expats can use to their advantage:

#1. Foreign Tax Credit (FTC)

The Foreign Tax Credit (FTC) is a tax credit that’s meant to help keep digital nomads from facing double taxation. The burden of paying taxes twice can take a huge chunk off a digital nomad or expat’s hard-earned money.

By choosing the Foreign Tax Credit, expats can subtract the foreign taxes they have already paid from their US income taxes. A digital nomad may be qualified to claim the FTC if the existing tax regulations in their current country require them to pay taxes in that area or location.

The good thing about using the FTC is that it enables digital nomads to claim a dollar-for-dollar tax credit for their foreign taxes and potentially reduce their unpaid US taxes to zero.

Digital nomads and expats must file Form 1116, Foreign Tax Credit, to claim their Foreign Tax Credit. On the other hand, if the type of foreign income earned by an expat is covered by the Foreign Earned Income Exclusion (FEIE), then they may not be eligible to use the FTC.

#2. Foreign Earned Income Exclusion (FEIE)

The Foreign Earned Income Exclusion (FEIE) is a tax benefit that lets American expats and digital nomads exclude as much as $126,500 of their foreign-earned income from the digital nomad taxation levied by the US.

To qualify for the FEIE, expats must meet any of the following conditions:

• They are a US citizen who also happens to be a bona fide resident of a foreign country or someone who has completed the bona fide residence test. The test requires foreign residents to have stayed in the country for a continuous and uninterrupted period, including a full tax year.
• The digital nomad is a US citizen or a resident alien who has been physically residing abroad or in a foreign country for a minimum of 330 dayswithin 12 consecutive months. This requirement is also called the physical presence test.
• The expat is a US resident alien who is also a citizen of a country that has an existing income tax treaty with the US.

The FEIE does not apply to passive income such as dividends, capital gains, and rental income.

#3. Foreign Housing Exclusion

The Foreign Housing Exclusion helps digital nomads deduct overseas rental housing costsfrom their gross earnings on their US returns. Just like in FEIE, digital nomads must pass either the physical presence test or the bona fide residence test.

At the same time, digital nomads must be able to itemize qualified housing expenses that exceed the 30% FEIE base amount (or $37,950) for 2024. Some examples of qualified housing expenses include:

• Rent payments in the foreign country where they are currently living
• Renter or homeowner’s insurance
• Required repairs on their rental home
• Home utilities, excluding streaming services, TV, internet, and phone usage
• Leasing fee
• Property fees

#4. Cutting Ties With Sticky States

If an expat or digital nomad used to reside in one of the sticky states that we’ve described earlier, that means they have to pay digital nomad taxes at the state level.

Fortunately, there are ways in which digital nomads can ‘cut ties’ with their state income liability and reduce their tax liabilities. These methods include:

• Updating and changing the address of their official records and registrations, whether it be their voter or driver’s registration
• Updating their old state ID
• Selling properties that they still own in any of the sticky states
• Moving any remaining belongings to a different state, preferably one that does not impose state taxes
• Closing any existing bank and financial accounts within the said states
• Canceling their driver’s license in that state

#5. Checking Tax Treaty Benefits

When using tax treaty benefits to increase their possible tax deduction, digital nomads must ensure that the foreign country where they currently reside has a tax treaty in effect with the United States.

They must also be a non-resident alien in the US, but only for tax reasons or purposes, and earn at least the qualifying or minimum amount required for taxation in the United States.

Claiming the tax treaty benefit or relief entails completing the following documents:

• Form W-8 BEN, Certificate of Beneficial Owner for United States Tax Withholding
• Form 8233, Exemption from Withholding on Compensation for Independent (& Certain Dependent) Personal Service of a Nonresident Alien Individual

#6. Using the Self-Employment Tax Deduction

Digital nomads who are sole proprietors or part of a business partnership can also take advantage of the self-employment tax deduction.

The self-employment tax deduction lets them include their FICA taxes in their business expenses and consequently reduces the amount of taxes they owe.

To deduct self-employment taxes from US digital nomad taxes, foreign-based freelancers must report 50% or half of their self-employment tax on Line 15 of Schedule 1 (Form 1040).

The self-employment tax deduction is just one of the many tax deductions for independent contractors that digital nomads can also look into to potentially increase the deductions they can claim on their US taxes.

What Documents Do You Need To File Your Taxes as a Digital Nomad?

The documents that American freelancers and remote workers must prepare to file their digital nomad taxes include their monthly or end-of-year bank statements, as well as proof of income such as pay stubs or pay slips, receipts, and invoices.

• They must also prepare their US Social Security Number. As for the tax forms, digital nomads must take note of the following IRS documents:
• Form 1040 and its schedules. Form 1040 is used to file US taxpayer’s annual income tax returns. When used to report foreign income, digital nomads must also take note of the appropriate Schedules to use that suit the type of income they are reporting to the IRS.
• Form 1116. This form is required when claiming the Foreign Tax Credit and reducing one’s US income taxes.
• Form 2555. Form 2555, Foreign-Earned Income Exclusion, is filed by digital nomads looking to deduct their US tax liabilities using the FEIE
• Form 8938 (FATCA). Also called the Statement of Foreign Financial Assets, the Internal Revenue Service requires this tax form from US freelancers overseas who possess foreign financial assets, including foreign securities or stocks, foreign mutual funds, and foreign-issued annuity contracts.
• Form 3520 and Form 3520-A. Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Foreign Gifts, is filed when a digital nomad has received or is expecting to receive overseas inheritance overseas.
• Form 5471. This IRS form is used to report transactions involving foreign trusts, foreign retirement accounts, pension accounts, or trust ownership.

