Worldwide Income Taxation
U.S. citizens and permanent residents (green card holders) are taxed on their worldwide income, regardless of where they live. As a digital nomad, you will need to report all global income on your U.S. tax return.
The US is 1 of only 2 countries in the world where you are taxed based on your citizenship. This is unlike Canadians and most other countries, where you can keep your citizenship but rescind your residency. This means as a US citizen, you are required to pay tax on your worldwide income no matter where you live.
I've known US citizens who have lived outside of the country for over 50 years but are still required to pay taxes there. You can rescind your American passport and forgo tax on your worldwide income, but this comes with other effects that can affect travel and benefits without a valid US passport.
So unlike Canadians, you can't simply move and stop paying. The good news is that the US tax code does provide some meaningful tools to reduce double taxation.
Foreign Earned Income Exclusion (FEIE)
The Foreign Earned Income Exclusion allows qualifying U.S. citizens living abroad to exclude up to $120,000 (2024) of foreign earned income from U.S. taxation.
To qualify, you must meet either the Physical Presence Test (being physically present in a foreign country for at least 330 days in any 12-month period) or the Bona Fide Residence Test (being a bona fide resident of a foreign country for an uninterrupted period that includes a full tax year).
In addition to the FEIE, you may qualify for the Foreign Housing Exclusion or Deduction, which allows you to exclude certain housing costs from income if you live abroad. This includes rent, utilities, and other housing expenses.
Foreign Tax Credit (FTC)
If you pay income taxes to a foreign country, you can claim a Foreign Tax Credit on your U.S. tax return. This helps reduce or eliminate double taxation, as it provides a credit for foreign taxes paid on income that is also subject to U.S. tax.
There are several countries that do not have a tax treaty with the US, including but not limited to most African countries, Bahrain, Cambodia, Fiji Islands, New Guinea, Antigua and Barbuda, Bahamas, Panama, Brazil, Chile, Peru, and many more.
Self-employment Taxes
Self-employment taxes (Social Security and Medicare) apply to digital nomads who are self-employed. Even if you qualify for the FEIE, this exclusion does NOT apply to self-employment taxes.
Totalization agreements help here. The U.S. has totalization agreements with several countries to prevent dual social security taxes. You may be able to contribute to one country's social security system and avoid paying into both systems.
FATCA and FBAR Reporting
If you hold foreign bank accounts, you may need to report them. Two key reports:
FATCA (Foreign Account Tax Compliance Act): If you hold foreign bank accounts, you may need to report them on Form 8938 if the total value of your accounts exceeds certain thresholds.
FBAR (Foreign Bank Account Report): If you have foreign financial accounts with an aggregate value exceeding $10,000 at any point during the year, you must file an FBAR (FinCEN Form 114).
Filing Requirements
Even if you live abroad, as a U.S. citizen or green card holder, you are required to file a federal tax return annually if your income exceeds the filing thresholds. This applies regardless of whether you qualify for the FEIE or FTC.
General Considerations for Either Country
Both Canada and the U.S. have tax treaties with various countries to help avoid dual taxation, but understanding which taxes apply and where to report income can be complex, especially if you're constantly on the move.
As a digital nomad, you'll need to secure international health insurance since domestic health plans generally don't cover extended periods abroad.
Contributing to or managing retirement plans like IRAs and 401(k)s in the U.S. may require additional planning when living abroad.
Both Canadians and Americans need to carefully choose a tax-friendly base for their nomadic life. Countries like Portugal (NHR program), Costa Rica, and Panama offer favorable tax regimes for expats. These countries have tax residency programs that can allow you to keep more of your income while enjoying a good standard of living.
The Importance of Records and Professional Help
Maintaining accurate financial records is crucial for digital