For those who desire actual independence and favor a more adventurous lifestyle, becoming a digital nomad is a dream come true.
Digital nomads are not tied to one area until retirement age, doing a typical 9 to 5 job. In essence, they support their travel-heavy lifestyles by working from home to support themselves. Being a digital nomad, though, is more difficult than you may imagine.
Digital nomads are not tied to one area until retirement age, doing a typical 9 to 5 job. In essence, they support their travel-heavy lifestyles by working from home to support themselves. It’s not as easy as you may imagine balancing professional obligations with touring the longest beaches in the world.
Taxes are one area of the digital nomad lifestyle that may be very complex. Since most individuals consistently reside in the same place, taxation is typically an easy topic to understand. What about digital nomads, though, who regularly relocate on a whim?
Here are some helpful hints for paying digital nomad taxes to assist you in better comprehending this topic.
Whether you’re a freelance SEO expert, blogger, or proprietor of a discount coupon website, the information presented here should be quite general and relevant to the majority of digital nomad lives.
The greatest advice for handling digital nomad taxes is provided here!
1. Recognize the Distinction Between Residency and Domicile
The distinction between domicile and residence is the first thing you should understand about paying digital nomad taxes.
Domicile can be referred to as a location (such as a nation) that a person regards as their permanent home or is intimately associated with. As an example, let’s say you’re a child and your domicile is where your parents live. You still have the home you perceive to be your “primary one”—the domicile—even if you own other homes.
In contrast, residency refers to a person’s prolonged residence in one place. Although it could last for weeks, months, or even years, the truth remains that it is not enduring. For instance, college students might think of their dorms as residences while they are enrolled, but their primary residence is still their family home.
How does it relate to digital nomads then? In essence, these locations remain your dwellings even if you live there for a longer amount of time (let’s say a few years) after each nation you visit. Unless you choose to live somewhere permanently. Your residence is still in your country of birth.
Now that you are aware of the distinction between these two terms, you must determine if you are a tax resident of the nation in which you will be residing.
2. Know the Global Tax Systems
You never know where your wanderlust may lead you as a digital nomad. After all, you have remote work that pays for your travel costs, so why not make the most of this chance?
Taxation based on citizenship
Only Eritrea and, more significantly, the US employ this method, which is extremely uncommon. As the name suggests, this system levies taxes on people according to their citizenship. You must still pay your US taxes if you are a citizen of the United States of America, whether you are living the digital nomad lifestyle in South Korea or Nigeria.
In accordance with this approach, digital nomads who are still US citizens must report their taxes to the Internal Revenue Service. Except for severe acts like renunciation one’s US citizenship, there is no option to cease paying these taxes. Even so, they are still responsible for paying the departure tax.
Exclusion of Foreign Earned Income (FEIE)
However, employing the Foreign Earned Income Exclusion is a way to somewhat lower taxation (FEIE). Unfortunately, there are some prerequisites in order to qualify for this form. You must first have a tax residence (the location where you work or do business) in a nation other than the USA. In addition, you must pass the IRA bona fide residency test or the physical presence test.
Additionally, you must have a foreign source of income. In this context, “foreign” denotes that the money must be earned outside of US territory, and “earned” refers to revenue through salaries, wages, or self-employment. This implies that passive income (such as interest or social security benefits) is ineligible.
Taxation based on residence
More than 130 nations adopt this kind of taxation, making it the most prevalent in the world (e.g., Canada, Australia, and many European Union states).
Simply said, digital nomads must pay taxes on their worldwide income in accordance with the local laws, not their citizenship, whenever they become tax residents in such nations (either through the 183-day limit or other ways).
As previously indicated, citizenship-based tax systems will require you to pay taxes as long as you reside in that nation. The residence-based paradigm is a lot more accommodating to digital nomads than the citizenship-based one.
For instance, evading taxes is simple if your country of origin has a residence-based taxation system and you want to leave. You must renounce your principal abode there and limit your annual visitation to 183 days. Your nationality is unaffected.
This mechanism is present in most tax haven areas as well as nations like Thailand and Panama. Due of the way it operates, this approach is most likely the greatest option for aspiring digital nomads.
In essence, nations that impose a territorial taxation system will only tax you if the majority of your income is earned there. As a result, if a foreign firm is your primary source of income, it is totally conceivable to live abroad tax-free.
3. Watch Out For The “183 Days” Rule
There’s a widespread misperception among digital nomads that traveling temporarily abroad automatically exempts you from paying taxes there.
According to this logic, traditional remote workers must pay taxes since they are tax residents when they remain in one place for more than 183 days. However, if they leave before the conclusion of that time frame, digital nomads won’t be liable for taxes.
The truth is more complicated. The “183-day rule” is not always the main consideration for deciding whether you are a tax resident.
For instance, digital nomads may occasionally be subject to early taxes if they have a usual abode—a place they dwell more frequently than anyplace else—in their present location. Similarly, if a person has a center of important interests there, early taxation in some regions may occur (e.g., a family or an occupation).
The location of your bank account and the significance of your professional job are additional crucial criteria.
In the worst instance, it can even come out that you weren’t aware that you were subject to taxation. Therefore, it’s crucial that you don’t take the “183-day rule” for granted and carefully examine the guidelines for tax residence in the nation where you want to stay..
4. Understand the distinction between tax evasion and avoidance
You may be thinking right now that it is conceivable for digital nomads to pay less tax. But you have to know how to do it correctly. Even if the distinction between tax avoidance and tax evasion is negligible, neglecting it might have significant negative effects.
Tax avoidance strategies enable you to take advantage of the tax system to reduce your tax bill and increase your after-tax income, even if they may be morally dubious.
Tax evasion is something you must never do. The majority of tax authorities in the globe effectively fight tax evasion, and those who are found may face harsh fines or even be forced to pay back taxes plus a significant interest.
There are several ways to evade taxes. Falsifying your income to the appropriate tax authorities or even altogether omitting to report it are two examples of such actions. Additionally, it’s against the law to submit your personal costs as deductible company expenses.
If you want to be a digital nomad and reduce your taxes as much as possible, do a ton of study on the topic before you take any action. You don’t want your ambition of being a digital nomad to become a nightmare, after all.