Digital Nomad Taxes: A Complete Guide for US Nomads (2024)

While life as a digital nomad is an adventure, it’s important to keep practical matters — like digital nomad taxes — in mind, too.

Moving to another country as an American doesn’t eliminate your US tax obligations. And if you also qualify as a tax resident in another country, that can significantly impact your finances.

As US expat tax specialists, we know how confusing taxes can get for digital nomads. Fortunately, we have the experience and know-how to guide you through it all. Below, we’ll go over what your tax and reporting obligations as a digital nomad are, why compliance is important, how to reduce your tax liability, and more.

US filing requirements for digital nomads

Whether or not digital nomads are required to file a US tax return depends on whether they meet the IRS’ minimum income reporting threshold.

Thresholds vary based on factors like age, filing status, and the type of income that you earn. That said, the general filing threshold for single, non-self-employed individuals under 65 in 2023 is tripped once you have $13,850 of income. For self-employed individuals, which is the reality of many digital nomads, the reporting threshold drops to just $400. Any taxpayer who meets the relevant filing threshold must file a US tax return — even if they live in another country.

While it may not seem very fair to have to pay taxes to a country you no longer live in, it’s perfectly legal for the IRS to impose this obligation upon you. This is because of the US’s citizenship-based system of taxation, which makes every US citizen and green card holder — regardless of their location — subject to US taxation.

There is some relief surrounding dealinds for those living outside of the country though. Americans living abroad get an automatic two-month tax filing extension beyond April’s tax day. For the 2023 tax year, the deadline to file your tax return as someone living abroad is June 17, 2024. You can further extend this deadline upon request to October 15, 2024.

Regardless of when your tax return is due though, you must still pay any taxes due by April 15, 2024 to avoid interest accumulating on your tax bill.

Federal income taxes for digital nomads in 2024

If you meet the threshold to file a US tax return, your worldwide income is then subject to US income tax rates. There is no “special rate” for Americans living abroad; instead, the tax brackets for digital nomads are the same as they are for those living stateside.

Tax brackets 2023

Source: IRS

Remember that income tax rates in the US are marginal, meaning that your true or “effective” tax rate is not simply applied equally across all of your income.

Self-employment taxes for digital nomads

Many self-employed digital nomads choose to incorporate, or establish a formal business structure for their self-employment activities. Doing so serves to limit their liability in the event of a legal conflict or detrimental financial event and in some cases, with careful tax planning, benefit from a tax perspective as well.

Sole proprietors, general partnerships, and LLC owners by default pay taxes according to the individual ordinary tax rates outlined above. They also are subject to self-employment taxes at a rate of 15.3% to cover Social Security and Medicare taxes.

LLCs that elect to be taxed as C-Corps pay taxes at the current corporate rate of 21%.

Finally, LLCs that elect to be taxed as S-Corps remain subject to ordinary individual tax rates on wage income, but protect business distributions from Social Security and Medicare tax.

State income taxes for digital nomads

Typically, proving you no longer maintain significant ties to your previous state of residence will get you off the hook for filing state taxes after moving abroad.

But it’s not always that easy. Some states are stricter than others and don’t consider a move abroad to be termination of state residency for tax purposes..

Sticky states for taxes

A few “sticky states” that make it difficult to sever tax residence include:

• California: 1% to 12.3% tax rate
• New Mexico: 1.7% to 5.9% tax rate
• New York: 4% to 10.9% tax rate
• South Carolina: 0% to 6.4% tax rate
• Virginia: 2% to 5.75% tax rate

In these states, you may need to take additional steps to formally cut ties as a tax resident and establish a new domicile. This may include doing things like:

• Selling any property you own in the state
• Closing any financial accounts you opened in the state
• Selling or moving your belongings out of that state
• Canceling your old state ID or driver’s license
• Updating official registrations (e.g. voter registration, car registration, pet registration) to reflect your new location
• Revising official documents that reference your previous location (e.g. estate planning documents)

Establishing residence in a low-tax state

If you want to maintain a physical or financial home base in the US, you may want to consider establishing a residence in one of these states that don’t charge income taxes:

• Alaska
• Florida
• Nevada
• New Hampshire
• South Dakota
• Tennessee
• Texas
• Washington
• Wyoming

B!T note: While New Hampshire has no taxes on most earned income, they do levy a 4% tax on dividends. The state is going to decrease this rate to 3% in 2024 and eliminate it from 2025 onward.

