25 Jul Are there tax benefits to working remotely abroad?
Although some companies are adopting a more flexible approach to working hours, very few took it so far that you could be work remotely for a company in Hawaii while based in Spain. This remote working style mainly was reserved for freelance workers and international travellers, not your everyday person.
Due to the quick rollout of the Covid-19 vaccination programme, international travel is now starting to open up, which is excellent for businesses that require employees to be at work physically. Many companies have switched to remote working and seen increased working from home productivity because remote working saves time and money.
Due to this new trend, some countries have brought in a ‘digital nomad visa’ for those who wish to working remotely long term and live the digital nomad lifestyle. After months of travel restrictions, many countries are encouraging remote workers to make their country their home for a while.
Those who want to work remotely from the US should consider the US tax system before doing so because the USA requires all US citizens to file an annual federal tax return, even when living on the other side of the world.
Thankfully, there are benefits for Americans who want the digital nomad lifestyle and enjoy working remotely abroad. It is called the ‘foreign earned income exclusion’, and it could mean the tax owed could be reduced down to $0 when claiming for this exclusion and filing taxes from overseas.
If an American is working abroad but for an American company or freelancing for US clients, it is possible to claim the foreign earned income exclusion and pay no income tax. Each country has its tax system for digital nomad visas, so it is essential to do the homework and seek advice from a tax advisor and experience in expatriate taxes.
This provides Americans with the life-changing potential to live and work in other countries, experience their culture and embrace a different lifestyle, all while still working for ‘home’. The only downside to this could be some rather challenging working hours!
Foreign Earned Income Exclusion Eligibility
Eligibility requires US citizens to prove they are legitimately living abroad via two IRS tests called a physical presence test and a bona fide residence test.
The physical presence test means at least 330 of the 365 days were spent living outside the US. The bona fide test requires the claimant to prove they are a permanent resident in another country. The 365-day requirement does not necessarily relate to a calendar year and is therefore not rigid. A digital nomad visa from another country will usually suffice as proof of bona fide residence.
Us citizens who earn over $108,700 may be eligible to claim further credits or exclusions such as the Foreign Housing Exclusion, allowing US citizens to exclude a proportion of their housing expenses if they rent a home abroad. This is a potential added benefit for those working remotely from abroad.
It is always advisable to seek the support of a UK and US expat tax advisor to help navigate challenges faced working remotely abroad, especially if this is the first foray.