How and When to File Your Taxes as an American Digital Nomad

To file your taxes as an American digital nomad, you must record all types of income you received within the tax year. At the same time, you must list down all qualified expenses, which you can claim later on to reduce the US digital nomad taxes that you owe

Next, prepare all the applicable forms that we’ve described previously in the article, and double-check that you provided complete and updated information about your earnings and sources of income.

You can also seek the help of a tax professional or use cost-effective and practical tools online, such as Paystub.org’s paystub generator. Our generator uses templates and a built-in calculator that enable you to record and calculate your foreign earnings, withheld taxes, and deductions accurately within minutes.

In this manner, you have a complete record of your earnings, which can prove useful when filing your annual tax returns.

What Happens if You Don’t Pay American Taxes as a Digital Nomad?

Failure to pay digital nomad taxes can result in facing expat tax penalties and paying fines.
Digital nomads will also possibly face the failure to file penalty, which is charged to digital nomads who do not file their taxes on or before June 15—the automatic tax-filing extension for digital nomads.

If you are facing the failure to file penalty, you must pay at least 5% to a maximum of 25% of your tax balances.

Another possible penalty that you may face by failing to file your digital nomad taxes is the failure to pay penalty. The said penalty applies if you are unable to pay the taxes you owe in full on or before the tax filing deadline.

All unpaid digital nomad taxes past the IRS deadline will accrue interest and will continue to do so until the outstanding tax balance is fully paid. Aside from that, you will also be charged with a fine worth at least 0.5% to a maximum of 25% of your tax balance.

Expat Penalties on Foreign Accounts

Meanwhile, if you earn income through foreign accounts, you must report all the money or income that you earn through the said income sources. To report all earnings in your foreign accounts, you must file either an FBAR (FinCEN Form 114) or Form 8938.

The failure to file an FBAR may leave you facing penalties worth up to 50% of the total balance of all your foreign accounts combined. If you fail to file Form 8938, you may end up having to pay fines ranging from $10,000 to $50,000.

Do American Digital Nomads Have to Pay Taxes in Other Countries?

Yes, American digital nomads may have to pay taxes in other countries in addition to their digital nomad taxes in the US. It all depends on the existing tax rules that apply in the country or location where they are currently residing and working.

The following list shows the countries that levy income taxes on digital nomads

• Costa Rica
• Georgia
• Estonia
• Dubai
• Spain
• Malta
• Andorra
• United Arab Emirates (UAE)
• Bermuda
• Romania
• Brunei
• Czech Republic

There is no excuse for a digital nomad or remote worker not to know any of the existing tax regulations in the foreign country where they decide to work.

Whether they are required to pay high-income taxes or significantly lower digital nomad tax rates compared to the US, it is crucial for American freelancers to fulfill their foreign tax responsibilities to avoid facing penalties and even possible imprisonment for tax evasion.

Final Thoughts

Dutifully paying your digital nomad taxes means completing more steps and paperwork than you would usually fulfill when you’re not filing your US returns abroad. Remembering all the requirements, IRS forms, and conditions can be overwhelming.

The best way to handle your tax obligations as an American freelancer or remote worker based abroad is to first get familiarized with the US tax regulations on foreign income and consult with the tax authorities in your current country about their applicable tax regulations on foreign residents.

If possible, try to learn the different digital nomad tax rules and regulations before moving to your destination or country of choice so that you have more than enough time to prepare the documents that you need.

Digital Nomad Taxes FAQ

#1. Is there a way not to pay taxes in the USA as a digital nomad?

Yes, with the help of the Foreign Earned Income Exclusion (FEIE). The FEIE is a tax benefit that lets digital nomads exempt up to $126,500 of their foreign-earned income from US federal or state taxes.

#2. Do I have to pay taxes only on income from the US, or does taxation also apply to foreign income?

You have to pay taxes on both your US and foreign-earned income, regardless if you are qualified to claim the FEIE. The said rule applies if you are a U.S. citizen or a U.S. resident alien residing abroad.

#3. Can you avoid double taxation as an American digital nomad?

You can avoid double taxation as an American digital nomad by first determining the portion of your earnings that is foreign-earned. Next, check the foreign tax benefits that you may be eligible to claim and the maximum amount from your income that you can exclude from taxation.

Claim all applicable foreign tax credits using Form 1116. If you have unused tax credits, you can carry them over for the next ten years.

#4. How long can I stay in the US without being liable to pay taxes?

If you have been physically present in the US for less than 31 days, then the IRS may not consider you a resident of the United States.

However, if you have been staying in the US in the current year for at least 31 days or 183 days within a span of three years, then you will likely become liable to pay taxes. The three-year window comprises the current year and the last two years before the current one.