Living Abroad & Working Online: The Reality of Becoming a Digital Nomad

You’ve escaped the daily grind of a 9-5… but not the IRS

If you work remotely while traveling abroad as a U.S. citizen or permanent resident, there are several things you should consider including digital nomad taxation

Lifestyle Changes

Traveling the world while maintaining a steady flow of income is challenging but not impossible. While gaining new experiences and immersing yourself into new cultures can be wonderful, it can also be shocking. Culture shock – or the feeling of unease and discomfort when put into an unfamiliar culture – may hit you harder than expected. You should also be prepared for the cost of living to vary, among other financial aspects.

Among many challenges, avoiding avoid any unwelcome surprises come tax season can save you from dealing with the IRS as a digital nomad.

Tax Implications

1. Worldwide Income Reporting
   • U.S. citizens and permanent residents are required to report ALL income, whether it is sourced from the U.S. or abroad. 
   • Self-employment, freelancing, remote employment, digital assets, and investments are included in worldwide income
2. Offsetting Double Taxation
   • Foreign Earned Income Exclusion (FEIE) – Exclude up to $126,500 (adjusted for inflation annually) with Form 2555
   • Foreign Tax Credit (FTC) – Offset U.S. tax liability with foreign taxes paid using Form 1116
   • Tax Treaties – Can reduce or eliminate certain taxes (e.g., on pensions, dividends, royalties)
3. Foreign Bank Account Reporting (FBAR)
   • FinCEN Form 114 must be filed if your aggregate foreign account balance exceeds $10,000 at any time during the year.
   • Separate from your tax return
     • Huge penalties for failing to file (civil: up to $10,000 per violation; willful: greater of $100,000 or 50% of the account balance).
4. Foreign Account Tax Compliance Act (FATCA)
   • Form 8938 must be filed with your tax return if you have specified foreign financial assets over certain thresholds (e.g., $200,000+ for single filers abroad).
   • Similar to FBAR, but broader in scope (includes investments, foreign pensions, trusts)
5. Self-Employment and Medicare Taxes
   • U.S. self-employed expats may still owe self-employment tax (~15.3%) unless protected by a totalization agreement with their host country.
   • Self-employment tax cannot be excluded with FEIE
6. Cryptocurrency and Digital Payments
   • Digital nomads often get paid in crypto or through global platforms (PayPal, Wise, etc.).
   • The IRS treats crypto as property—capital gains apply on trades and sales.
7. State Tax Obligations
   • Some states (e.g., California, Virginia) are aggressive about taxing former residents unless you sever ties.

Roles of a CPA

• Prepares and files tax returns (Form 1040 and related forms).
• Manages complex income streams from multiple sources
• Provides strategic tax planning to maximize credits, avoid double taxation, and minimize liability.
• Analyzes tax implications of applying FEIE, FTC, and Tax Treaty benefits
• Determines if you need to report foreign financial assets by filing FBAR, FATCA, or Form 8621 to avoid hefty penalties for noncompliance.