Greetings, digital nomads! You’re living the life, working remotely, and exploring the world one Wi-Fi signal at a time. But there’s a specter that haunts your paradise: taxes. Never fear, we’ve got you covered with the exciting tale of FEIE for digital nomads. Buckle up; we’re about to embark on a journey as thrilling as your last Instagram story.

THE LATEST TREND IN GLOBAL WORKFORCE MOBILITY
A rising number of professionals are leveraging technology to work from virtually anywhere in the world. They are the digital nomads, the modern-day wanderers who carry their livelihood in their backpacks. And countries around the globe are catching on, offering unique visas to attract this mobile workforce. These are the Digital Nomad Visas (DNVs), the latest trend in global workforce mobility.

But what does this mean for U.S. expats who are digital nomads? How does it impact their tax situation? Let’s delve in.

The beauty of DNVs is their flexibility. Traditionally, work visas are tied to a specific job or employer within a host country. In contrast, DNVs allow the holder to continue working for foreign employers or clients while residing in the host country. This means you can enjoy the local cuisine, culture, and lifestyle without needing to secure local employment.

For U.S. expats who are digital nomads, DNVs open up new horizons. They provide an opportunity to reside in countries with a lower cost of living, allowing for a potentially better quality of life. Moreover, these visas often come with added perks like access to coworking spaces, networking events, and even local health insurance.

THE TAX IMPLICATIONS OF DIGITAL NOMAD VISAS
However, with great freedom comes great responsibility – specifically, tax responsibility. Acquiring a DNV does not absolve U.S. expats of their U.S. tax obligations. Regardless of where they earn their income, U.S. citizens and green card holders are required to report their worldwide income to Uncle Sam.

The good news is that U.S. expats may qualify for certain provisions like the Foreign Earned Income Exclusion (FEIE), Foreign Housing Exclusion or Deduction, and Foreign Tax Credit to mitigate the risk of double taxation. However, these provisions come with specific requirements and are not automatically granted.

While DNVs offer an enticing opportunity, they also bring some complications. The host country’s tax laws come into play. Some countries may consider income earned while residing there as taxable, regardless of where the employer or client is based. This could potentially lead to a situation where digital nomads face tax liabilities in both their home country and the host country.

Moreover, the host country might have social security agreements with the U.S., impacting self-employment taxes. Also, U.S. expats need to be aware of reporting requirements for foreign bank accounts and assets, which can become relevant based on the specifics of their stay in the host country.

Living the digital nomad lifestyle might seem like an endless vacation, but Uncle Sam still wants his share of your worldwide income, whether you earned it while surfing in Bali or coding in a cafe in Paris. Yes, as a U.S. citizen or green card holder, you are liable for federal taxes on your worldwide income. But there are ways to ease your tax burden.

TAX BREAKS AVAILABLE FOR AMERICAN DIGITAL NOMADS
The digital nomad lifestyle has become increasingly popular among Americans looking to work while exploring the world. However, as an American expatriate, one must navigate through the complexity of U.S. international tax laws when filing taxes. This article aims to guide you through the various tax breaks available to American digital nomads and help you understand the tax forms necessary.

FOREIGN EARNED INCOME EXCLUSION (FEIE)
One of the most significant tax breaks for American digital nomads is the Foreign Earned Income Exclusion (FEIE). This allows U.S. citizens or resident aliens living abroad to exclude certain types of income from U.S. income tax, including self-employment income, capital gains, or dividend income.

However, qualifying for the FEIE isn’t as simple as living outside the U.S. and having a foreign mailing address. You need to pass either the Physical Presence Test or the Bona Fide Residence Test, which take into account your country of residence.

THE PHYSICAL PRESENCE TEST
The Physical Presence Test essentially requires you to be physically present in a foreign country (or countries) for at least 330 full days in a consecutive 12-month period. For instance, let’s say you’re a digital nomad bouncing around Europe. If you spend 330 days (not necessarily consecutive) across various European countries within a year, you qualify under this test.

