US Digital Nomad Tax Exemptions, US Digital Nomad Tax Exemptions

US Digital Nomad Tax Exemptions

Here is some very useful information about US Digital Nomad Tax Exemptions for anyone working abroad long-term or considering pursuing the digital nomad lifestyle.

US Digital Nomad Tax Exemptions, US Digital Nomad Tax Exemptions

Objective and Outline

The Goal To get you interested enough to look into your tax

options and take them into account when traveling to the States.

The Assessment If you do Remote Year for the full year and you
don’t go to the States too often (more than about 30 days), I
believe you’ll qualify.

The Disclaimer I am not a tax lawyer. Please don’t rely on this
advice alone when completing your tax returns.

FOREIGN EARNED INCOME EXEMPTION (FEIE)

This is the facet of US tax law that applies to digital nomads akaAKA US Digital Nomad

Tax Exemptions, as we move around too much to be associated with any other single

country for tax purposes.

Since it’s an exemption, all money that qualifies is subtracted from
your reported income.

It has three tests: Tax Home, Physical Presence, and Bona Fide
Residence

FEIE TESTS

US Digital Nomad Tax Exemptions, US Digital Nomad Tax Exemptions

References
1 – https://www.irs.gov/pub/irs-pdf/f2555ez.pdf
2 – https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion-can-i-claim-the-exclusion-or-deduction

TEST 1 – TAX HOME

Generally wherever your office desk is. The location that would be considered
your primary office.
For most people, this concept is used by the IRS to determine if they can write
off travel expenses.
According to the IRS(1), we are itinerants and our tax home is wherever we are

working and we are working in foreign countries.(2)

References
1 – https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion-tax-home-in-foreign-country
2 – http://hodgen.com/donald-rumsfeld-unicorns-and-tax-homes-for-digital-nomads/

TEST 2 – PHYSICAL PRESENCE

Must be in a foreign country for at least 330 days in any 12 month consecutive
period.(1,2)
The period doesn’t have to align with the calendar year2

. For instance, we will be out

of the country from Feb 1st 2016 to January 31st 2017 and this is just fine.
We can spend 36 days in the US and still qualify, since 2016 is a leap year.
Be careful, days spent traveling to/from the US may count as being in the US.(3)

References
1 – https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion-physical-presence-test
2 – https://www.irs.gov/pub/irs-pdf/p54.pdf Page 15
3 – https://www.irs.gov/pub/irs-pdf/p54.pdf Page 15, Section ‘Travel’

TEST 2 – PHYSICAL PRESENCE CONTINUED

US Digital Nomad Tax Exemptions, US Digital Nomad Tax Exemptions

References
1 – https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion-physical-presence-test
2 – https://www.irs.gov/pub/irs-pdf/p54.pdf Page 15, Figure 4-B

IF YOU PASS THE TESTS…YOU QUALIFY FOR US THESE US DIGITAL NOMAD TAX EXEMPTIONS 

I QUALIFY, WHAT DOES THAT MEAN?

You are exempt from paying income tax on $276.77 (1,2) of earned income for each day you
spent outside the US in 2016.
Independent contractors (1099) still need to pay the 15.3% self employment tax.(3)
If you joined us in Montevideo on Feb 1st and didn’t go back to the US again in 2016, you will
pay no income tax for earnings up to about $92,700.
Any amount over the FEIE gets taxed at 28% (5), but standard deduction ($6,3006
) andexemptions ($4,000 each and everyone gets at least one) will zero out the next $10,300 in
income.

References
1 – $101,300 / 366
2 – https://www.irs.gov/pub/irs-pdf/f2555ez.pdf
3 – https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion
4 – $276.77 * (366 – 31)
5 – https://www.irs.gov/pub/irs-pdf/p54.pdf Page 21, Section ‘Figuring tax on income not excluded’
6 – https://www.irs.gov/uac/newsroom/in-2016-some-tax-benefits-increase-slightly-due-to-inflation-adjustments-others-are-unchanged

IT SOUNDS TOO GOOD TO BE TRUE

Q: Is my income ‘foreign earned’ if it came from a US company?
A: Yes, who or what company ppaidyou doesn’t matter. What matters is that you
earned it, and you did so while in a foreign country.
IRS Publication 54 (1), Page 16: “…Income you receive for work done in Austria is
income from a foreign source even if the income is paid directly to your bank account
in the United States and your employer is located in New York City.”

Q: Why does the government allow this?
A: In actuality, it’s weird that we have to pay tax at all when we don’t reside in the
US. In fact, the US and the small east African nation of Eritrea are the only two
nations to tax citizens not residing in the country.(2)

References
1 – https://www.irs.gov/pub/irs-pdf/p54.pdf
2 – https://en.wikipedia.org/wiki/International_taxation#Citizenship

EXAMPLE – ERIKA

US Digital Nomad Tax Exemptions, US Digital Nomad Tax Exemptions• She qualifies for the FEIE, as she spent 330 days in another country (the minimum).
• She gets credit for 299 days in 2016, totaling in an exemption of $82,756.

References
1 – https://www.youtube.com/watch?v=bte1M8d2Mu4 Flight Of The Conchords, We’re Both In Love With A Sexy Lady
2 – 366 days in 2016 less January (31 days) and less 36 days spent in the US
3 – 299 days out of the US in 2016 times $276.77 (the daily exemption amount)

EXAMPLE – ERIKA CONTINUED

US Digital Nomad Tax Exemptions, US Digital Nomad Tax Exemptions

• She’ll pay 28%(1) tax on $6,944, the income exceeding her exemptions + deductions.
• If Barbra earned this money while self-employed, the FEIE does not affect her self-employment
tax(2) (15.3%3) and she must pay it on her net income. She would be wise to report all of her business expenses to reduce this tax.

References
1 – https://www.irs.gov/pub/irs-pdf/p54.pdf Page 21, Section ‘Figuring tax on income not excluded’
2 – https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion
3 – https://www.ssa.gov/news/press/factsheets/colafacts2016.html

CATCH 22’s

Contributions to Traditional or Roth IRAs can only be made up to $5,500(1) or the
amount of your income that doesn’t qualify for the FEIE(2), whichever is less.

The physical presence test measures the number of days spent in a foreign country. If
you’re in international waters you aren’t in a foreign country and those days may not
count.(3)

You still need to file a US tax return even if your calculations show your tax will be
reduced to zero.

References
1 – https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits
2 – http://ustax.bz/expats-iras/
3 – https://www.irs.gov/pub/irs-pdf/p54.pdf Page 13, Section ‘Foreign Country’

4- US Digital Nomad Tax Exemptions

NEXT TAX YEAR

12-month consecutive periods for the physical presence test can overlap1. This means if you qualify for the FEIE in 2017, you’ll likely qualify for 2018 as well.

US Digital Nomad Tax Exemptions, US Digital Nomad Tax ExemptionsReferences
1 – https://www.irs.gov/pub/irs-pdf/p54.pdf Page 15, Figure 4-B

QUESTIONS?

US Digital Nomad Tax Exemptions, US Digital Nomad Tax Exemptionshttps://www.irs.gov/pub/irs-pdf/p54.pdf Page 14, Figure 4-A

If you have any other questions about US Digital Nomad Tax Exemptions or if you want to know How to be a Digital Nomad feel free to leave me a comment, or DM me on my Instagram.

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US Digital Nomad Tax Exemptions, US Digital Nomad Tax Exemptions

Author Nomadic Nava

"Travel the world, live a better life, be who you want to be." @nomadicnava

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