You don’t have to be tied to one place for a job anymore! A new popular trend is being a digital nomad! People are taking advantage of being able to do their job from their computer without having to be in an office. More and more people are living in places farther from their actual office and working remotely. Now living in Spain while you work for a company based in New York may sound great, but it is important to think of the tax implications of doing so. If you retain your U.S. citizenship, Uncle Sam will still want you to pay taxes on your income. Luckily, the process for filing your federal income tax return and paying your taxes is the same whether you live in Kansas City or Rome. You just have to remember to do both tax returns and on time!
No matter where you live or work, you must report all of your income. Whether that’s income from one job or several, you must report any income you are making. The IRS will need to know what you’ve earn in US Dollars, so you need to be aware of what the current currency exchange is for wherever you are versus the U.S. dollar. When reporting your earning you need to make sure that you report all your income. Even if you earned income abroad or in the United States, you need to report it all to the IRS. Also, if you are choosing to be self-employed and living abroad, don’t forget to make your quarterly estimated tax payments as if you lived in the United States. If you are self-employed in another country, you will still need to pay Estimated Tax Payments as if you were still living in the U.S.
One benefit for those working and living abroad is the Foreign Earned Income Exclusion. If you have the qualifying income, you can elect to exclude foreign earned income that is the result of your personal services up to $104,100. This applies to both employees and people who are self-employed. To qualify for this deduction, you must be a resident of a foreign country for the full tax year or be physically present in a foreign country for at least 330 full days in a 12-month period. You can also look at claiming a foreign housing cost amount exclusion from your gross income. This amount is your total housing expenses minus a “base housing amount” and is 16% of the maximum exclusion amount times the number of days.
One problem many taxpayers see that work in a different country is your income could be getting taxed twice: once by the foreign country you work in and by the U.S. The IRS realizes this and offers a tax credit for those that qualify. The Foreign Tax Credit is intended to help lower the amount you’re currently be taxed at. With this credit, you can either choose to take the amount of any qualified foreign taxes paid or accrued during the year as a foreign tax credit or as an itemized deduction. In most cases it is better to take the credit for qualified foreign taxes. This is because the credit will reduce your actual U.S. income tax on a dollar-for-dollar basis and you can choose to take the foreign tax credit even if you do not itemize your deductions.
If you’re worried about filing your tax return on time, know that the IRS does give you an automatic two-month extension to file your return and pay any taxes due without having to request an extension. Your deadline is now in June instead of April. IF you owe any penalties, these will be calculated based on the June date as well.
If you’re worried about filing your federal income tax return while you are abroad, Polston Tax can help. Our team of tax accountants can work with you on all the different tax deductions and tax credits and what income you need to claim. Call us today at 844-841-9857 or click below to schedule your free consultation.