Becoming a Digital Nomad

Working remotely while abroad has obvious appeal. Keep in mind that different destinations have different tax consequences. Here’s a look at how working remotely from abroad could affect your take-home pay.


Working from outside the United States for a few weeks or months

If your trip is just for a few weeks, you will probably be OK. A general rule of thumb is that you should leave before six months if you want to avoid having to file a tax return in a second country, but there are exceptions.


If your trip is longer than a few months, consider a destination that offers digital nomad visas that will exempt you from local taxes, as long as your employer is based outside of that country.


Beach destinations including the Cayman Islands, Bermuda, Aruba, Costa Rica, Antigua and Barbuda have six-month- to two-year programs that allow people earning money abroad to stay without paying local tax. 


You are still on the hook for U.S. taxes

The United States is one of the few countries that taxes its citizens, not just residents, on their worldwide income. That means that if you are a U.S. citizen, you will have to keep paying federal, state and local taxes.


If you pay foreign income tax, you may be able to get a credit or deduction when filing your U.S. income tax return if the country you work from has a bilateral tax treaty with the United States. But rules vary. There is not a uniform way of doing this, and that’s one of the biggest issues.


If you qualify for the Foreign Earned Income Exclusion, your first $108,700 is exempt from U.S. income tax. But keep in mind that this applies only if you’re a U.S. citizen who resides in a foreign country for more than 330 days within 12 consecutive months, not including time on planes, or if you are a bona fide resident of a foreign country. (You would still have to pay federal and state taxes on unearned income including interest, dividends and capital gains.) It is important to track the number of days abroad to be able to prove to U.S. tax authorities that you were there.


Don’t forget about your state taxes


The rules are complicated and vary by state, so keep track of how many days you spend working in each state. If you decided to ride out the pandemic at your out-of-state vacation house or with your parents in the suburbs, you may be in for an unpleasant reality: a hefty tax bill.


Some states impose income tax on people who work there for as little as a single day. Even before the pandemic, conflicting state tax rules were creating issues for the increasing number of people who were working remotely,


The state where you have your primary residence typically can tax your worldwide income, and any state where you earn income also has the right to tax you on the income you earn in that state. That immediately creates a possibility of two separate states taxing the same income.


Many states offer credits for taxes paid to other states, and that may ease the burden. But if the state where you have relocated does not have a reciprocity agreement with the state of your primary residence, you could be subject to double state-income taxation.


As long as you still have a primary residence in the state where you had been working and intend to return there you are still a resident. The same applies for people who have moved to the Hamptons for the last few months — they will not be exempt from New York City tax if they return to the city once the pandemic is over.


Get your boss on board

Employers need to know where their employees work in case their presence leads to corporate tax obligations abroad. The risk is higher when employees are bringing in revenue for companies, such as in sales positions,


Still, many companies are operating on a “don’t ask, don’t tell” policy. As more people work from abroad, it may be harder for companies to turn a blind eye. About 10.9 million Americans last year described themselves as digital nomads — people who work remotely and tend to travel from place to place — up from 7.3 million in 2019. The tax system globally right now is not prepared for what the work force is going through. At some point we’ll see a system where people are asked on the way in or out if they were working and countries will try and get some more tax revenue from this very mobile work force.

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