What items qualify for tax deductions? Are the rules different for digital nomads?
Every year, it can be a struggle to file your taxes. You want to make sure you are filing correctly so that you don’t get in trouble with the IRS or other government tax revenue collector, but you also want to ensure that you are saving as much money as possible.
Going overseas can help you lower your tax expenses. Digital nomad tax deductions can lower your tax obligations even further.
As you continue to read, you’ll find out more about what you can count as a tax deduction and what you need to know about filing taxes as a digital nomad living overseas.
In this article, we’ll discuss:
- What is a tax deduction?
- What qualifies for tax deductions?
- Tax Deductibles: office space and supplies
- Tax Deductions for Bloggers
- Is an Airbnb tax deductible?
- Tracking Your Expenses
- US Taxes for Nomads
- Foreign Earned Income Exclusion
- Avoiding Double Taxation
- US Self-Employment Tax
- Other Reporting Requirements for US Nomads
- Australian Taxes for Nomads
- Canadian Taxes for Nomads
- UK Taxes for Nomads
WHAT IS A TAX DEDUCTION?
A tax deduction allows you to subtract an amount from your taxable income. These are expenses that can be subtracted from or applied against your gross income when you are figuring out how much tax you owe.
The standard tax deduction is the flat amount that the tax system will let you deduct with no questions asked. You have the option to claim an itemized deduction by adding up all of your deductible expenses or you can deduct a flat amount of the standard tax deduction. The amount you can claim for your standard tax deduction is based on your filing status.
If you choose to add up all your deductible expenses, you will need to be prepared to provide evidence to the IRS if they ask. While claiming an itemized deduction will take more work than claiming a standard tax deduction, it can save you even more money.
WHAT QUALIFIES AS TAX DEDUCTIBLE?
For those who are self-employed and working overseas, what can you count as a deductible expense? Any expense you have to pay in order to earn your living is deductible.
What is included in your digital nomad tax deductions?
For something to be considered a tax deduction it needs to be a usual, reasonable, and necessary expense for your line of work. There are two types of expenses that you can claim as a tax deduction: capital expenses and operating expenses.
Capital expenses are all of the physical devices you need for your business to function and grow. A capital expense is an investment into the business and its future. This can include laptops, tablets, phones, etc.
Operating expenses include what you need to function from day to day. These are expenses you incur while doing regular business, such as the cost of goods sold. This can also include the cost of office supplies, utilities, licensing fees, property taxes, and insurance.
TAX DEDUCTIBLES: OFFICE SPACE AND SUPPLIES
You can deduct costs spent on office space or the cost of a coworking membership. You can also deduct the cost of office supplies and expenses including notebooks, pens, printing costs, and even WiFi.
Your laptop and computer equipment is another deductible expense. Your phone expenses can be deductible as well. If you are wanting to deduct the cost of your laptop in Canada, Australia, the US, or the UK, you can only deduct the amount that your laptop is used for work. If half of the time you use your laptop is for work and the other half is for personal use, then you can only deduct half of the cost of the laptop.
If you have a work phone that is necessary for your business, then you can deduct the cost of your phone and SIM card.
Paypal fees or other banking fees that you have to pay in the process of getting paid your income are also deductible. Legal expenses, accounting expenses, and professional fees (such as the cost of a license or insurance that you need to operate your business) are deductible expenses.
Costs for any memberships or subscriptions for your work or any expenses for education related to your field can be deducted.
DEDUCTIONS FOR BLOGGERS
What digital nomad tax deductions exist for nomads who run a website or blog?
If your work includes running a blog or website, you can deduct the cost of your website hosting or domain fees. You are also able to deduct other marketing expenses including what you pay for newsletter programs, operating platforms, or click funnels.
Your advertising expenses, such as the expenses you paid to boost posts on Facebook, are deductible. So are any educational expenses, such as the cost of a blogging course, that you took to learn to better run your business.
The cost of paying any affiliates to help sell your products, virtual assistants, or employees can also be deductible.
If you are a travel blogger, many of your travel expenses will also be deductible.
IS AN AIRBNB TAX DEDUCTIBLE?
Can you count Airbnb as a tax deduction?
If you have to travel for your job, staying at an Airbnb could possibly be deducted as a travel expense. This won’t work if you are traveling constantly. An Airbnb can be counted as a travel expense if you are temporarily traveling outside of your tax home for work purposes.
Your tax home is most likely going to be your place of regular business. If you don’t have the main location for your business, your tax home is going to be where you live.
TRACK YOUR EXPENSES
In order to take advantage of the above-mentioned tax deductions, you’ll need to make sure you are carefully tracking your expenses and keeping your receipts. You’ll want to sweat the details.
Find a way that you can keep and organize your receipts. Keep a document, spreadsheet, or another app or program that will help with your organization, but don’t throw the original receipts out. If you are ever audited, you’ll have to be able to provide the original receipts that show your expenses.
US TAXES FOR NOMADS
Americans living abroad are still required to pay US taxes. The United States has citizenship-based taxation. This means that as long as you are considered a US person, you will be required to file and pay US taxes, no matter where you live in the world.