A steps you may take to establish tax residence in one of the above states include:

• Purchasing residential property there
• Registering your business there
• Opening financial accounts there
• Storing your belongings there

Additional US compliance & reporting obligations

In many cases, digital nomads need to submit more forms than just the standard Form 1040 when filing their federal tax return each year.

Americans living abroad, especially if they open online accounts like Wise and similar, that hold various currencies, will typically need to file the Foreign Bank Account Report (FBAR). This is required for US citizens with over $10,000 in foreign financial institutions. Note that this $10,000 figure refers to the combined total value of all of your foreign financial accounts.

In other words, holding two foreign accounts containing $6,000 each would still require you to file an FBAR. Even though neither of them individually exceeds the $10,000 threshold, the sum of them — $12,000 — does.

Less frequently, you may also need the Statement of Specified Foreign Financial Assets (Form 8938). Americans whose foreign assets exceed a certain value must file a Statement of Specified Foreign Financial Assets, more commonly referred to as Form 8938. For Americans abroad, the reporting threshold is:

• Over $200,000 in foreign assets on the last day of the tax year, OR
• Over $300,000 in foreign assets at any point during the tax year

Note that Americans living within the US may need to file Form 8938 as well, although the threshold is significantly lower (over $50,000).

Enforcing compliance

Some digital nomads mistakenly think that the US is unable to track their foreign financial holdings.

However, the US has a wide global reach due to the Foreign Account Compliance Act (FATCA). Among other things, this legislation mandates that foreign financial institutions (FFIs) share the account information of all American clients with the US government.

At present, it’s relatively easy for the US government to track Americans’ foreign assets and subsequent tax and reporting obligations. To avoid fines and penalties, you must stay fully compliant at all times.

Foreign tax obligations for digital nomads

We’ve already established that American digital nomads have US tax obligations — but what about foreign tax obligations? The answer depends on whether you are a tax resident of another country or earn income sourced from another country.

Residence-based taxation

As opposed to the US’s system of citizenship-based taxation, most countries have residence-based taxation. In this system, countries tax individuals based on whether they meet their unique definition of tax residency. Typically, a country will tax its residents on their worldwide income, while taxing non-residents only on the income sourced within that country.

Specific tax residency rules vary from country to country, but one of the most common ones is the 183-day rule. Countries that employ this rule classify anyone who spends more than 183 days out of the tax year in that country as a tax resident.

Reminder: Make sure to check tax residency rules in whichever countries you’ll be spending a significant amount of time in.

Earning income in another country

If you earn income sourced from a particular country, their government may tax you on it even if you’re not a tax resident. For example, if you rent out a property that you own in Spain, the Spanish government will tax you on that income (albeit at a special non-resident tax rate).

The tricky thing for digital nomads is that many foreign governments consider any income you earn while physically present in their country fair game for taxation. These countries may forbid tourists from working there (even if they’re working remotely for a US-based company). As such, they may deny you entry at the border if you tell them you plan to work there.

Others may expect you to file a tax return and pay taxes on any income you earn in the country, no matter how little time you spend there.

As a result, digital nomads who will only be visiting a country for a short period of time aren’t always forthcoming about their plans to work while there. While this practice isn’t uncommon, it is legally questionable — and can result in consequences if you’re caught.

How to avoid double taxation

If you owe taxes in a foreign country and the US, don’t panic. You can often avoid paying taxes in both countries on the same income. Two of the best tax benefits for Americans living abroad include the:

Foreign Earned Income Exclusion (FEIE)

The FEIE allows Americans living abroad to exclude a certain portion of their foreign-earned income from US taxation. For tax year 2023, you can exclude up to $120,000. Because you can only claim the Foreign Earned Income Exclusion for earned income, however, passive income like interest, dividends, rental income, and retirement/pension income does not qualify.

To be eligible for the FEIE, you must meet one of two tests:

• The Physical Presence Test: For anyone who has spent 330 days in any 365-day period outside of the US. (Note: The 365 days do not have to line up perfectly with, but must fall within, the calendar year.)
• The Bona Fide Residence Test: For those who have been residents of another country for at least a full tax year and can prove it through official documentation.

