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Tax Issues for Digital Nomads, Remote Workers, and a New Wave of Expatriates Living Abroad

Updated: Feb 17

The digital age has brought about a new way of doing business. Instead of showing up to a boring desk job, Remote Workers & Expatriates find themselves logging in from a destination that would be considered vacation by anyone else's standards. Digital Nomads have found a niche in this new world of business, and they operate from anywhere in the world!

A multitude of tax issues arise when you decide that your remote work will include travel abroad for extended periods. Most involve the Foreign Earned Income Exclusion (FEIE), Foreign Tax Credit (FTC), and the Report of Foreign Bank and Financial Accounts (FBAR).

Foreign Earned Income Exclusion

The maximum exclusion allowed in 2023 is $120,000 per person, or $240,000 if married filing jointly. The FEIE can help you reduce taxable income from earned income sources fairly dramatically if not entirely. Earned income sources include earnings as a contractor, those who receive 1099-NEC's, and even the typical W-2 earner.

To qualify for the foreign earned income exclusion (FEIE) you must have established a Bona Fide Residence in a foreign country, or you must have met the qualifications under the Physical Presence Test. Both of which require you to be out of the United States for a substantial period of time.

Click HERE for a link to the IRS's website discussing the FEIE.

Bona Fide Residence

You must have established residency in the foreign country for an uninterrupted period of at least an entire tax year to claim the exclusion through this test. This is less common unless an individual plans to live in that country for more of an extended period.

Physical Presence Test More commonly seen is the Physical Presence Test. The minimum qualification is being out of the country for 330 days at any time during a rolling calendar year. To qualify for the entire amount an individual must be out of the United States for the entire year. The amount of the exclusion is prorated based on the number of days, but the minimum that is required is 330 days. The rolling calendar is defined by any consecutive 365 day period. An example is August 1st to July 31st of the following year is considered a 365 day period within a rolling calendar. Some strategy can arise deciding when to file, or even if amending a return makes sense. For example, filing an extension may allow a taxpayer to claim more days for the credit on the prior year tax return. If you plan to stay abroad during the current year and through the end of the extension period, these additional days may help you qualify for a bigger exclusion. In some cases, people who would not have qualified at all for the exclusion may qualify under the new rolling calendar. All of this possible with a tax return extension. If you have already filed a return and didn't qualify for the exclusion, but have since spent significant time abroad the following year, you may be in luck. We can take a second look at the new rolling calendar to see if you would qualify under an amended tax return.

Foreign Tax Credit

This non-refundable credit is for income taxes that you have paid to a foreign government as a result of foreign income tax. This helps you to avoid paying taxes twice on the same income. Please note that you are not allowed to take both the FEIE & FTC on the same income. However, the foreign tax credit can be applied to any income that remains taxable after the foreign earned income exclusion applies. This credit, also, applies to stock sales and other capital gains when taxes are paid to another country.

Foreign Bank and Financial Accounts (FBAR)

A U.S. Person (citizen, resident, corporation, partnership, limited liability company, trust, and estate) must file the FBAR when the aggregate value of foreign accounts exceeds $10,000 at ANY TIME during the calendar year. There are a few exceptions which the IRS mentions on their website, HERE.

Not Out of The Woods

Your earned income may not be subject to Federal Income Taxes (or be significantly reduced) with the FEIE, but that doesn't mean you're ready to finalize a tax return. Some types of income are subject to what's called self-employment taxes, and it is taxed at a rate of 15.3% even when that same income is excluded from federal income taxes! Earned income is the money a contractor receives for services, and wages earned by a W-2 employee. The good news is that there are entity type considerations which may help with some of this. Click HERE to continue the discussion with my article on S Corporations.

Book a Free Discovery Appointment

See if Rangeview Tax & Accounting is a good fit for you with a Free Discovery Chat! We offer in-person, on-site, and telephone discovery chats. On site chats are typically business with exceptions available under appropriate circumstances for individuals.

Book a Paid Consultation

Our paid consultation is $50 and puts you on the line with a tax professional who will answer questions that you have related to IRS Code, and Tax Strategies. Pay for your consultation, select one of the available appointments, and provide the general topic of discussion or questions that you wish to discuss. If you choose to move forward with our services, we will credit the consultation fee towards a future tax return preparation.

Tax Projections

Stay on top of the upcoming filing season with a tax projection! We will collect various data including current pay stubs, expected business income, and more extraordinary situations like selling a home, rental, or business. From there we annualize the figures and run a mock tax return to get a good idea of an expected tax liability. This gives us a baseline in which we can further advise tax planning strategies that may apply.

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