When you decided to become your own boss while working from home, you didn’t consider one giant detail: digital nomad tax regulation. That’s right. Running your own business or freelancing won’t save you from filing taxes and collecting expenses.
Well, if you don’t want to give up traveling, it’s time to get your head around it. So, without further ado, let’s jump into the dark side of digital nomads’ lifestyle that no one wants to talk about.
International Digital Tax Terms You Need to Get Confident With
As a digital nomad’s general tax practice, consider yourself a tax resident when you spend over 183 days in the same country. In short, if you want to stop taxes in your home country, you need to notify your new employment and residence. This step is crucial if you’re going to open a bank account in your new country of residence, need local health care, or rent a place. Plus, you need it to show economic activity in the country of new tax residency.
As a digital nomad, how you pay taxes depends on the country and visa arrangements. However, these are the three terms you can’t miss when organizing your digital nomad tax record.
1. Tax Residency vs. Citizenship
Tax residency and citizenship are two very different things. The latter is where you were born, and it doesn’t change traveling. On the contrary, tax resolution depends on your residency. Both statuses can affect your taxes, but they are different things.
2. Different Types of Tax Laws
Unless there are specific visa arrangements, most countries apply a tax system based on residency. However, countries like the US establish their tax system on citizenship. In short, Americans pay taxes wherever they are living. Finally, places like Portugal or Panama updated their systems to welcome travelers and digital nomads. You pay taxes based on the local income produced on their territory. In short, digital nomads can earn salaries from abroad and live in a tax-free country.
3. Double Taxation Agreements
Sometimes, individuals are tax-payers for two countries at the same time. In this case, most governments provide double taxation agreements to define which country must consider you as a resident and tax your income.
How To Organize Digital Nomad Tax Expenses, Deduction, And Income
Now, we have a vague understanding of digital nomad tax terminology. So, let’s jump to the funniest part: how to fill in taxes as a digital nomad?
Especially if you are new to this remote self-employment gig, it can be tricky to organize your financial plan and get the process in place. So, take a deep breath, and let’s look together at the three most important things to add to your digital nomad tax file.
Tax Deductions for Digital Nomads
One of the coolest things about being a digital nomad is tax reductions. Especially after the rise of visa schemes due to the pandemic, you can choose your new home based on how much taxes you will pay.
In addition, you can deduct working expenses like:
- Any tech-related equipment, including laptop bags or stands, better laptops or accessories like headphones and micros.
- Office expenses like notebooks, pens, or prints.
- Phone expenses
- Coworking space membership
- PayPal or banking fees when receiving a salary
- Legal and accounting expenses
- Professional licenses or insurance
- Training and association fees
- Courses or education expenses related to your field
Is digital nomads’ insurance worth it? Check out the answer!
Digital Nomad Tax Reductions for Bloggers And Freelance Writers
As a remote blogger or writer, you can ask about the following deductible expenses:
- Website hosting and domain fees like Host Gator or Big Scoots.
- Newsletter software (Aweber, MailChimp, Convertkit, BirdSend), click funnels, eCommerce subscription, and marketing expenses.
- Advertising expenses.
- Blogging courses and training.
- Affiliates and sales
- Employees or virtual assistants
PS. For bloggers, often travel expenses are also tax-deductible!
Tracking Expenses And Managing Receipts
The only trick you have to remember filing taxes as a digital nomad is tracking everything with receipts and invoices. The key here is doing it as you go, not after. You can organize receipts and expenses in two ways:
It doesn’t matter how hard you try to postpone your adult life. At some point, you will find yourself thinking that an Excel sheet is the best option to keep things together.
Here are four steps to get you in the habit of tracking your expenses and make your life easier at the end of the tax year:
- Collect tax-deductible receipts
Every time you purchase or attend a course, you can add on the list the deductible expenses, keeping them in print and digital copy.
- Add your receipts
On your brand new spreadsheet, add date, store/vendor, category, amount, and relevant details of your expenses – ideally picking different colors for each type. For example, red goes for things not tax-deductible, green for refunded costs, and so on.
ProTips: As a digital nomad, you also need to add the currency and track the exchange conversion based on where you are.
- Store original copies of receipts and invoices
Remember that most countries want original copies for your expenses. So, always keep printed copies of the receipt with you.
To recap, creating a spreadsheet with categories and subcategories is the most effective way to track and manage expenses in no time – if you update it every day!
ProTip: You can use different apps for your digital nomad tax system if you don’t fancy manually adding all your tax-deductible expenses. One of the most popular expense-tracking app is Trail Wallet. It automatically adds customizable categories and currencies. In addition, the app produces an annual expense report and a monthly export with relevant data.