Foreign Tax Credit (FTC)

If you’re a resident of a foreign country who pays foreign income taxes, you may be able to claim the FTC. This provision gives you dollar-for-dollar tax credits on foreign income tax payments that can be applied to US tax bills. To qualify, these taxes must be:

• Legal
• Based on income
• Made out to you specifically

Because many foreign countries have higher tax rates than the US, those who claim the FTC often eliminate their US tax liability entirely. They can even receive tax credits that can be applied to future US tax bills.

Let’s say you owe $10,000 in taxes to the US government but already paid $13,000 in income taxes to Thailand. With the FTC, you can subtract that $13,000 you paid to Thailand from your US tax bill of $10,000 to not only wipe it out for that year, but also receive $3,000 in tax credits to apply to your next US tax bill.

B!T note: If you live in a country that has a tax treaty with the US, you may be able to claim some of its benefits to help avoid double taxation via Form 8233. But while income tax treaties are designed to provide tax relief in theory, in practice, they almost always contain a Saving Clause that renders them largely ineffective. As a result, most expats are better off claiming the FEIE or FTC.

The best countries for digital nomads

If you’re interested in setting up a digital nomad home base in a foreign country, there are plenty of options to choose from. In fact, over 50 countries now offer a dedicated digital nomad visa.

Some of the top options for 2024 include:

• South Korea: If you’re a fan of K-pop or K-dramas — or just want to explore a safe, beautiful, high-tech country — Korea’s recently launched digital nomad visa could be the right fit for you.
• UAE: With zero income taxes, a growing expat community, a thriving entrepreneurial spirit, and a dedicated visa for freelancers, digital nomads are heading to Dubai in droves.
• Croatia: Croatia offers a pleasant Mediterranean climate, 1,000+ islands, and beautiful historic cities (some of which you might recall as key filming locations in Game of Thrones). They also have a special digital nomad visa that exempts holders from taxation.
• Thailand: Named one of the best countries to travel to in the world by Condé Nast Traveller, US News & World Report, and Insider.com (among many others), digital nomads in Thailand love the low cost of living, tropical climate, beaches, food, and gorgeous, historic temples.
• Malta: This small island nation offers digital nomads crystal-clear waters, ancient ruins, and a high level of English fluency. Their digital nomad visa also boasts exemption from Maltese taxes.
• Spain: From big cities to beaches, fine art museums, and delicious tapas, and beautiful medieval castles, Spain offers it all. The fact that their digital nomad visa offers a flat tax rate of 24% just adds to the appeal.

How to set up your US business entity as a digital nomad

US expats working as freelancers, entrepreneurs, small business owners, independent contractors, and other types of self-employed workers often choose to incorporate their businesses in the US for tax purposes. Some of the most popular options include:

• Sole Proprietorship: For businesses owned and operated by one single person or a married couple; all business income and loss are reported on your personal income tax return.
• General Partnership: For businesses owned and operated by more than one person, each of whom shares profits and debts; all business income and loss are reported on personal income tax returns.
• Limited Partnership: For businesses owned and operated by more than one person. Partners are either general (actively sharing in income and loss) or limited (investors only). Limited partners have less legal and tax liability, while general partners have greater control of business operations.
• Limited Liability Corporation (LLC): A business entity that limits liabilities for owners while giving them the option to be taxed on their personal tax returns or as a corporation.
• S Corp: A business entity that limits liability for owners with business income and loss reported on their personal income tax returns. Lower self-employment taxes, but typically more complex and expensive to file.
• C Corp: A business entity that limits liability for owners and requires them to file a separate corporate tax return. No self-employment taxes, but typically more complex and expensive to file.

Digital nomads often have special rules to consider when setting up a business due to their frequent movement. That’s why we recommend setting yourself up for financial success by proactively collaborating with a US expat tax accountant. They can advise you on the best small business entity for you and your circ*mstances.

Digital nomad payroll considerations

If you are employed by a company while living abroad, your paycheck will likely look a bit different than it did when you were based in the US. That’s because US companies whose employees are officially residents of another country must comply with that country’s labor laws and tax system. Some changes you could see include:

• Different income tax rates: Many other countries have higher income tax rates than the US, so your paycheck may be smaller than you’re used to after taxes
• Social security contributions: Depending on how long you intend to stay in a country — and whether or not the country you’re living in has a totalization agreement with the US — you may need to contribute to their social security system instead of (or in addition to) the US system.

References

1. Dependents, Standard Deduction, and Filing Information
2. Federal income tax rates and brackets
3. 9 States With No Income Tax
4. 15 countries that offer a digital nomad visa