In 1789, Benjamin Franklin wrote, “In this world, nothing can be said to be certain except death and taxes.”
Fast-forward to 2018 and Franklin’s words still ring true, especially for digital nomads. The lifestyle affords one the convenience to work anywhere and the freedom to travel anytime. But without a definite place of residence, dealing with taxes is tricky.
The whole subject of taxes is complex. But once you’re familiar with its fundamental rules, you should be able to figure out how to stay on top of your taxes wherever you are in the world.
In general, most countries have either a residence-based or citizenship-based tax system, or a combination of both.
Under the residence-based system, you need to pay taxes if you stay long enough in a certain country— even when you’re a citizen elsewhere. Most countries in the European Union follow this system.
In contrast, a clear citizenship-based tax system imposes taxes on individuals on their worldwide income no matter where they live. A prime example is the United States. The country requires its citizens whether living stateside or not to pay taxes when they earn $10,000 a year or $400 in self-employment.
There are also countries that set double tax treaties with other jurisdictions ("treaty partners") to avoid double taxation of one's income. These treaties define which taxes are covered on for citizens and tax residents.
For example, a nomad with property in his home country is assessed with real estate tax and continues to pay income tax in the country he is staying in.
If the same tax is payable to both countries, the treaty also states who between the two countries have the right to collect it. Alternatively, digital nomads can avail of tax reliefs where it will be possible to set off the taxes they owe in one country with the taxes they paid in another country or vice versa.
Although the time period varies per jurisdiction, visitors who stay for more than 183 days or roughly six months in a certain country will be taxed for income earned in that country.
Take a look at the tax and residency requirements of popular nomad destinations:
Regardless of where you are and how much you earn, there are steps you can take to stay on top of your taxes and avoid the deadline rush or late fees.
This can be an expense spreadsheet or an app-based system. Take note of deductible expenses like your laptops, school supplies, mobile phone, co-working space memberships, and the like.
If you run a blog or eCommerce site, you’d want to declare website hosting and domain fees and advertising expenses as part of deductible expenses.
Log these receipts on your spreadsheet and organize them by:
If you receive payments in different currencies, include a conversion rate to account for the fluctuations of currency.
Revisit your spreadsheet monthly or quarterly so it’s easier to tally by the end of the year. Keep the original receipts in a safe place if in case your local taxing authority asks for the original copies.
Aside from creating your own spreadsheet, there are apps that can help you file your taxes from your desktop or your mobile phone. Below are some of the best-ranked mobile tax apps according to PC Magazine:
You can opt to be a non-tax resident of your home country and choose to be a resident for taxation purposes in another country that charges minimal or even zero taxes on your income.
Below are some countries where this is possible:
One misconception that digital nomads have is that they would not have to pay any taxes at all if they set up an offshore account. As a general rule, you are liable for taxes in the country where you take up residence.
A better approach is to incorporate your freelance business into your tax residence. As soon as the business becomes stable, set up an offshore account. This approach lets you hit the proverbial two birds with one stone: you have proof of payment of income tax while enjoying the benefits of an offshore account. With the tax declarations, you have something to present if you need to make big investments in your tax residence and avoid potential trouble with local taxing authorities. At the same time, you diversify your portfolio and protect your assets from political risks.
If all else fails and you feel lost in the maze that is the taxation system, consider hiring an accountant that specializes in tax planning for digital nomads and expats. Compared to doing it yourself, these specialists are in a better position to advise you about your specific situation and what exemptions you can avail of. Having them file tax returns on your behalf saves you time and effort as well.
Taking care of taxes is rarely a walk in the park. But by keeping your financial life in order, you can avoid the shock of a huge tax bill or late payment fees so you can go out and enjoy your digital nomad life to the fullest.
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