The Tax Gray Areas Every Digital Nomad Should Understand
As a digital nomad, you have the luxury of being able to travel all over the world, working as you go. Providing you have an internet connection and a laptop, anything is possible when it comes to building a career online.
With that being said, there are some gray areas when it comes to international law and taxes. Whether that’s establishing tax residency or preventing double taxation, there’s plenty you should inform yourself about to make sure your taxes are filed correctly.
In this guide, we’ll take a look at the tax gray areas every digital nomad should understand when paying it.
Why state taxes aren’t as simple as ‘leave and forget’
When you’re a digital nomad, it’s important to determine where it is you’re officially a tax resident, especially if you don’t have a fixed address or you move frequently.
While a growing number of countries are now offering digital nomad visas, they don’t necessarily clarify or resolve tax issues that are more complex in nature.
It’s not possible to simply leave and forget state taxes because many states will pursue former residents for taxes if they haven’t completely severed ties.
Defining tax residency
The most difficult of challenges is determining where you are when it comes to being an official tax resident. This is particularly important to determine when you don’t have a fixed address.
The 183-day rule
Many countries have a 183-day rule, where if you spend more than this number of days (roughly six months) within the country in a tax year, you then become a tax resident. However, it’s not a threshold that’s universal and might be lower in some countries.
Ties to a country
Tax authorities will look beyond just a simple day count. They’ll look into your ties to the country, as well as where you live and work. In some countries, you can be a tax resident, even when working abroad.
‘Resident nowhere’ risks
The idea of being a tax resident nowhere is simply a myth. Attempting this strategy as a digital nomad could prevent you from accessing benefits, and that might lead to a higher overall tax burden in comparison to adhering to the tax laws and rules for each country.
Citizenship-based taxation
For US citizens, worldwide income must be reported to the IRS regardless of where you live. For other countries, it differs, so it’s good to know what your native country does in this regard.
Key rules for when digital nomads pay state taxes
For digital nomads, there are some key rules to stick to so that you’re paying your taxes correctly. Regardless of where you are in the world, here are some tips for adhering to the law.
Domicile vs Physical Presence
When referring to domicile, this is your legal and permanent home. This is the property you intend to return to after traveling.
You can be physically absent from the domiciled state for years, but legally owe state income tax.
The ‘Convenience of the Employer’ rule
A handful of states will use the ‘Convenience of the Employer’ rule. This rule is to tax remote workers based on the location of their employer, regardless of where the employee is living and working.
States with this rule include New York, Delaware, Nebraska, Connecticut, and Pennsylvania.
If you’re a digital nomad who is domiciled in one of the nine states, then you can easily avoid state taxes by leaving the state. These states include:
Alaska
Florida
Nevada
New Hampshire
South Dakota
Tennessee
Texas
Washington
Wyoming
Professional tips for keeping finances stress-free
With that being said, there are plenty of professional tips for keeping your finances stress-free. Understanding tax obligations for each of the countries you’re looking to visit is important, as well as hiring a tax advisor where needed.
Here are a few additional tips that can help you as a digital nomad so that, financially, you’re benefiting as much as you can.
Travel like a local
It’s important that you’re traveling like a local, as well as eating, drinking, and engaging in local activities that will help to save you money. Try not to go out for dinners and spend beyond your means, as this will likely mean you’ll run out of money much faster.
Diversify your income
Securing multiple income streams through the use of remote work is beneficial. The more you can diversify your income, the better.
With that in mind, seek out all of the passive income sources available to ensure financial stability.
Build an emergency fund
An emergency fund is incredibly helpful when it comes to keeping you financially secure. Saving a cushion of money that will help to cover emergencies is helpful. With that being said, make sure you’re setting aside some money every month so that your account will slowly build up.
Invest wisely
Investing wisely in yourself is important because, despite being an individual, as a digital nomad, you run yourself as a business in some ways.
With that being said, you want to set aside some money for long-term investments and for retirement planning so that you can prepare for the future, as well as to enjoy the present.
How to do your taxes properly as a digital nomad
Digital nomads pay state taxes that contribute to society, so you want to ensure you do your due diligence when it comes to doing your taxes properly. With that being said, here are some tips to do your taxes correctly when working as a digital nomad.
Understand tax residency rules
It’s beneficial to understand tax residency rules, not just for your nationality, but your primary tax obligations. Again, this is where the 183-day rule is relevant.
Handle home country obligations
You’ll want to be aware of your home country’s tax system, for example, the use of the Foreign Earned Income Exclusion. The FEIE is helpful to reduce your tax bill.
Research home country laws
When living in a new country, you may also have local tax obligations that you’ll need to adhere to. So be aware of digital nomad visas and look for tax incentives where possible.
Use double taxation agreements
Double taxation agreements will prevent you from being taxed twice on the same income. This is something to look out for to help control how much tax you pay.
Keep meticulous records
Meticulous records should be kept by anyone who is a digital nomad. That’s why it’s important to track all of your income, travel dates, and business expenditures. That way, you can file your returns correctly and prepare for potential audits.
Consider professional advice
The complexity of international law and working as a digital nomad can make it difficult to navigate taxes. As such, you should consider professional advice and help.
With these tips, you’ll be able to navigate the gray areas of tax easily this year.
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