Can American Digital Nomads Claim the Foreign Earned Income Exclusion?

Digital nomad life is becoming increasingly popular as more and more of our work lives move into online mediums. People can work from nearly anywhere in the world these days, as long as there is high speed internet in the place they have chosen to move to or visit. Becoming a digital nomad has opened up being able to see the world while still earning an incometo many people who would not have been able to before.

One of the complicated parts about becoming an international digital nomad is how it affects the obligation to file US taxes. Many people are not sure whether they have to file, and if so, whether they still have to pay any US tax once they’re earning money outside of the US.

If you are ready to learn more about whether American digital nomads can claim the Foreign Earned Income Exclusion, read on!

Can American Digital Nomads Claim the Foreign Earned Income Exclusion?

The Foreign Earned Income Exclusion is a tax exclusion that allows you to exclude up to around $110k of income, provided that your income was earned when you were living abroad. This is distinct from income that was earned in the US, or unearned income. You will have to qualify to claim this tax exclusion, but it can be very valuable for Americans who are working and living abroad.

To qualify for the Foreign Earned Income Exclusion, you must have lived and worked outside of the United States for at least 330 days of any 365-day period. This is called the Physical Presence Test, and you cannot get around this part of the requirements under any circumstances, unless you can demonstrate that you are a permanent resident in a single foreign country. This second test is known as the Bona Fide Residence Test. To claim the Foreign Earned Income Exclusion, you have to qualify for one or other of the two tests.

You have to have spent time all of your 330-day period abroad on the actual land territory of another country. Time spent in international waters, or in the air – or even in space! – does not count. Astronauts cannot claim the Foreign Earned Income Exclusion, however there aren’t too many digital nomad astronauts, yet at least.

You will also need to record your travel days, those spent on US soil, and the days that you spent traveling. Digital nomads often are not worried about the Bona Fide Test since they are not setting up a permanent residence in a set country.

To claim the Foreign Earned Income Exclusion, you have to file Form 2555 along with Form 1040, reporting all your income, whatever currency it’s earned in,

Filing Correct US Taxes Matters

You shouldn’t think that you can just worry about your US taxes later when you get back home. You will have to file correct US taxes the entire time that you are working abroad as an American digital nomad, and you shouldn’t take this process lightly. Filing taxes late or incorrectly can lead to expensive back tax bills and penalties that you definitely want to avoid having to pay.

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