How taxes work as a digital nomad working remotely from the US
Staying compliant with taxes while exploring the world
Have you dreamed about becoming a digital nomad and fantasized about working from exotic locations in different countries? If so, reality sets in after a bit of fantasizing, and you realize it will be more complicated than packing your suitcases and booking a flight. If that's you, we’re here to help! In this blog post, we’ll focus on those whose primary residence is in the United States and answer common questions you may have related to taxes so that you stay compliant while traveling the world.
Do you need a visa?
As a US citizen, you don’t need a visa to visit certain countries, such as Europe unless you decide to stay longer than three months. This includes digital nomads working from a US company while In general, you can stay in any EU country for 90 days in a 180 day window. These rules vary country by country but the same applies to many other countries.
Do Digital Nomads Have to Pay US Taxes?
The U.S. taxes Americans based on citizenship, not a place of residency. That means it doesn’t matter where you currently live — if you’re legally considered a U.S. citizen and make over the minimum worldwide income, you have a tax obligation. This is true even if you earn no income within the U.S.
Taxable foreign income for digital nomads includes:
- Rental Income
Do I have to pay income tax to the U.S. and the countries I visit?
Before you stress about paying taxes twice on the same income (once to the U.S. and once to your new country) you should know that tools and benefits are available to digital nomads. These tax benefits, such as the Foreign Earned Income Exclusion and Foreign Tax Credit, can help you avoid double taxation.
Foreign Tax Credit
If you paid or accrued foreign taxes to a foreign country or U.S. possession and are subject to U.S. tax on the same income, you may be able to take either a credit or an itemized deduction for those taxes. This simply means if you pay a country x amount in taxes, you can deduct these taxes to the USA. This reduces foreign income taxes and reduces your U.S. taxable income. In the end, though, you will be paying taxes in both locations but not full tax in both locations.
Foreign Earned Income Exclusion
The Foreign Earned Income Exclusion (FEIE) allows those who work outside of the country to exclude all or a portion of their foreign earned income from their U.S. taxes.
The FEIE is available to digital nomads who either:
- Work outside the U.S. as an employee, whether for a U.S. or non-U.S. employer
- Work outside the U.S in a self-employed or partner capacity
- Pass either the Bona Fide Residency Test or the Physical Presence Test
Employees of the U.S. government can’t claim the foreign income exclusion. However, an employee of a private company under contract with the U.S. government might still be eligible.
Physical Presence Test
The easiest way for digital nomads to qualify for the FEIE is the pass the physical presence test. It requires that you spend more than 330 full days outside of the US during any 12-month period. You can spend those 330 days in a single foreign country or several — though you must be in the country legally.
Bona Fide Residency Test
The bona fide residency test is much harder to use to qualify for the FEIE. The test requires that you:
- You are a US citizen
- Maintain a residence in a foreign country
- Live within that country for an entire tax year (usually January 1–December 31)
- Have no plans of returning to the US in the foreseeable future
If you pass either of these tests, you qualify for the FEIE. This means if you choose Gypsy’s Caravan Experience you may be eligible for the FEIE. You can use these tax savings to fund your adventure across the world.
What if I stay in a country long enough to become a resident?
Generally speaking, US citizens are subject to US tax laws regardless of where they reside and for how long. However, after staying in one European country for more than 183 days, you will be considered as a resident there. The same applies to many other countries. Your income then becomes liable for income tax in that country plus the US. This is when Foreign Tax Credit’s are used to prevent double taxation. Just keep in mind that taxpayers will generally have to file returns in both countries.
Limitations when working for a US company from abroad
Remote work for a foreign company while living abroad also has its disadvantages, for example:
- You won’t have access to the local health care system or the state pension fund
- You aren’t entitled to sick pay or other additional benefits
- You will get paid in the US, which is different from the local currency. It might result in exchange rate costs and potential fluctuations from month to month.