One of the enduring legacies of the COVID-19 pandemic is that thousands of companies that transitioned to remote work intend to remain either 100% remote or employ a remote/office hybrid model permanently.
Firms have already adopted online platforms and tools to facilitate remote work, and they have learned to trust and manage their remote employees. In fact, many employers have seen the benefits of a remote workforce, such as reduced overhead costs and increased employee productivity.
From an employee perspective, the lack of a commute provides more time in the day as well as cost savings, and there can be a liberating sense of autonomy in the remote workplace.
With international travel restrictions easing, the transition to working remotely also offers the opportunity to move abroad, either to live in another country or to become an international digital nomad. This opportunity exists for employees as well as for many business owners who were previously anchored by brick-and-mortar office environments.
The appeal of working remotely from abroad is not just the fun and freedom of exploring new and exotic lands without taking a career break; there’s often a tax benefit to working remotely from abroad.
TAX REPORTING REQUIREMENTS IF YOU WORK REMOTELY ABROAD
Americans working abroad still have to file a U.S. tax return every year. This is because the U.S. taxes those who are citizens, whether or not they are currently residing in the country.
If you live in another country, you may have to pay foreign taxes, too. Neither paying foreign taxes nor international tax treaties prevent Americans living abroad from having to file U.S. taxes, however.
TAX BENEFITS OF WORKING REMOTELY ABROAD
While, as an American working remotely from abroad, you’ll still have to file a U.S. federal tax return every year, it’s often possible to reduce your U.S. income tax to zero. To achieve this, some planning is advisable before moving abroad to ensure that you meet all of the criteria.
For example, some states may still want you to pay state taxes after you move abroad. While rules vary from state to state, this may be due to having certain ongoing ties to the state, such as property, financial accounts, or dependents, or just an intention to return. Some people actually move to an income tax-free state before moving abroad to avoid having to pay state taxes from abroad, but for most people, this isn’t necessary.
In terms of foreign taxes, if you’re planning to become a digital nomad, it’s fairly straightforward to travel from country to country in a way that means you won’t become a tax resident in any single country. Different countries have different rules, of course, so it’s important to research each country’s tax rules to ensure you don’t unintentionally find yourself liable to pay foreign income tax.
To reduce your U.S. federal tax bill, you’ll need to spend 330 days or more outside the U.S. in the 365-day period after you move abroad. Doing so allows you to claim a tax benefit for Americans abroad called the Foreign Earned Income Exclusion. The Foreign Earned Income Exclusion (FEIE) states that the first $108,700 (in 2021) of your earned income can be excluded from U.S. federal taxation. To claim the FEIE, you’ll need to file form 2555 when you file your form 1040.
When planned accordingly, an American who earns less than the FEIE’s earned income limit, who isn’t required to pay income tax in another country, and who doesn’t have to pay U.S. state taxes, won’t owe a penny of income tax anywhere.
While it can take a bit of planning (and it’s always sensible to seek a specialist’s advice to ensure that you’re fulfilling all the necessary criteria), working remotely from abroad can yield surprising tax savings, allowing you to save or invest your additional income while also enjoying the uplifting experience of exploring the world.
Looking forward, I can see some employers considering to promote or even incentivize working remotely from abroad as an employee perk—energized, happy employees can only be good for business.
Katelynn is a CPA, a partner, and COO at Bright!Tax Expat Tax Services, the award-winning U.S. tax provider for Americans living overseas.