2 ms·

This depends on how nomadic you are, what the laws of your host nation are, whether you're prioritizing tax burden or access to services, etc. 1) US citizens

by patio11 12y ago

This depends on how nomadic you are, what the laws of your host nation are, whether you're prioritizing tax burden or access to services, etc. 1) US citizens have unambiguous legal requirement to file and pay US taxes wherever you live. 2) The Foreign Earned Income Exemption will excuse you from taxes on the first 90k or so of profits, though not self-employment taxes. This makes it advantageous for many Americans to file and pay US only. This may or may not be kosher under laws of host country -- treatment of immigrants with unique situations varies WIDELY, sometimes even between clerks at same office. 3) You get a dollar for dollar tax credit against US taxes for foreign taxes. If you live in a high-tax country like most of Western Europe or Japan, you may choose to file and pay locally then take the foreign tax credit to extinguish your US liability. This is often useful for services/immigration status/etc. Foreign Tax Credit can't be double-applied over FEIE, so in practice only matters if you have high income or you generate capital gains (not subject to FEIE generally). 4) Read those tax treaties! Get competent pro advice! I overpaid US taxes by $10k prior to finding a single piece of paper existed that excuses Americans in Japanese Social Security from US self-employment tax. Front-line clerks in both countries were ignorant of it. (Edit: On the chance that there's one other self-employed USian here who or on a future Google search wondering how to demonstrate status under the US Japan Social Security Totalization agreement, where that status means because you're paying Japanese social security taxes either personally or through your employer then you don't have to pay US self-employment taxes or social security or medicare, the answer is ask for a J/USA 6 form from your local Japanese social security office. If they don't believe that exists, they're wrong -- have them call the International Affairs Desk at the (national) Social Security office -- we literally had to get word directly from the mouth of the 年金局の国際年金課長.)

gsb 12y ago
Relating to #3, if you expect to be overseas long term and you are in a situation where foreign tax credit will cover your US tax liability, it can be advantageous to use the foreign tax credit instead of the FEIE even if your income is less than the ~100k FEIE limit. This is because the unused credit can be rolled forward and used as a buffer for cases where you do something tax-advantaged in your country of residence which is not honoured by the IRS. Most commonly this could be capital gains on the sale of a primary residence which is tax-free in many countries but only partially so in the US. But there are many other such possibilities, like retirement savings not covered by totalization agreements, special treatment for redundancy payouts, lump sum retirement payments, etc. There is this general idea that tax agreements eliminate double taxation, but they only do so imperfectly because the legislation is tailored for people temporarily working overseas, not people who make their home overseas. These cases are perhaps not relevant to the typical digital nomad when they set out, but things happen and you may choose not to return to the US. In those cases, it is good to have chosen to file your taxes in a way that maximises future choices. In my view the FEIE should only be used if you KNOW you will go back to the US soon and want the easier filing it provides, or if your foreign tax credit is simply not enough.
davidw 12y ago
> I overpaid US taxes by $10k prior to finding a single piece of paper existed that excuses Americans in Japanese Social Security from US self-employment tax. I got hit by that too. It's the same (or similar) in Italy: if you are self-employed, you don't have to pay into the Italian equivalent of social security. If you work for a company directly, you do. Most accountants here do not know this, nor do most US accountants.

by patio11 12y ago

gsb 12y ago

Relating to #3, if you expect to be overseas long term and you are in a situation where foreign tax credit will cover your US tax liability, it can be advantageous to use the foreign tax credit instead of the FEIE even if your income is less than the ~100k FEIE limit. This is because the unused credit can be rolled forward and used as a buffer for cases where you do something tax-advantaged in your country of residence which is not honoured by the IRS. Most commonly this could be capital gains on the sale of a primary residence which is tax-free in many countries but only partially so in the US. But there are many other such possibilities, like retirement savings not covered by totalization agreements, special treatment for redundancy payouts, lump sum retirement payments, etc. There is this general idea that tax agreements eliminate double taxation, but they only do so imperfectly because the legislation is tailored for people temporarily working overseas, not people who make their home overseas. These cases are perhaps not relevant to the typical digital nomad when they set out, but things happen and you may choose not to return to the US. In those cases, it is good to have chosen to file your taxes in a way that maximises future choices. In my view the FEIE should only be used if you KNOW you will go back to the US soon and want the easier filing it provides, or if your foreign tax credit is simply not enough.

davidw 12y ago

> I overpaid US taxes by $10k prior to finding a single piece of paper existed that excuses Americans in Japanese Social Security from US self-employment tax. I got hit by that too. It's the same (or similar) in Italy: if you are self-employed, you don't have to pay into the Italian equivalent of social security. If you work for a company directly, you do. Most accountants here do not know this, nor do most US accountants.