How To Handle Taxes As A Digital Nomad?
Handling taxes has always involved a lot of brainstorming and head scratching. And if you’re a digital nomad then there are a lot of grounds to cover while handling taxes in an effective manner. You may not be tied down one place while working as a digital nomad, but it doesn’t let you escape the drudges that come along with your employment. Paying the taxes is one of your main duties as the citizen of your country. And by filing your returns at a regular interval, you are doing a service to your countrymen.
People are always in search for finding loopholes to avoid/reduce their tax liabilities. Digital nomads are no different. Relatively new job genres such as being a digital nomad isn’t very well known to the officials. This turns out to be blessing in disguise as the officials are not caught up with the concept and, as a result, there are many loopholes. There are a lot of grey areas which can be reworked in your favour. Thus, I have compiled the list of methods for managing your taxes as a digital nomad. These methods have helped me save a whole lot of my hard earned money and hopefully these will help you too. Keep reading:
File your digital nomad income as income from self-employment in the US
This is one of the most effective strategies for reducing your tax liabilities. You may incorporate your own foreign company and hire yourself. Income earned as a digital nomad can be routed through this company. This is better than passing the income to you directly as the US Tax taxes only the worldwide income above the foreign earned income exclusion. Since, one cannot use self-earned income under the foreign earned income exclusion, so this obviously is a better idea. This method may not work for the current year but definitely for the next subsequent years. You must not cheat and declare all your income honestly.
You need to file an FBAR in case you have $10K or over amount in your foreign bank account at any time. There also is a separate form for the IRS in such a case. It’s much easier to move back to the US once you have filed your returns every year. This will also help you in accruing all low income benefits once you move back. Please note that this method works in case you work as a freelancer on a US based website.
Earn you incomes through an offshore company
Many digital nomads commit the mistake of earning the income in their own name or using their home country’s corporation’s name. This may qualify you for tax exemptions under several provisions like the The Land of Free’s Foreign Earned Income Exclusion, but this exposes you to a wide varied other allied taxes. Thus, it is better to earn through an offshore company to chisel down your tax liabilities so that your hard earned money is entirely yours.
Choose your destination carefully
Digital Nomads are happy to call any place their home. This is where they make a big mistake. Personally I make a list of places where I would be able to avoid paying much taxes on my income. Finding places that grant you exemptions on your taxes is the key!
Not many countries have strict policies regarding foreign investment income as the US has. Preferably travel to countries that have a practice of using the ‘territorial taxation’ method. This means that only those income earned in those countries is taxes. Travel to the countries with low tax rates to avail the benefits.
Also, many countries in Europe follow the practice of ‘residential taxation’. Living there for a prerequisite number of days (183 or more in a year) enables you to pay taxes on your worldwide income. This is another strategy that the digital nomads can adopt to avoid high tax rates.
Hire an accountant who specializes in expat tax laws
Personally, I prefer the top tax firms in my city to look after the tax filings. Yes, it might seem quite expensive at first but the benefits attached to it makes you feel that your money was well spent. Many of my friends, then, were paying insane amounts as taxes, whereas I, with the help of this firm, was paying a meagre amount and saving most of my money.
Although hiring an expat expert can be quite cumbersome, as not many are aware of the concept of digital nomads. But hiring a tax counsel is truly worth the money as I was able to save an unimaginable sum of money due to their sensible advice.
Use foreign currencies to bank oversees
Holding US dollars in your bank account is a bad strategy if you’re a digital nomad of US origin. The ease that offshore banks provide while holding your foreign currency is amazing! Also, the exchange rates that they provide is extremely cheap compared to major US banks. There are many banks in Asia which provide wealth haven for your hard earned money. Adhering to this method also bolsters your image as a truly global citizen. You are not just another traveler on vacation, but a citizen having a global identity.
Get the status of a tax non-resident in your home country
Getting a second residency is a very good idea for a digital nomad. This makes several daily life inconveniences fade away. However, choosing a country for residency can be tricky. There are several countries that limit the amount of time one can spend in their territory. Fortunately, there are countries like Panama that offer Friendly Nations Visa. These visas are used by the citizen of 50 countries to obtain permanent residency within its territory.
Once the status of a tax non-resident is conferred upon an individual, massive cuts in tax rates and amount becomes accessible to them. The procedure for obtaining this status is too straightforward and simple. The individual has to just stay outside the US border for atleast 330 days in a calendar. And once you fulfill this requirement, you’re qualified to be a tax non-resident of the US. Upon approval, you’re eligible for the tax cuts and other benefits attached to it.
As discussed above, there are several workarounds for reducing your tax liabilities if you’re a digital nomad. Just remember to never cheat and pay your taxes at regular intervals. Always stick to the legal ways finding loopholes in the system and explore them. Finding illicit methods if tax avoidance can land you into trouble. Hire an able tax attorney to look after all your taxing formalities and enjoy your vacations!
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You might also want to read:
— Top five places for Digital Nomads
— 5 Must Read Books For Digital Nomads
–- What’s the best bank account choice for a digital nomad?
— How to succeed as a freelancer
— How remote jobs are helping woman workforce in India
– 10 Must have tools for every remote worker