THE BONA FIDE RESIDENCE TEST
The Bona Fide Residence Test, on the other hand, is for digital nomads who have made a specific foreign country their host country and home for an uninterrupted period that includes an entire tax year.

FOREIGN HOUSING EXCLUSION
Beyond the FEIE, there’s the Foreign Housing Exclusion, which allows you to exclude certain amounts paid for household expenses that occur as a consequence of living abroad. Your bank statements and income information will be crucial in determining your eligibility.

DOUBLE TAXATION & TOTALIZATION AGREEMENTS
It’s worth noting that the U.S. has totalization agreements with certain countries to avoid double taxation of income for Social Security purposes. If you’re residing in a resident country with such an agreement, you may be able to credit your foreign tax payment against your U.S. tax liability via the foreign tax credit.

THE IMPORTANCE OF ESTABLISHING A TAX HOME
To claim these exclusions, you must have a tax home in a foreign country. A tax home is generally considered to be the location of your main place of business, regardless of where your family home is located. As a digital nomad, your tax home is where you’re currently working, not necessarily where you’re domiciled. A virtual mailbox can often serve as your mailing address for tax purposes.

SELF-EMPLOYED NOMADS: THE LONE SAILORS
For self-employed individuals, navigating tax waters can be even more turbulent. You may have to pay self-employment tax, which covers Social Security and Medicare, regardless of the FEIE. It’s like being asked to pay for an extra shot of espresso in your coffee, whether you wanted it or not.

TAX DEADLINE: THE CLOCK IS TICKING
The tax filing deadline for American expats, including digital nomads, is June 15th. But if you need more time, you can request an automatic extension until October 15th. It’s like hitting the snooze button on your tax obligations.

Related: U.S. ExpatTax deadlines for 2023: What you need to know

RENOUNCING U.S. CITIZENSHIP: THE ULTIMATE ESCAPE?
Renouncing U.S. citizenship is a major decision with significant tax consequences. You’ll need to file Form 8854 with your final tax return to cease to be a US person for tax purposes. Plus, you’ll need to prove you’ve complied with all federal tax obligations for the past five years.

Related: Renounciation of US Citizenship Abroad

REGULAR INCOME TAX VS FEIE: A BALANCING ACT
Even with the FEIE, you might still owe regular income tax on any income over the FEIE limit. Plus, the FEIE doesn’t apply to unearned income such as capital gains. It’s like finding out that your all-you-can-eat buffet has an exception for the dessert section!

BANKING AND FINANCE: STAYING AFLOAT
Whether you have a non-US bank account or you’re dealing with thousands of dollars in foreign income, you might have to file a Foreign Bank Account Report. As they say, with great financial freedom comes great reporting responsibility.

FINAL THOUGHTS: SMOOTH SAILING AHEAD
Remember, being a digital nomad doesn’t mean you can give taxes the slip. Tax laws can be as complex as the tax code itself, but with the right knowledge and preparation, you can navigate them successfully. Understanding the tax breaks available can help minimize your U.S. taxable income.

Keep wandering, keep working, and keep filing those taxes, nomads! As you live your digital nomad lifestyle, remember to stay connected – not just to the internet, but to your tax obligations as well. Just as you wouldn’t sail into a storm without a compass, don’t venture into the world of taxes without a good understanding of the FEIE and other tax issues. As a digital nomad, the world is your oyster, but remember, Uncle Sam still wants his share of the pearl!

WRITTEN BY
Kasia Strzelczyk, EA
A certified accountant and IRS enrolled agent with over 8 years of experience working with US expats. With a deep understanding of the unique financial challenges faced by expats, Kasia is dedicated to helping clients navigate complex tax laws and regulations.

Have a question? Contact Olivier Wagner, 2040 Abroad or Kasia Strzelczyk