Digital nomads – those who work while traveling or living abroad (often remotely) – may dream of completing reports while marveling at the sunset in a castle in Santorini, Greece, or relaxing in the serene beauty of the bamboo groves in Arashiyama, Kyoto, after a day’s work in a nearby café.
However, for American digital nomads living abroad, the dream of working and living amidst picturesque beauty often turns into financial challenges. The already complex U.S. tax process can become even trickier when living overseas.
As U.S. citizens residing abroad, tax obligations come with additional requirements and complex rules, many of which they may not be familiar with. Any errors could result in hefty fines.
For these adventurous souls, living abroad comes with various tasks and challenges. Understanding tax laws in the U.S. and the host country may be something they are least willing to focus on.
MyExpatTaxes, a platform specializing in tax filing for overseas American expats, emphasizes the importance of understanding tax regulations and actively managing tax responsibilities, says CEO and co-founder Nathalie Goldstein.
“Many expats overlook the requirement to report foreign income to the U.S.,” Goldstein notes. “This situation is particularly common among digital nomads or self-employed individuals with U.S. clients, who may not realize their income earned abroad still needs to be reported to the U.S.”
American citizens must be aware that U.S. tax laws apply to all expats, regardless of their location worldwide, as long as they maintain U.S. citizenship.
In 2020, the U.S. State Department estimated around 9 million American citizens were living overseas.
According to a 2021 survey by InterNations, 48% of American expats living abroad work remotely full-time, with only 20% spending at least 15 days per month working remotely, and 16% working outside the office environment for about five days per month.
With the rise of remote work and more Generation Z individuals (born between 1997 and 2012) choosing entrepreneurship, this trend continues to grow.
All U.S. citizens or green card holders must adhere to the same regulations, filing income, estate, and gift taxes, and pay estimated taxes, as prescribed by the IRS, whether residing within the U.S. or abroad.
Regardless of the income source being domestic or foreign, Americans must file taxes according to U.S. tax law, and their place of residence does not exempt them from this obligation.
One potential benefit for expats feeling overwhelmed by tax requirements is that they have more time compared to ordinary U.S. citizens to fulfill their tax obligations.
Expats living outside the U.S. typically enjoy an automatic two-month extension for filing and paying taxes. The IRS may even allow them to file by June 15 if they meet certain criteria:
– Their main residence and business activities must be outside the U.S. and Puerto Rico.
– They must be serving in the armed forces outside the U.S. or Puerto Rico.
This extension is applied automatically. However, expats must include a statement when filing their taxes to prove eligibility for one of the conditions mentioned above; failure to submit this may result in late fees.
If unable to file by June 15, expats can further extend the deadline to October 15 by submitting Form 4868 before June 15 and paying interest on any taxes not paid by the regular deadline.
Nathalie Goldstein established MyExpatTaxes after recognizing the challenges expat Americans face when filing taxes. In recent years, the lifestyles of expats and digital nomads have become increasingly common, leading to confusion and uncertainty regarding fulfilling tax obligations.
In addition to understanding global income reporting and tax obligations, expats commonly make three serious mistakes. Utilizing a tax filing platform designed for expats is crucial to help avoid missing tax reporting duties and possible future penalties.
Mastering tax laws of both the U.S. and other countries is not easy, and expats may be unaware of tax treaties that prevent double taxation of the same income.
Moreover, policies such as the Foreign Earned Income Exclusion (FEIE) and Foreign Tax Credit (FTC) can offset foreign taxes, potentially lowering or eliminating tax burdens.
“Without understanding all available deductions and credits, one might miss out on refund opportunities,” Goldstein highlights, underscoring the importance of finding the right forms to maximize refunds.
Navigating IRS requirements can be daunting. MyExpatTaxes simplifies the process, eliminating guesswork and assisting users in finding the most advantageous tax strategies.
Filing taxes in two countries involves numerous forms, rendering expats confused about which deductions or credits to choose.
“Choosing between the Foreign Earned Income Exclusion (FEIE) and Foreign Tax Credit (FTC) is not straightforward,” Goldstein explains. “It’s essential to note that opting for FEIE may disqualify one from claiming the child tax credit refund.”
American citizens and green card holders can retain individual retirement accounts (IRAs) established prior to leaving the U.S., although contributing to these accounts post-departure may not be permissible.
Without familiarity with international tax laws, digital nomads may face penalties for noncompliance. The IRS notes that expats can only contribute to domestic IRAs if they have taxable income after exemptions and credits.
“Many expats continue contributing to IRAs even when ineligible,” Goldstein points out, noting that most tax software and companies do not verify compliance with IRA contributions, potentially resulting in a 6% excess contribution tax annually.
Additionally, IRS officials inform that digital nomads working and living abroad must address two vital issues. Firstly, they must report any overseas financial accounts to the Financial Crimes Enforcement Network (FinCEN), a branch of the Treasury Department, even if these accounts generate no income.
Failure to report these accounts correctly could lead to legal consequences. This requirement applies to bank, savings, or investment accounts held at non-U.S. financial institutions, which newcomers unfamiliar with tax laws or lacking professional guidance may easily overlook.
Another concern relates to transactions involving digital assets like cryptocurrencies and non-fungible tokens (NFTs). Many investors are unaware that income from digital assets is taxable, applying to all American citizens. However, handling taxes becomes more complex if these assets are held in foreign accounts. Correct reporting of all income generated is mandatory, irrespective of asset location.
Missing tax deadlines or inaccuracies on required forms could entail high costs for digital nomads. Being classified as “delinquent” by the IRS could lead to the State Department revoking passports or facing more severe consequences. Delayed taxes accumulate significant interest and penalties, making back payments increasingly challenging with time. Hence, early research on relevant tax laws, ensuring compliance with all regulations, and seeking expert guidance are the most cost-effective and efficient approaches.
To sidestep these issues, Americans who enjoy traveling and choose to live abroad should prioritize understanding U.S. tax laws applicable to their circumstances and the tax regulations of their host country. This can also serve as part of cultural research.