US persons include US citizens as well as US green cardholders.
As a digital nomad living overseas, you’ll still be required to file your taxes with the IRS annually by April 15.
FOREIGN EARNED INCOME EXCLUSION
The US has tax deductions specifically for US persons living overseas. The Foreign Earned Income Exclusion allows US persons overseas to exclude the first about $100,000 of their income from US federal income tax.
The amount you can exclude is adjusted each year. In 2021, you can exclude $108,700. If your total worldwide income is under this amount, you will be able to reduce your US tax federal tax obligation to zero by claiming this exclusion.
To qualify for the Foreign Earned Income Exclusion, you need to be able to pass one of two tests: the physical presence test or the bona fide residence test.
The physical presence test requires that you spend more than 330 days of a year outside of the United States on foreign soil. You’ll need to keep track of your days. Days spent traveling to and from the US won’t count as days on foreign soil.
To pass the bona fide residence test, you’ll need to establish a tax home outside of the United States. This means you’ll need to become a tax resident in a foreign country.
You are still required to file your taxes. In order to use the Foreign Earned Income Exclusion, you’ll need to claim it on your tax forms.
AVOIDING DOUBLE TAXATION
As an American residing overseas, both the United States and your country of residence will want to tax you. Luckily, the United States has another tax deduction for US persons living overseas called the Foreign Tax Credit which allows you to avoid double taxation.
You can claim this if you have a tax home outside of the United States where you are obligated to pay tax. The tax you pay there can be deducted or excluded as a dollar-for-dollar credit from your US income tax.
If you are living in a high-tax country, and your tax obligations there are higher than your tax obligations in the United States, your Foreign Tax Credit can cancel out your US federal income tax obligation.
If your tax obligation in your foreign tax home is lower than your US tax obligation, then you can deduct your foreign tax cost from your US tax cost and just pay the excess amount to the United States.
Foreign Tax Credits can not be used on top of the Foreign Earned Income Exclusion. However, your Foreign Tax Credits may be used to cover the excess money that was not covered by the Foreign Earned Income Exclusion.
US SELF-EMPLOYMENT TAXES
The money that you exclude through the Foreign Earned Income Exclusion excludes you from federal income tax, but it does not exclude self-employment taxes including Social Security and Medicare.
However, you may be liable for the Self-Employed Contributions Act (SECA) tax which means you will be able to pay your Social Security tax to the country where you reside rather than paying it to the US. This only works if your country of residence has a Totalization Agreement with the US.
The IRS may ask for a Certificate of Coverage from your country of residence in order to prove that you are paying a Social Security tax somewhere. If you aren’t paying Social Security tax to another country, then you won’t be exempt from paying Social Security in the US.
What countries have a Totalization with the United States?
- Czech Republic
- Slovak Republic
- South Korea
- United Kingdom
OTHER REPORTING REQUIREMENTS FOR US NOMADS
What other things are you required to report as a US person living overseas?
The Foreign Account Tax Compliance Act (FATCA) requires you to report your foreign assets using Form 8938. You have to declare this on your tax return if you have over $200,000 worth of foreign assets, not including your home.
The Foreign Bank Account Report (FBAR) requires you to report your assets in foreign accounts, such as checking accounts, savings accounts, or pensions, if your foreign assets total up to more than $10,000.
AUSTRALIAN TAXES FOR NOMADS
Filing your taxes as an Australian living a nomad lifestyle is a bit easier. Australia has an online tax system that is pretty simple to use.
Australia does not have citizenship-based taxation, which means it’s possible to leave Australia and no longer pay taxes there. However, this is going to be dependent on whether or not you are still considered an Australian tax resident.
CANADIAN TAXES FOR NOMADS
Your tax filing obligations as a Canadian are going to be dependent on your residence status. The four main resident categories in Canada are factual resident, non-resident, emigrant, or resident.
A factual resident is a Canadian who is living outside of the country, but still has significant ties to Canada or is living overseas temporarily. As a factual resident, you will still be required to report your worldwide income on your Canadian tax return.
To become a tax non-resident of Canada, you may have to cut any substantial economic or residential ties to the country, file official forms, and pay a departure tax. If you become a non-resident of Canada, you won’t be required to file a Canadian tax return in the future.
UK TAXES FOR NOMADS
Your tax filing obligations in the United Kingdom are going to be determined by your residence status. As a UK resident who is traveling overseas, you will still be required to file your taxes to the UK.
To get out of filing and paying any UK tax, you’ll need to leave the UK and become a non-resident.
Tax deductions are a great way to save money regardless of where you hold your citizenship. Take advantage of the tax deductions available to digital nomads to lower your tax expenses even further. All the time and effort required to keep track of these deductible expenses will be worth it when you see how much they can lower your tax bill.
Apart from your itemized deductions for work, don’t forget to look into large deductions available for US persons overseas. Utilize the Foreign Earned Income Exclusion or Foreign Tax Credit to lower your tax to as low as zero.