Being an expat is enjoyable but the lifestyle comes with a couple of conundrums, notably considering taxes. Many people are actually totally unaware of various taxing systems, which can be cumbersome if you’re country-hopping regularly.
Taxes of the country of residence should be researched well in advance, and you should consult the local expat community and even professional services whenever uncertain. Risking legal retribution in a country you’re unfamiliar with is to be avoided at all costs.
The main issue is that digital nomadism is still largely undefined in some countries. Many people travel on a tourist visa and work on the go to avoid the hassle, but if you’re planning to relocate to a foreign country, you should research your options.
Here are the 5 most important factors to consider.
1. Found a Sole Proprietorship
Whenever uncertain, founding a sole proprietorship is usually the best option. Taxes for this type of business may vary greatly from country to country though, so make sure to pick a country with beneficial taxes before you start traveling.
Another factor to keep in mind is health insurance. Some countries require a certain sum (which is rarely below $25k annually) to be allocated for health insurance, so don’t forget to look up your options.
Contrary to popular belief, digital nomadism isn’t suitable for people without savings, so ensuring you have enough money for any unforeseen circumstance is the only proper way to go about things.
2. Know Your State Taxes
No matter where you are, you’ll still have to pay expat state taxes. However, there are some exemptions. To determine whether you’re considered a taxpayer, consider the following: Find out whether you’re considered a resident of the state for tax purposes.
You’re considered a resident if:
- You lived in the state for any duration during the tax year
- You have a permanent place of residence in the state
- Your immediate family lives in the state while you’re abroad
- You keep your voting rights, ID card or driver’s license in the state
Income earned while working in the state is taxable in the said state. Keep in mind that other income (pension and retirement income, various government benefits) may also be taxable if you have state residency.
The states that don’t levy state income taxes are:
- South Dakota
- Washington State
Finally, New Hampshire and Tennessee only apply income tax on dividend and interest income.
California, South Carolina, New Mexico and Virginia — the so-called “sticky states” have a bit more rigorous rules. Namely, you’ll need to pay the taxes even if you didn’t live in the state during a year if:
- You own a property
- You own a bank or investments account
- You hold an ID card, a driving license and/or a voter registration
- You have a mailing address in the state (relatives included)
- You have dependents in the state
3. Find out Whether You Qualify for the Streamlined Tax Filing Procedures
The Streamlined Filing Procedures were introduced in 2012 and are often seen as an alternative to the IRS’ programs. They were designed specifically for Americans living outside the U.S. to catch up on missed taxes.
The streamlined filing procedures portend filing only a small number of tax returns, which makes them rather beneficial for many people.
You qualify for the program if:
- You can demonstrate that the reason for not filing taxes in the past was because you didn’t know you were required to
- You have been living outside the U.S. for at least 330 full days during one or more of the three most recent tax years
- You haven’t had an abode in the U.S. for one or more of the three most recent tax years. You can produce and mail off a signed statement (Form 14653) certifying the above-mentioned
4. Preventing Double Taxation
Not many people know that while Americans are required to pay state taxes, they do not actually own anything.
First of all, there are a couple of ways to prevent being taxed on foreign-earned income, notably:
The Foreign Tax Credit (FTC)
The FTC is designed to help expats claim a dollar-for-dollar credit on foreign income taxes. If you have obtained a foreign tax liability, you qualify for the program.
The Foreign Earned Income Exclusion (FEIE)
The FEIE is applicable to expats who can pass either the Bona Fide Residency test or the Physical Presence Test. You can exclude up to $107,620 of your foreign earned income.
The U.S. has in place tax treaties with more than 70 countries. Not all of them are the same, so look up the specific agreement before moving abroad.
5. Claim Your Coronavirus Stimulus Checks
If you have a Social Security number, fall within the income threshold, and file expat taxes, you may qualify for the Coronavirus Stimulus Checks, namely three stimulus payments, unemployment benefits and child tax credit expansions.
Keep in mind that you still qualify even if you haven’t filed your U.S. expat taxes in a couple of years or owe back taxes.
Being an expat is thrilling and inspiring, but taxes remain taxes no matter where you (or anyone else) go. Keeping track of your finances is crucial and taxes are no small provision.
As mentioned above, digital nomadism is not for people without savings, so make sure you’ve taken taxes into account.
Make sure to choose the best model to prevent double taxation; use expert services if uncertain. In the long run, any savings will make a huge difference so do your homework and pick the best combination for your specific circumstances. E.g., giving up your U.S. driving license may save you from paying stellar taxes, so do your research in advance.