The Tax Life of a Digital Nomad

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Have you considered moving outside the US? Or maybe you already have and have questions about how your US taxes will work. If so, today’s blog is a “don’t miss” for you.

You may have heard that you don’t have to pay US taxes if you live outside the US. That is true, but with some special rules. You may be eligible for the foreign earned income exclusion (FEIE). The exclusion amount is $104,100 in US. If you otherwise qualify, that means you won’t pay US taxes on up to $104,100. Please note that this is a federal law and not necessarily a state law. It depends on the state.

There are a few rules to consider with that. First, this is EARNED income. It can’t be income that you receive passively like interest, dividend, capital gains, royalties or rent. Secondly, if you clearly have nexus (or connection) with the US for this earned income, then it may be taxable. For example, let’s say that you live in Mexico near the US-Mexico border and travel to the US for a job daily. The income earned there will not be eligible for the FEIE. You didn’t earn it in the foreign country and your daily travel would mean that you’re not in compliance with the next part.

You also need to have a qualified status in the foreign country. There are two ways to get this:

  • Physical presence test, or
  • Bonafide residence.

The physical presence test is an object test. If you are outside of the US for 330 of 365 days, you will meet this qualification.

The other test is the bonafide residence test. In this case, it is more subjective. You must have legal residency (the appropriate foreign visa) and be able to prove that your foreign home is your main home. If you qualify using the bonafide residence test, you are allowed to be in the US up to 120 days (travel days to and from the US count as US days). But the more you are in the US, especially if you visit a US home, the harder it may be to prove that your foreign residence actually is your primary residence.

There is also a housing allowance that can seem confusing, but is actually based on a formula and determined based on the total amount of FEIE and the base housing allowance for your foreign residence. Items to track for this include rent, utilities, meals and all other “reasonable” living expenses.

Remember, though, that this income likely will be subject to taxes in your foreign country. Some countries have higher tax rates than the US, so be careful you’re not jumping from the frying pan to the fire with higher taxes.

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