The explosion of technology has allowed for a significant increase in digital nomads. That is, green card holders and United States citizens who travel the world while working for clients from virtually anywhere. But, traveling the world does not remove United States tax obligations – it only makes taxes more complicated. Whether you have been traveling the world for years or only recently became a digital nomad, be sure to get the help of a professional.

Using This Guide

This guide is intended for anyone who is, or is considering becoming, a digital nomad – United States citizens who work abroad. It is vital to understand your tax obligations so that you can enjoy your lifestyle while remaining compliant. Consider the issues below as you think about your options for your new country of residence.

Foreign Earned Income Exclusion

The FEIE is one of the largest benefits available for digital nomads. If certain criteria are met, digital nomads can exclude as much as USD 100,000 of earned income, if earned abroad. To qualify for this exclusion, you must meet at least one of two criteria:

• Physical Presence Test, or PPT – Both work and live outside the US for a minimum of 330 days in any 365 day span.
• Bona Fide Residence Test, or BF – Both work and live in a single foreign country during a complete calendar year.

These two tests sound very much alike, but they are really very different in how they will apply.

The essence of the physical presence test is that you left the US and for a period of 12 consecutive months have not been back to the US for a total of 35 days during this time. This is any period of 12 months, not necessarily the calendar year. Note too that the 35 day maximum does not need to be consecutive – several short trips can add up to make you ineligible.

There are two seemingly minor, but very important points to remember:

• Any days spent in the US count toward the 35 day limit. For example, if you land in the United States on August 1st and depart on August 10th, you must count 10 days of time in the United States.
• The 330 day minimum time outside of the United States must be on the territory of a different country. So if you are on a cruise ship (in international water), those days will not be included in the count of days outside the United States.

The bona fide residence test will most likely not apply to digital nomads. It is intended for those moving to establish residency in a single foreign country.

Earned Income and Unearned Income

The distinction between earned and unearned income is important for many aspects of tax law. A simple way to view this is that earned income is from an activity in which you actively participated. Unearned income, also known as passive income, is from an activity in which you did not actively participate. As an example, compare what you earn from an office job versus what you earn from back interest or investment gains. 

For digital nomads, earned income can sometimes be excluded from taxes. Location matters, too, though. If you give a presentation in the United States (earned income) although you live in Europe, that income is earned within the United States and is not eligible for the foreign earned income exclusion.

Due Dates for Filing and Other Requirements

Taxpayers who live outside of the United States on the standard filing deadline of April 15th get an extension to June 15th. This extension is automatic, and an additional extension to October 15th can be requested.

Along with the typical tax obligations, many digital nomads must also file a Foreign Bank Account Report (FBAR). This report is only informational, but is a requirement for anyone with foreign financial accounts whose total value exceeded USD 10,000 at any time during the year. The deadline for the FBAR is April 15th, with an automatic extension to October 15th.

These are only federal deadlines and requirements. Be sure to understand any state tax obligations as well.

Self Employment Complications and Benefits

For many people, they work for an employer who pays Medicare and Social Security taxes on their behalf. Most digital nomads, however, are self employed, which means they likely must make their own payments under the Self-Employed Contributions Act (SECA). If you are flexible in your location, consider which countries have Totalization Agreements with the United States. If a taxpayer lives in one of these countries, they are exempted from paying the SECA tax.

Australia	Germany	Poland
Austria	Greece	Slovak Republic
Belgium	Ireland	South Korea
Canada	Italy	Spain
Chile	Japan	Sweden
Czech Republic	Luxembourg	Switzerland
Denmark	Netherlands	UK
Finland	Norway
France	Portugal

Totalization Agreements

Totalization agreements, also known as International Social Security Agreements, serve two purposes. They avoid double taxation in the form of Social Security tax paid to both the country of residence and the country in which the taxpayer works. Second, they help avoid benefit coverage gaps for people who have earned income in more than one country. Totalization agreements specify that earnings from one program apply to the other if necessary to obtain benefits.

Choosing an Address

You may be a digital nomad, but you will still receive physical mail. So where should you have it sent? Choosing a US state for your mail can cause problems. Most tax advisors recommend digital nomads rent virtual mailboxes. One company providing this service is Travelling Mailbox. This company provides you with an address in Texas, which does not have state tax. They can also scan your mail so you can review it online from anywhere.

This can be a complicated area, and is not always as simple as choosing an address in a no-tax state. Consult with a professional advisor when deciding what to do about a US address.

Length of Time Abroad

The USD 100,000 foreign earned income exclusion is clearly an important consideration. Likely the most difficult part of eligibility for the exclusion are the physical presence or bona-fide residency tests.

A taxpayer who spends much of their time abroad, although they don’t meet the 330 day requirement for FEIE eligibility, should consider spending additional time traveling. Time spent living outside the United States counts toward eligibility, regardless of where it is.

Because of the size of this exemption, some people might find it more beneficial to stop working and stay abroad until they meet the 330 day requirement than to return to the United States early and continue working.

Of course, this situation is complicated by tax requirements in host countries too. As we often remind you, consult a professional.

FAQs

What about the reverse scenario, where I have US income but live abroad?

The answer to this question is highly dependent on the details of your situation, so is impossible to answer generically. It will depend on your visa type, the laws of the specific country you are living in, and other factors. We recommend contacting a tax professional familiar with the laws of the country you are (or plan to be) living in.

I don’t live in the United States. Why do I need to file United States tax returns?

The simple answer is that it is the law. All American citizens, as well as holders of US green cards, must file a tax return annually that includes all of their income – even that earned abroad.

What about double taxation?

There is almost never a situation that results in double taxation. Taxes paid in your country of residence are offset on your US taxes. There are often local tax implications, though.

How much do I need to earn before I have to file a United States tax return?

Please see the article on the IRS website, Do I Need to File a Tax Return?

Can I receive a tax refund even without a US tax obligation?

In some cases this is possible. There are several credits in the tax code that could result in a tax refund, even without a tax obligation.