Last but not least, you need to include your income in your digital nomad tax file. Especially if you have multiple clients paying in a different currency, you need to set up a smooth method to organize your income to claim tax returns whenever you are.
Once again, we need to prepare a spreadsheet adding the following categories:
- Income category – affiliate payment, monthly salary, website advertising, book sales, freelance writing, etc.
- Employer or client
- Payment date
- Final amount
PS: If you don’t add one of your income sources, you could get in trouble. Especially companies that fill out their tax return listing each employee or contributor – so be careful!
Pro Tips To Survive Digital Nomad Tax Regulations Anywhere
Now, we know how to organize our digital nomad tax expenses. But, how to start dealing with tax regulations from abroad? By finding an accountant or tax preparer before leaving .
To clarify, accountants offer a higher level of expertise, asking for consistent fees. So, suppose you started your journey in the digital nomad tax world. In that case, you probably need a tax preparer with enough international experience to help you out with local tax regulations. You can just type accountant + digital nomad + [your residence] on Google and see the options if you don’t know everyone. Or, you can collect tax firms, accountants, resource articles, and forums to ask for recommendations. The point is, do everything you can to be prepared before leaving.
After that, you need to send it to your tax preparer:
Some tax firms can automatically access your income slips via your country’s online tax system. Usually, these slips include employment income, payments, and investment income like interest and capital gains. Or, you can simply collect the slips and generate an electronic form.
Here is when our spreadsheets come in handy. If you add expenses daily on a Drive, you can share this document with your tax preparer to prepare everything for your tax return.
Pay Tax But Receive Your Refund!
Finally, these boring habits give you results. You can get your refund once you organize tax reduction, expenses, and income and pay digital nomad taxes! So, your tax preparer can give you all the details, and you can arrange payment with your bank – most banks allow online tax payments.
ProTips For US Digital Nomads
Here are the best DIS tips for U.S. Digital Nomads tax returns:
- Foreign Earned Income Exclusion (FEIE): Even with this income exclusion, you need to file digital nomad taxes when the income is under $100k. It provides a tax credit that reduces/eliminates federal taxes.
- Physical Presence Test / Bona Fide Residence Test: The FEIE proves you’ve been living abroad for 330+ days in a year.
- Foreign Tax Credit (Form 1116): You can deduct it from any U.S. taxes payable when you pay taxes abroad.
- Foreign Account Tax Compliance Act (FATCA, Form 8938): With over $200k in foreign assets, you need to declare income for tax return.
- Foreign Bank Account Report (FBAR, Form FinCEN 114): You declare assets in all foreign accounts when you earn over $10k.
- Exclude Your Spouse: If you marry a foreigner, you can have separated tax systems.
Here are a few things to remember for US digital nomads:
- All US citizens or Green Card holders must file U.S. tax returns declaring their worldwide income living abroad.
- Virtual addresses or mail services help with IRS and State tax authorities.
- US citizens don’t need US self-employment taxes (Social security and Medicare) with a foreign employer. Working for US companies, the deduction is automatic on salary.
PS. Some self-employed digital nomads may be liable for SECA (Self-Employed Contributions Act) tax based on the destination country. Here are the countries participating in the Totalization Agreement with the United States:
- Europe: Italy, Germany, Switzerland, Belgium, UK, Sweden, Spain, France, Austria, Finland, Ireland, Luxembourg, Denmark, Slovak Republic, Norway, Greece, Czech Republic, Portugal, Netherlands, Poland
- North/Central/South America: Chile, Canada
- Asia/Australasia: Japan, South Korea, Australia
ProTips For Canadian Digital Nomads
For Canadian digital nomads, residence status makes a significant difference for tax returns. Before submitting your digital nomad tax file, check the CRA Website to learn about requirements and benefits. Usually, Canadian accountants recommend becoming a non-resident to reduce taxes. However, the best solution always depends on your employment agreements and country of residence.
ProTips For Australian Digital Nomads
Australia’s online tax system is relatively easy – at least, compared with the US. on the website, you can select the category based on your working situation, and there is plenty of documentation about digital nomad taxes.
ProTips For EU & UK Digital Nomads
For the EU and UK, the situation varies by country. While Europe launched several visa schemes for digital nomads, the UK is still dealing with Brexit. In this case, it’s better to speak with experts to find out the best solution based on income and career.
Best Countries for Digital Nomad Taxes
1. Hong Kong
6. The Caribbean
9. Sri Lanka
10. New Zealand
We made it! This is a short roadmap of the most important things to consider when filing digital nomad taxes. It might feel overwhelming. But once you get started, it will be easier than you think!
So, name your folder and start collecting your receipts, your tax return is ready to come and find you wherever you are!