“Nothing is certain except death and taxes” – even for digital nomads. Benjamin Franklin’s famous quote is, unfortunately, true no matter which country you live in, but it’s another level of reality if you are from the United States. Navigating the ever-changing world of taxes as a digital nomad can get tricky, especially for business owners, but there can also be benefits and tax breaks when you move abroad.
Moving across states in the U.S. usually means immediate residency establishment for business owners. This process involves transferring your business to the new state. Relocating to another country, however, doesn’t necessarily complicate your U.S. business affairs. Many countries are indifferent to you running a U.S. business while residing overseas. They might even offer enticing digital nomad visas. However, living abroad doesn’t free you from filing and paying U.S. taxes. Here are key tax implications for U.S. business owners moving abroad:
Foreign Earned Income Exclusion (FEIE)
If you become a resident of another country or spend over 330 days outside the U.S., you could qualify for FEIE. This benefit can make up to $120,000 of your 2023 income non-taxable abroad. It applies to “earned income,” which includes W2 wages but not S-corp income or dividends. Note that the FEIE doesn’t cover self-employment taxes, so you might still owe taxes if your income is below the exclusion threshold. In some cases, the requirement to pay self-employment tax may be excludable, but this usually requires proof that you are paying for medical insurance and social security in your new country of residence. Please check with an accountant to be sure.
Foreign Housing Allowance
Besides FEIE, you might also qualify for this, which allows an additional 30% exclusion. Note that this exclusion is usually only applicable if you are earning W-2 wages and are paying for your own housing. In 2023, this could mean around $156,000 of tax-free income. This amount can increase if you live in a city with a higher living cost than the U.S. average.
Foreign Business Considerations
Starting a business abroad involves complex tax implications for U.S. citizens. It requires multiple forms with your tax return, and failing to file them can lead to significant penalties. Engaging with international tax strategists and accountants is vital in this scenario, especially if your earnings exceed $500,000 annually.
FinCEN Requirements
Opening a local bank account abroad necessitates filing Form 114 with the U.S. Financial Crimes Enforcement Network (FinCEN). This is only required if the balances of all of your foreign bank or investment accounts add up to $10,000 at any point in the year. This form is straightforward and available online. FinCEN threatens large penalties for those who fail to file this form but exceed the $10,000 limit.
Foreign Tax Credits
Tax residency in a foreign country often leads to local tax obligations. The IRS offers credits for taxes paid abroad. For instance, if the local tax rate is 20% and the U.S. rate is 40%, you’ll owe the 20% difference to the IRS. Conversely, if the local rate is higher than the U.S. rate, you won’t owe the IRS but also won’t get a refund on the difference. Hence, avoiding local taxation can be beneficial.
Residency in Country With 0% Tax From Foreign Income
In countries like Panama, Paraguay, and Georgia, digital nomads often benefit from favorable tax rates on foreign income.
For instance, Panama offers a territorial tax system, meaning income earned outside of Panama is not taxed.
Paraguay attracts digital nomads due to its low taxes on foreign-sourced income. Non-residents pay 0% while Paraguayan residents are subject to 10% on your worldwide income.
Georgia also provides attractive tax regimes for foreign entrepreneurs, with Georgia having a flat tax rate of 1% for revenues up to 500,000 Georgian Lari (GEL) (about $187,000) and 3% above this amount. For micro-businesses with income up to 30,000 GEL (just over $11,000), the rate is 0%.
Moving abroad as a U.S. citizen can yield significant tax advantages, like the FEIE and Foreign Housing Allowance, which can result in over $156,000 of tax-free income. However, it’s essential to understand the filing requirements, such as the Form 114 for foreign bank accounts, and the tax treaties in place in your resident country. Please have a consultation with your accountant to navigate these tax benefits effectively before moving abroad.