US TAX FOR EXPATS & DIGITAL NOMADS

Grace Taylor, Gracefully Expat LLC

HELLO!I’m an Enrolled Agent (EA) with 10 years of experience specialising in US expat tax:

▪ Previous career in Big Four

▪ Now location independent digital nomad

▪ I provide consultations and tax preparation services to US expats & digital nomads

2

Big picture:While becoming a digital nomad may add complexity, your taxes may actually improve.

Today you’ll learn how to:Get the facts, make a plan,and get out there.

3

US EXPAT TAX BASICS

Overview of essential tax concepts for Americans living & working outside the US

*Disclaimer: Information provided is for general informational purposes only and is not intended as, nor does it constitute, tax advice.

CITIZENSHIP-BASED TAXATION

▪ All US citizens and Green Card holders are subject to worldwide taxation & reporting, no matter where they live or work

▪ US is unique in this regard

▪ However, there are methods by which US expats may reduce or eliminate US tax on foreign source income

5

Foreign Earned Income Exclusion (FEIE)

Primary mechanism by which US expats/digital nomads reduce US tax on foreign source income from working

6

Physical Presence Test (PPT)Physically present in a foreign country for at least 330 days in any 12 month period.

Does not need to be the same country.

FEIE - TESTS TO QUALIFY

Bona Fide Residence Test (BFR)Must be a ‘bona fide’ resident of a foreign country for a period that includes an entire tax year (Jan-Dec).

Typically requires permanent or long-term right to live/work in that country & other supporting facts.

7

FEIE - BASICS

Exclusion AmountThose who qualify can exclude up to $102,100 in tax year 2017. ($104,100 in 2018)

Income must be earned from working; investment income does not apply.

LimitationsDoes not apply to Self-Employment tax.

Freelancers & most entrepreneurs will still owe US Self-Employment tax (i.e. Social Security & Medicare, around 15%)

Filing RequirementsMust be claimed on form 2555, which is not always well-supported or well-understood by either conventional commercial tax software, or all US tax preparers.

8

$

FEIE - COMMON QUESTIONS

What if I...● have US clients?● work remotely for a US employer?● sell products into the US?● get paid in a US bank account?● use a US mailing address?● have a US LLC?

None of these preclude you from claiming FEIE if you qualify.

9

Steve Stays StaticIncome: $100,000 (W-2)

Federal Tax: $15,410

State Tax: $6,654

FICA: $7,650

Total tax: $29,714

Take home: $70,286

EXAMPLE: A TALE OF TWO TAXPAYERS

Danny Digital NomadIncome: $100,000 (location independent business)

Federal Tax: $0

State Tax: $0

FICA (Self-employment tax): $14,130

Total tax: $14,130

Take home: $85,870

10

$15,584SAVED

OTHER TAXES TO CONSIDER

11

US State Income Tax

Varies depending on which state you’re

from

Sales TaxIf you are selling

physical products into the US you may be

subject to state sales tax

Foreign Taxes If you are subject to

non-US income taxes you may be able to claim a Foreign Tax

Credit to offset

STATE TAX ISSUES

What are the tax issues in your state, and what to do about it

State tax can vary significantly from Federal:What are the good, the bad, and the ugly

states, when it comes to tax?

13

THE GOOD - STATES WITH NO INCOME TAX

Nothing to file:▪ Alaska ▪ Florida▪ Nevada▪ South Dakota▪ Texas▪ Washington▪ Wyoming

14

Interest/dividends only:▪ New Hampshire* ▪ Tennessee*

*Applies to residents only, & both states look to be in process of phasing the tax out

THE BAD - STATES YOU CAN BREAK UP WITH

▪ Nearly all other states allow you to ‘break residency’

▪ File part-year resident return in the year you leave

▪ If you qualify for FEIE, you can usually break residency in most states that have an income tax

15

THE UGLY - STATES YOU NEED TO WATCH OUT FOR

Hard to break residency▪ New Mexico▪ South Carolina▪ Virginia▪ California

16

Hard to break residency,AND doesn’t accept FEIE, OR honour international

tax treaties...▪ California

Bottom line: If you’re from California, talk to a tax professional.

Moving to another state before leaving the US may be advisable.

BE YOUR OWN BOSS

Tax tips for when you make the leap from employee, to free

Track & claim business expensesBest practice: track these throughout the year

Travel to clients, or to conferences (like this one, or Nomad Summit Chiang Mai!) can be a business expense

Consider a legal structure (i.e. an LLC)Simple to set up, doesn’t complicate your taxes or cost too much to maintain

Make quarterly estimated payments

i.e. for self-employment tax you’ll owe

18

OTHER CONSIDERATIONS

Trump Tax Reform, FBAR/FATCA, foreign taxes… here’s your executive summary

TRUMP TAX REFORM

Standard Deduction Increase

▪ Higher standard deduction likely to benefit digital nomads claiming FEIE

▪ Marginal tax rates lower overall; if you have taxable income over the FEIE max

Repatriation of Foreign Earnings▪ Only applicable to

taxpayers using foreign corps (i.e. an IBC) in their structure

▪ Retained earnings brought back into US tax

End of Obamacare mandate

▪ No practical impact, as taxpayers qualifying for FEIE got an exemption anyways

20

$

FBAR/FATCA

21

Foreign Bank Account Reporting (FBAR) -

Reporting requirement if aggregate value of all non-US bank/financial accounts exceeds $10,000 USD at any point in the tax year.

Filing deadline is now harmonised with 1040 (including extensions).

Filed online with Treasury Dept (FinCEN): https://www.fincen.gov/report-foreign-bank-and-financial-accounts

FATCA - Separate but related reporting required if non-US financial assets exceed certain (higher) thresholds; filed on form 8938 as part of individual tax return.

22

Foreign taxes may apply if you’re staying somewhere longer term, or setting up a base.

Foreign tax credits mean no double taxation

KEY TAKE-AWAY POINTS

Filing RequirementsAll US citizens or Green Card holders must file a tax return if required, even if they have $0 taxable income after FEIE.

Filing Deadlines -2018● April 17, 2019● Automatic extension to

June 15 for expats● Extension to Oct. 15 (file

form 4868)

FEIEMust be claimed via filing form 2555 to be valid. Can be claimed on amended returns or returns filed via Streamlined Filing Procedures

23

Self-Employment TaxMany self-employed US digital nomads will owe SE tax. Should consider making quarterly estimated payments.

FBARIf non-US bank/financial accounts exceed $10k. No tax due w/ this form but hefty penalties can apply for non-compliance. File at the same time as your tax return.

To-Do● Track your US days for PPT ● Track income/expenses if

self employed● File timely/catch up on

filing

US expat/digital nomad tax issues may be complex,

but don’t get overwhelmed.

A qualified tax professional can help you get back

to doing what you do best: growing your business

& enjoying your lifestyle.

24

25

THANKS!ANY QUESTIONS?You can contact me at:

▪ grace@gracefullyexpat.com

Or schedule a consultation at:

▪ gracefullyexpat.com/work-with-me/

Check out my digital nomad tax course:

▪ gracefullyexpat.com/courses/

CREDITS

Special thanks to all the people who made and released these awesome resources for free:

▪ Presentation template by SlidesCarnival▪ Photographs by Unsplash

26