Home Business Insights & Advice Tom Griffiths on does working remotely from abroad provide tax benefits?

Tom Griffiths on does working remotely from abroad provide tax benefits?

by John Saunders
26th Jul 21 12:46 pm

The global pandemic has turned the business world on its head in many respects and created a shift in working styles no one could have predicted. Although some companies and organisations were moving toward a more flexible approach to their working hours, very few took it so far that you could be working remotely for a company in Japan when you were based in France. This style of work was mostly reserved for freelancers and international travellers, not your everyday employee.

Since the impressive rollout of the Covid-19 vaccine, international travel looks likely to open up later in 2021, which is excellent news for businesses that rely on people needing to be physically in a place of work. However, many companies have now shifted to working remotely and seen an increase in staff productivity because working remotely also saves time and money, the two sacred elements of a successful organisation.

In direct response to this new trend, some countries have now brought in a digital nomad visa to enable people who want to work remotely long term and effectively become ‘techpats’ (which is just a new way of saying, digital nomad). Some countries already allowed this type of movement and settlement; however, due to months of travel restrictions, many countries have now seen the benefit and are trying to encourage remote workers to make their country their temporary home for a while.

Eager global remote workers from the US should consider the US tax system when looking into working abroad because America requires all citizens to file a yearly federal tax return, even if they’re living on the other side of the globe.

But, fear not, there is a benefit for Americans who want to embark on the digital nomad lifestyle and live/work abroad. This benefit is called the ‘foreign earned income exclusion’, and claiming for this exclusion when filing your taxes from overseas could reduce the amount owed to $0.

But few Americans know about a surprising tax benefit available for Americans who live and work abroad. It is called the foreign earned income exclusion. Claiming this exclusion when filing U.S. taxes from abroad can, in many cases, reduce one’s U.S. tax bill to zero.

Each country has its tax system for digital nomad visas, so it is essential to do the homework and seek advice from a tax advisor and experience in expatriate taxes. But it’s worth noting that some countries with digital nomad visas do not tax the income earned in that country. If an American is working abroad but for an American company or freelancing for US clients, it is possible to claim the foreign earned income exclusion and pay no income tax.

This provides Americans with the life-changing potential to live and work in other countries, experience their culture and embrace a different lifestyle, all while still working for ‘home’. The only downside to this could be some rather challenging working hours!

The foreign earned income exclusion can also be utilised for Americans who work remotely while travelling abroad and don’t wish to remain in one country.

Eligibility for the foreign earned income exclusion

To be eligible to claim for the income exclusion, US citizens must prove they are legitimately living abroad via two IRS tests called a physical presence test and a bona fide residence test.

The physical presence test requires a demonstration that at least 330 of the 365 days were spent living outside of the US. The bona fide test requires a demonstration that the claimant is a permanent resident in another country. The 365-day requirement does not necessarily relate to a calendar year and is therefore not rigid. A digital nomad visa from another country will usually suffice as proof of bona fide residence.

Us citizens who earn over $108,700 may be eligible to claim further credits or exclusions such as the Foreign Housing Exclusion, allowing US citizens to exclude a proportion of their housing expenses if they rent a home abroad. This is a potential added benefit for those working remotely from abroad.

There are some circumstances where it’s possible to mitigate the social security tax requirement for those working remotely from abroad for American companies or clients, but this is a little more convoluted.

It is always advisable to seek the support of an ex-pat tax advisor who can help navigate the challenges one faces when working or living abroad, especially if this is the first foray into working remotely on an international basis.

Tom Griffiths is a tax advisor and consultant specialising in US expatriate tax matters. Please contact Tom Griffiths to discuss how working remotely from abroad could provide tax benefits in more detail.

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