Becoming a digital nomad is a dream come true for people who value true independence and prefer a more adventurous life.
Instead of working your traditional 9-to-5 job in one place until the retirement age, digital nomads are location-independent. In essence, they enable their travel-rich lifestyles while working remotely to earn their keep. However, becoming a digital nomad is not as simple as you may think.
Instead of working your traditional 9-to-5 job in one place until the retirement age, digital nomads are location-independent. In essence, they enable their travel-rich lifestyles while working remotely to earn their keep. However, juggling work tasks and exploring the longest beaches in the world simultaneously is not as simple as you may think.
One particularly confusing aspect of a digital nomad lifestyle is related to paying taxes. Most people live in one area all the time, so the matter of taxation is usually straightforward. But what about digital nomads who frequently change their location on a whim?
To help you understand this subject better, here are some useful tips regarding paying digital nomad taxes.
The advice here will be pretty universal and applicable to most digital nomad lifestyles, so it shouldn’t matter whether you’re a freelance SEO expert, a blogger or a discount voucher site owner.
Here are the best tips for navigating digital nomad taxes!
The first thing you need to know about paying digital nomad taxes is that there is a difference between domicile and residency.
Domicile can be defined as a place (e.g., a country) that an individual considers their permanent home or is substantially connected with. To illustrate a point, if you’re a kid, your parents’ home is considered your domicile. Even when you own a few residences, you still have the property you consider your ‘main one’ – the domicile.
On the other hand, residency is when someone lives somewhere for a certain period of time. It could be months or even years, but the fact remains that it is not permanent. For example, university students can consider their dorms as residences for the period of their studies – but their domicile is still their family home.
So how does it connect to digital nomads? In essence, even if you’re living for a longer period of time (say, a few years) in each country you visit, such places are still your residencies. Unless you decide to permanently settle down somewhere. your domicile is still located in your country of origin.
Now that you know what the difference between these two terms is, you need to check if you’re a tax resident in the country you’re going to live in.
As a digital nomad, you never know where your wanderlust will take you. After all, you have a remote job which covers your traveling expenses, so why not use this opportunity to its full potential?
You can find more information on how to legally reduce your taxes and optimize retirement planning at https://www.sovereignman.com/. However, before you start your adventure, it’s good to first become familiar with the different tax systems around the world and how they may apply to you.
This system is very rare, essentially being used only by Eritrea and more importantly, the United States. As the name implies, this system taxes individuals based on their citizenship.
If you’re a citizen of the United States of America, it doesn’t matter if you’re enjoying your digital nomad lifestyle in Nigeria or South Korea – you still have to pay your US taxes.
Under this system, digital nomads who still have the US citizenship need to declare their taxes to the US tax authority, the Internal Revenue Service. There is no way to stop paying these taxes unless individuals are willing to take drastic measures and renounce their US citizenship. Even then, they still have to cover the exit tax.
It is possible, however, to reduce the taxation somewhat by using the Foreign Earned Income Exclusion (FEIE). Unfortunately, there are certain requirements to be eligible for this form.
First of all, you need to have a tax home (the area where you are employed or do your business) in a country different from the USA. Additionally, you need to meet the physical presence test or the IRA bona fide residence test.
You also need to have a foreign-earned income. ‘Foreign’ here means that the income needs to be gained outside of the territory of the US, while ‘earned’ refers to salaries, wages or self-employment gains. This means that the passive form of income (e.g., interests or social security gains) do not qualify.
This system is the most widespread form of taxation model around the world, being used by more than 130 countries (e.g., Canada, Australia and many European Union states).
To explain it in simple terms, digital nomads who become tax residents in such countries (either through the 183 days rule or other means) have to pay taxes on their worldwide income based on the local laws, not on their citizenship.
As mentioned above, citizenship-based systems will force you to cover taxes as long as you’re a citizen of that country. Residence-based system is a much more digital-nomad-friendly approach than the citizenship-based model.
For example, if you’re planning to leave your country of origin and it has a residence-based taxation system, avoiding taxes is quite easy. You have to give up your primary residence there and don’t spend more than 183 days per year in said country. Your citizenship stays intact.
You can find this system in countries such as Thailand or Panama and in most tax haven regions. This model is probably the best choice for aspiring digital nomads, because of how it works.
In essence, countries with a territorial taxation system will only tax you if your income is generated inside said countries. As such, it’s entirely possible to live there tax-free if your main source of revenue is a foreign business.
Among many digital nomads, there’s a common misconception that short-term stays in foreign countries always shield you from paying taxes there.
The belief here is that traditional remote workers have to cover taxes because they’re staying in one area for longer than 183 days and therefore become tax residents. On the other hand, digital nomads who will move out before the end of that period won’t become subject to taxation.
The reality is not as simple. Manage your expectations to avoid situations of expectations vs reality. In many cases, the ’183 days’ rule is not the only factor determining your status as a tax resident.
For example, digital nomads may sometimes trigger earlier taxation if they have a habitual abode in their current location – a place they live in more frequently than anywhere else. Similarly, premature taxation in some areas may happen if the individual has a center of vital interests there (e.g., a family or an occupation).
Other important factors are the location of your bank account or how important your professional position is.
In the worst case scenario, it might even turn out that you’re eligible for taxation, but you didn’t know about it. As such, it is important that you don’t treat the ‘183 days’ rule as an indisputable fact and always read the rules and regulations concerning tax residency in the country you’re planning to stay.
At this point, you’re correctly thinking that it is possible for digital nomads to reduce their taxation. However, you need to know how to do it right. After all, the difference between tax avoidance and tax evasion is small but ignoring it can have big consequences.
The practices that belong to the tax avoidance category can be morally questionable, but are ultimately legal – they help you exploit the tax system to make your tax liability smaller and improve your after-tax revenue.
What you should never do is engage in tax evasion. Tax departments around the world usually prosecute evasion very efficiently and caught offenders might get punishing fines or even be ordered to pay the back taxes with a large interest.
Tax evasion can take many forms. A good example of such practices is falsifying your income to the valid tax authorities or even ignoring to mention it completely. It is also forbidden to incorrectly file your own spending as tax-deductible business expenses.
If you’re planning to minimize your taxes as much as possible as a digital nomad, always research the subject extensively before you do anything. After all, you don’t want your digital nomad dream to turn into a nightmare.
Paying taxes as a digital nomad can be a confusing matter. However, it is crucial that you understand how it works to avoid any potential issues and maybe even profit a bit.
You need to understand the different tax systems used around the world and how they change your tax situation. Knowing your way around them will allow you to plan your travels and work in a way that helps you minimize your tax liability.
Additionally, keep in mind that the line between tax avoidance and tax evasion is thin. You need to be very careful not to cross it, as the consequences can be punishing.
Don’t treat the ‘183 days’ rule as an infallible principle but rather a general idea – after all, many countries consider additional factors when determining your tax residency.
Finally, know the difference between a domicile and a residence – the former is usually your country of origin, while the latter can be any place you live in for a certain period of time.
Hopefully, these tips will help you sort out your taxation as a digital nomad and make the most out of your location-independent lifestyle! Good luck!
Max is a copywriter who loves to create engaging and informative content. He’s an avid fan of all things science fiction and futurism.