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Isn’t it wonderful to think about giving up the nine-to-five routine and becoming a full-time traveler? The appeal of an unhampered existence appears carefree. Still, there’s at least one element of truth that shouldn’t be ignored – paying taxes.
While each situation is unique, there are specific typical guidelines that you should follow to avoid trouble with the IRS when you’re on the road, mostly involving taxes, work, and travel. Read on to find out what they are:
1. File Appropriately
“If I work overseas, do I pay taxes?” is a question that is asked often. When you leave home and are working remotely abroad, you’ll need to file several types of tax returns. If your permanent residence is still in the United States, you must continue filing annual US tax returns in addition to state income tax returns if applicable. You can use Form 1040-NR or 1040EZ-NR to file your federal tax return.
How to file taxes while abroad? Use Form 8843 to file your taxes on any income earned abroad by US citizens or residents, including wages, salaries, professional fees, and tips you may have received while working abroad for a foreign employer. You’ll need to attach this form with your annual tax filings if you meet specific requirements.
If you’re not required to file taxes for some reason but have taxable income from sources such as wages, bank interest or dividends, capital gains, rental real estate, and royalties – all of which would usually be taxed – you’ll need to file an FBAR (Report of Foreign Bank and Financial Accounts) with the Department of Treasury using Form 114.
As a citizen and resident of the United States, it is your responsibility to know what forms to file and when—letting this part slide can trigger significant penalties or even criminal charges.
2. If I Travel for Work, Where Do I Pay Taxes?
Every taxpayer has a tax home. This is the place where you maintain your permanent residence and are considered by US law to be living, even if you’re away for an extended period. For instance, if your spouse or children continue to live in your house while you travel worldwide, that might qualify as your tax home.
If you don’t have any fixed abode, your tax home is the general area where your permanent residence is located. If you travel extensively, it may be possible for you to designate more than one tax home so that you can file an election with the IRS stating which address(es) qualify as such.
3. Keep Records of Your Expenses
This is the most critical point that you should seriously consider. When filing taxes with the IRS, you will be required to report what you earned (income) and spent (deductible expenses). If the IRS audits you, there’s a good chance they’ll also probe into how much you spent on living expenses and other tax-deductible items to make sure that no numbers appear inflated or unreasonable.
If you’re still set on the idea of becoming a full-time traveler, then read up on tax laws that relate to your situation. You may even want to consult with a tax attorney or enrolled agent who can help you make sense of things once the business starts picking up.
4. Foreign Earned Income Exclusion
If you travel overseas for business, one way to lower your overall tax bill is by taking advantage of the Foreign Earned Income Exclusion. You may be subject to this exclusion if you are a citizen or national of the United States and qualify as either a bona fide resident of a foreign country for an uninterrupted period that includes at least one day during the tax year or you are physically present in a foreign country or countries for at least 330 days within 12 consecutive months. If either of these situations applies to your situation, then you may be eligible for an exclusion.
5. The Physical Presence Test
To pass the Physical Presence Test, you must simply be away from the United States for more than 329 days of the year. When traveling to and from the United States, it’s crucial to remember this exam and its requirements. Passing this tax test will likely save you a lot of money on US taxes.
What is a Digital Nomad?
A digital nomad is a person who uses telecommunications technologies to earn a living and, more generally, conduct their life in a nomadic manner. Such workers may also be called technomads, mobile workers, or location-independent workers. This remote working arrangement allows them greater geographical freedom to travel when they choose.
The term “digital nomad” may also be used more broadly to refer to any individual who uses telecommunications technologies such as Skype, cellphone, and broadband Internet to conduct business away from a fixed location.
Many people travel the world while performing remote work on a computer. This is especially true in developing countries where wages are low enough that most people can survive on their savings while living very modestly. In this context, being a digital nomad means having the technical skills and business acumen to maintain a remote income-producing lifestyle successfully.
This usually requires some level of expertise with web technologies (such as HTML), social media (such as Twitter), e-commerce (software such as Amazon Mechanical Turk), or online marketing (such as AdSense).
Your taxes don’t stop when you leave the US. If you travel full-time, it can be hard to keep up with your tax obligations and file an accurate return for every year. The process is also different depending on how much money you make and what type of income source(s) it comes from (e.g., salary vs. self-employed).