US Tax Tips for Digital Nomads

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Digital Nomadism

The life of the Digital Nomad is often incredible, filled with romance, adventure and surprises. Many would even describe the lifestyle as “a dream come true”. Especially those who haven’t lived it!

The fact is, digital nomadism can sometimes be a logistical nightmare. Between juggling reservations for travel and accommodations, securing the proper visas and residency documentation, and transferring money across international borders, all the while trying to track down new freelance gigs and meet your clients’ deadlines, you barely have time to check the local surf conditions.

All joking aside, even the most frazzled nomad will confess that it’s an enviable lifestyle, but it certainly has its challenges. And one of the greatest difficulties involves managing your finances without falling afoul of the law.

Don’t Mess With Taxes

Specifically, I mean tracking your income and filing for taxes. Doing so accurately and punctually is hard enough when you’re living stateside with a fixed address. But when you’re on the move, with no permanent address, working for clients all over the world, and getting paid in any number of different currencies, the process can become painfully complicated.

Having managed my own small businesses for the better part of the last 25 years, and spending the last 3 overseas or on the road, I’ve learned a few things about international accounting. Sometimes I learned my lessons the hard way, and sometimes not.

Either way, I’ve come up with some quick tips that will hopefully make your tax season as painless as possible, so you can get back to what you do best: living the dream.

Note: We are neither certified accountants nor tax attorneys, and none of the following pointers should be construed as legal advice. When in doubt, perform your own due diligence to answer questions concerning your own specific circumstances, and hire a lawyer if necessary.

BOOKKEEPING

As a digital nomad, you are most likely self-employed, and as such you need to be tracking your own finances. The most important thing you can do to reduce your tax-filing headaches, is to keep track of your income and expenses as neatly as possible.

I’ve been using QuickBooks software for more than a dozen years now and I’m very comfortable with it and have happily recommended it to several friends and colleagues. But there are lots of similar apps and services on the market. If you’re really savvy, you can even create your own spreadsheets and do it yourself.

On the other hand, if accounting and record keeping are absolutely not your thing, you can outsource. Maybe you can pass it off to your partner or spouse. This can be an excellent solution; just ask my wife. Or you can hire a bookkeeper. And why not hire one of our own? Check out the digital nomad forums, and you shouldn’t have trouble finding a remote bookkeeper.

US RESIDENCY

When you file your taxes, the third thing they ask you, after your name and social security number, is where you live. As a digital nomad, you’ve probably run into this stumbling block before. Hopefully you have an address in the states that you can use. In most cases, the best practice is to use the same address you use for your U.S. bank accounts.

FOREIGN RESIDENCY

If you are a US citizen residing in a foreign country, you may have tax obligations in that country. But remember, even if you pay tax in a foreign country, U.S. citizens are still required to file for taxes with the IRS. Maybe you don’t like the sound of that, but that’s how it works.

For more details on filing as an expat, check out 1040 Abroad.

If you have a legal work permit and earning money in a foreign country, you will almost certainly have to pay taxes in that country. But you will earn a credit on that foreign income, which you can report on IRS Form 2555.

TAX RESIDENCY

Residency is a complicated thing. Laws vary in different country, and sometimes they are open to interpretation. It’s possible to reside in a country as a tourist and not have any tax obligations. You can also get what’s called a non-lucrative visa which allows you stay longer than you would as a tourist, but without the right to work and earn money. That means you don’t have to pay taxes either.

As a digital nomad, these are probably your best options. As an American, you’re going to have to file with the IRS no matter what. So, for me, it’s best to avoid fiscal residency anywhere else.

MOVING MONEY

If you’re working for international clients and trying to send or receive money across borders and between foreign banks, you may have found the process surprisingly complicated or expensive, or both. It used to be. But a company called TransferWise has changed that and made international finance so much easier. Their fees are normally around 1 percent, and from my experience, their exchange rates are very competitive. Other options like PayPal charge about 3 percent, and if there’s a currency exchange involved, that’s where they really seem to get you.

It can also be helpful to have an online bank. In Europe, we recommend N26. They work very well with TransferWise, and because they only exist online, without branch offices, they keep their overhead down, and customer fees are minimal. Most accounts and services are free. They’ll also give you a debit card that makes it easy to put Euros in your wallet.

OBAMACARE

Although it might seem easier to use a relative’s domestic address when you file your taxes, there’s at least one advantage I’ve discovered in filing Form 2555 and stating your foreign address. The Affordable Care Act requires every American citizen to obtain health insurance.

You should probably have health insurance anyway, but if it’s not through an American insurance provider, you’ll have some explaining to do. Form 8965 provides another way to do your explaining. The IRS page on the Affordable Care Act has explanation of this exemption in section 9. If you’re out of the country for more than 330 days, you’re exempt from Obamacare.

FILING AND DEADLINES

The due date to file taxes, regardless or where you live or where you say you live, is alway April 15. But you can always file Form 4868 for a free and automatic two-month extension to June 15.

With e-filing, you can file for taxes from anywhere in the world, from the comfort of your own wi-fi connection. Be sure it’s a safe and secure wifi connection, because you’ll be uploading all of your most sensitive personal and financial information. DO NOT do this in a campground or from the lobby of your hotel.

If your income is under $66,000 and there’s no fancy stuff like capital gains or losses to report, you can file online with Free File. It’s a pretty straightforward process. If you make more money or have more complicated things going on, then you can use Free File Fillable Forms. This is still free, but you’ll need to know what you’re doing, and have some experience in reading IRS forms.

PAY AN ACCOUNTANT

If you can decipher the IRS forms and file your taxes on your own, that’s great. And in most cases, it’s probably not as hard as you think.

But if you have a lot of going on in the way of financial activity, it might behoove you to pay an accountant. They know what they’re doing, and they can often save you money with deductions you didn’t know about, enough to cover the cost of their services.

If you’re living overseas and earning foreign income, however, you might not be able to rely on the same accountant from back home who has done your family’s taxes for the last ten years. Your international situation might entail too many exotic factors that your garden variety CPA is not trained to deal with.

So again, you might find a more qualified accountant in the digital nomad circles. You can also check out H&R Block and their special department dedicated to expat tax preparation.

FOREIGN BANK BALANCES

One last item to be aware of when you’re living a life without borders, the IRS is very interested in foreign bank accounts. If you have your name on a foreign bank account with a balance over $10,000, you are required to disclose the account by filing the FinCEN Form 114, Report of Foreign Bank and Financial Accounts, by April 15.

I hope these pointers and reminders help you get a better handle on your tax filing requirements as a location independent freelancer. The thought of it can be intimidating, but the more you know, the easier it turns out to be.

Further Reading: Learn more tips for Digital Nomad living from the following articles.

• Digital Nomadism: How to earn money on the move
• Location Independent Schooling: The future of education
• 12-Step Program to change your life and discover the world