The digital nomad lifestyle grants you a lot of freedom. Sadly, it doesn’t grant you freedom from taxes. If you’re an American citizen, then the citizenship-based tax system means you need to file your taxes regardless of where you reside. Other countries have different policies, but rarely can digital nomads skirt by without paying any taxes.
So, the challenge becomes how to reduce your tax burden. Whether you prefer to reach out to experts who can help you with your individual tax return or go it alone, below are five tips for minimizing what you owe:
1. Avoid penalties by filing on time
Filing your taxes on time helps you avoid the penalties or fines that can come from late filings. To make this easy, ensure you keep accurate records of your income, expenses, and any other relevant information throughout the year. Then, note down tax deadlines on your calendar and set reminders so you don’t forget.
2. Use tax treaties to avoid double taxation
Tax treaties between countries serve to prevent double taxation. So, if you reside in a country that’s different from your home country, a tax treaty can prevent you from being taxed by both, and hence, reduce your overall tax burden
For example, if you’re a digital nomad from the U.S. who currently resides in Thailand, you may be able to exclude up to $120,000 of your foreign-earned income from US taxation. The specifics of these tax treaties can be pretty complex, so we recommend reaching out to a tax pro to see if and how it applies to your situation.
3. Deduct your business expenses
Business expenses can include costs associated with travel, accommodation, equipment, and other things necessary for conducting business. That might include a plane ticket to an industry conference, a fully-furnished home office, or software you rely on for your job.
Claiming these business expenses as deductions can reduce your taxable income, leading to a far more manageable overall tax liability. Let’s say, for example, you’re a digital nomad who works from a home office. If you earn $50,000 a year but spend $10,000 to run your business, you can claim the $10,000 and only pay taxes on $40,000.
4. Put money in tax-advantaged accounts
Although you may be a few decades away from retirement, it’s important to plan how you’re going to pay for it. One way is through tax-advantaged retirement accounts. For American citizens, this usually means IRAs or 401(k)s, while for Aussies, it’s typically a superannuation fund. Names and specifics aside, these accounts help reduce your taxable income.
For example, digital nomads who contribute money to an IRA can see their earnings grow tax-free until withdrawal. Meanwhile, employed Aussies can salary-sacrifice into their super, while low-income earning freelancers can take advantage of government co-contributions.
5. Set up shop in a low-tax jurisdiction
Digital nomads who own companies can lower their tax burdens by setting up their companies in countries or counties with low taxes. This is a bit more complicated than deducting business expenses or opening an IRA, so it requires very careful planning and expert help. However, if done correctly, it can significantly reduce how much you owe.
For example, Estonia doesn’t require you to pay corporate income tax if the profits are kept inside the company. Malta, Hong Kong, and Singapore also have low corporate tax rates.
The digital nomad lifestyle allows for plenty of freedoms, but not the freedom to disregard taxes. Keep the above five tips in mind to legally reduce what you owe and enjoy how you work—wherever you are!
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