“Nothing is certain except death and taxes” – even for digital nomads. Benjamin Franklin’s famous quote is unfortunately true no matter what country you live in, but it’s a different level of reality if you’re from the United States. Navigating the ever-changing world of taxes as a digital nomad can be tricky, especially for business owners, but there can also be benefits and tax breaks to moving abroad.
Moving to other states in the US usually means that business owners must obtain residency immediately. This process involves transferring your business to the new state. However, moving to another country doesn’t necessarily have to complicate your U.S. business affairs. Many countries are indifferent to you running an American company while living abroad. They may even offer tempting visas for digital nomads. However, living abroad does not exempt you from filing and paying US taxes. Here are the keys tax consequences for US business owners moving abroad:
Foreign Income Exclusion (FEIE)
If you become a resident of another country or stay outside the US for more than 330 days, you may be eligible for FEIE. This benefit can amount to up to $120,000 of your 2023 income that is not taxable abroad. It applies to “earned income,” which includes W2 wages but not S-corp income or dividends. Keep in mind that the FEIE does not cover self-employment taxes, so you may still owe taxes if your income is below the exclusion threshold. In some cases, the obligation to pay self-employment tax may be excludable, but this usually requires proof that you pay for health insurance and social security in your new country of residence. To be sure, you can check with an accountant.
Foreign housing allowance
In addition to FEIE, you may also qualify for this, which allows for an additional 30% exclusion. Keep in mind that this exclusion usually only applies if you earn W-2 wages and pay for your own housing. In 2023, this could mean about $156,000 in tax-free income. This amount may increase if you live in a city with a higher cost of living than the U.S. average.
Foreign business considerations
Starting a business abroad comes with complex tax implications for U.S. citizens. Multiple forms are required on your tax return, and failure to file them can result in significant penalties. Working with international tax strategists and accountants is crucial in this scenario, especially if your annual income exceeds €500,000.
FinCEN Requirements
Opening a local bank account abroad requires filing Form 114 with the U.S. Financial Crimes Enforcement Network (FinCEN). This is only necessary if the balance of all your foreign bank or investment accounts amounts to € 10,000 at any time during the year. This form is simple and available online. FinCEN is threatening steep fines for those who don’t file this form but exceed the $10,000 limit.
Foreign tax credits
Tax residence abroad often leads to local tax obligations. The IRS offers credits for taxes paid abroad. For example, if the local tax rate is 20% and the US rate is 40%, you will owe the 20% difference to the IRS. Conversely, if the local rate is higher than the U.S. rate, you won’t owe the IRS anything, but you won’t get a refund for the difference either. Avoiding local taxes can therefore be beneficial.
Residence permit in a country with 0% tax on foreign income
In countries such as Panama, Paraguay and Georgia, digital nomads often benefit from favorable tax rates on foreign income.
For example, Panama offers a territorial tax system, which means that income earned outside Panama is not taxed.
Paraguay attracts digital nomads because of its low taxes on income from foreign sources. Non-residents pay 0%, while Paraguay residents must pay 10% on your worldwide income.
Georgia also offers attractive tax regimes for foreign entrepreneurs, with Georgia having a flat tax rate of 1% for income up to 500,000 Georgian Lari (GEL) (approximately $187,000) and 3% above. For microenterprises with an income up to 30,000 GEL (just over $11,000), the rate is 0%.
Moving abroad as a U.S. citizen can provide significant tax benefits, such as the FEIE and the Foreign Housing Allowance, which can result in more than $156,000 in tax-free income. However, it is essential that you understand the filing requirements, such as Form 114 for foreign bank accounts, and the tax treaties in effect in your country of residence. To effectively take advantage of these tax benefits before moving abroad, contact your accountant.
