Tax Tips for Expats, Digital Nomads, and Other US Citizens Who Live Abroad

Expats, dual citizens, digital nomads: all people who may retain American citizenship but don't spend much time in the US which can lead to serious headaches at tax time. Here are some tips to help you understand your dual citizen and expat taxes.

Why Do I Need to File a Tax Return if I Don't Live in the US Anymore?

The United States and Eritrea are the only countries in the world that tax you based on your citizenship, not your residency. If you haven't turned in your passport, you still need to file a federal tax return even if you didn't have any US-sourced income. Even if you have to file a tax return in the country(ies) you've lived in most of the year, it doesn't relieve you of being obligated to file a tax return.

However, while you still have to file a return it may not mean you'll need to pay taxes. Whether you have to pay taxes depends on your sources of your income as well as how long you've lived outside the US during theyear. The income must be reported but may not necessarily be taxed.

You also may or may not need to file state income tax returns. If you own interest in a business as an investor or participating in it from around the world as digital nomads are wont to do, you need to worry about this more than an expat with a job. State taxes may also be a concern for you if you own rental real estate.

US Income Tax Relief if You Live Abroad

Your US-sourced income will still be subject to income tax regardless of the amount. For your foreign-source income, the two most common tax relief measures available to most expats are the foreign earned income exclusion and foreign tax credit.

The foreign earned income exclusion (FEI) for the 2015 tax year is $100,800. You can exclude up to $100,800 USD of foreign-sourced income from federal taxation while any income over that amount is not exempt. There are also certain residency and physical presence tests you must meet to qualify for FEI.

Self-employed expats can use FEI for US-sourced clients and gigs, but are still subject to self-employment tax unless you are a resident of a country that has a totalization agreement with the US.

The foreign tax credit is less strict than FEI when it comes to residency, in that you can claim a credit for foreign income taxes regardless of if you hold citizenship in that country or lived there most of the year. But you can't take both the credit and deduction, only one.

What Records Do I Need to Keep?

Keep track of dates you enter and leave the US as you must report how many days you lived abroad to claim FEI. Digital nomads need to be particularly careful with the "substantial presence" test, as hopping countries and states may mean just missing the 330 day mark of being able to claim FEI.

Carefully note how much you pay in foreign income taxes. If self-employed, make sure to keep track of where you performed services and for whom.

Dukhon Tax is available to assist dual citizens, expats, digital nomads, and other taxpayers living abroad with their federal and state tax concerns.


Is Living in a State with No Income Tax Really Easier on Your Wallet?

All Americans are obligated to pay federal tax income taxes, and most states (and some counties and cities) will also make their residents pay a separate income tax with a few exceptions. The following states don't have an income tax:

  • Alaska
  • Florida
  • Nevada
  • South Dakota
  • Texas
  • Washington
  • Wyoming

Sometimes, people include New Hampshire and Tennessee on that list because earned income (wages and income from self-employment) isn't taxed but those states do tax investment income like interest and dividends. The above seven states have
zero state income tax.

There are some tradeoffs that can come with having no tax on your wages and other income. Tennessee doesn't tax wages but has the highest sales tax rates in the nation, at a 7% base rate with local rates making total average 9.45% which is even higher than New York City's 8.875% sales tax. Texas and Nevada also have very high sales tax rates, which heavily compounds cost of living regardless of how much you earn.

States with High Property Taxes

While states with high income taxes like New York and New Jersey are also home to high property taxes, Florida gathers most of its revenue from sales tax but also has very high property taxes as does Texas. New Hampshire homeowners pay among the highest property taxes in the nation and have the highest in-state tuition at public colleges of any other state. Like sales tax, mounting effective property taxes can make basic living expenses tougher to shoulder and harder to stay in your home if your income falls because of illness, job loss, or the birth of a child.

States that rely predominantly on regressive taxes like sales tax (where the tax takes up more of the taxpayer's income as their income decreases) may also be more devious in other non-tax government fees such as traffic tickets, driver license fees, business licenses, and other public services and necessities. This is a form of taxation that doesn't seem as blatant as having to file a state income tax return alongside your federal one every spring, but it is how state and local governments make up for the shortfall.

High Natural Resources can Offset State Taxes

Contrary to the states that rely on sales tax, Alaska and Wyoming receive massive tax revenue from their natural resources that enables them to have lower costs of living than other states. Alaska is a notable exception in that being so remote and having to rely on imports makes basic expenses like food more expensive, but the state also grants a basic income to its residents through the Alaska Permanent Fund so all the residents can share in the natural resource royalties the state receives as its primary revenue source.

When pondering whether to move to a different state, tax policy alone usually isn't the deciding factor.

Moving for a job, the ease of setting up a business, or to be near loved ones may trump the economic reasons for moving to a low or no tax state. If you've lived in a high-tax state in your prime working years and having more money in your pocket sounds appealing, you should take a look at the state's general approach to public policy and see if it aligns with your budget and values. You might not care about high traffic ticket prices if you don't drive and high costs of getting a business license if you don't want to start a business, but no income tax could still mean some hidden financial pitfalls elsewhere.