If you aren’t actually in your country of citizenship, do you need to pay taxes in that country? Is it really necessary? Will anyone ever know if you don’t?
The short answer is—Maybe. It depends on where you are from, where your employer is from and how long you are traveling.
This article doesn’t discuss whether you need to pay taxes where you are currently living or traveling to. I’m only discussing if you need to pay taxes your country of citizenship if you are not actually residing there.
I’ve provided links to my sources for each country. I recommend that you investigate further based on your situation. Most countries have very specific rules, and limitations change frequently.
Even if you are not present in Canada, if you maintain any ties to Canada you become a “factual resident”. That means you are required to pay income taxes on any worldwide income you receive. If you have a home, a spouse, any personal property, bank accounts or health insurance in Canada you will likely be considered a factual resident. Sorry guys.
If you pay tax in a foreign country, you can usually deduct that amount. There are lots of tax treaties in place to help you avoid paying taxes in two countries at once. But there is no standard overseas tax credit unless you happen to be digging for oil or involved in an engineering or agricultural activity.
More info at: Canadian Revenue Agency on Canadian Residents Abroad and International and Non-resident Taxes
Spend more than 6 months outside the country and you become a non-resident. However you still owe tax on income that came from an Australian source. Any income that comes from elsewhere is tax free.
Best case scenario: be an Australian citizen and have clients who aren’t in Australia.
More info at: Australian Taxation Service - Residency
If you live outside the UK for more than 183 days in the year, you can become a non-resident, but you must still pay tax on any income originating from the UK. So if your boss is in the UK, you owe tax.
Like Canada, the UK has plenty of treaties in place to avoid making you pay tax in two countries. But that means you still have to pay tax in at least one of them.
More info at: HM Revenue & Customs - Non-Residents
The bottom line for digital nomads is: If you are outside the US for 330 days of the year, you do NOT have to pay INCOME taxes on any WAGES you earn while you are away.
First, no matter where you live, if you earn money you still have to file your taxes. You might not owe any tax, but the government still wants to know where your money came from.
When you file your annual taxes, you need to submit the papers for a “foreign earned income inclusion” which is a fancy phrase for a tax credit. (Form 2555 for the uber tax savvy).
You qualify for this exclusion if:
You meet the Tax home test: This test simply requires that your principal place of business, employment or residence is located outside the US. If you don’t have a residence (i.e. you’re livin’ in a tent) you can use the location where you do most of your business. If that means your place of business is in 330 different campgrounds around South America, that’s fine.
You also meet one of these two tests:
1. Bona fide residence test: You only meet this test if you are a resident of another foreign country for the ENTIRE tax year. You also must intend to stay overseas for an “extended, indefinite stay”. Most digital nomads don’t stay long enough to pass this test.
2. Physical Presence test: You must be outside the US for 330 days of any consecutive 12 month period. Assuming you spend less than 30 days at home, you’ll meet this test.
Income Tax and Wages
This credit only applies to federal income tax on wages.
It doesn’t apply to state income taxes, or unemployment, or social security or medicare. You still have to pay all of those taxes.
It also doesn’t apply to any income you receive that is not considered wages. Wages being defined as: “Salaries, professional fees, and other compensations received for personal services you preformed in a foreign country.”
For example: if you’re a freelance writer, developer or designer, your clients’ payments are wages. And selling products, interest from a bank accounts, dividends or distributions from your company are NOT considered wages.
Only money given to you as a salary, or in return for a service, is eligible to be excluded from income tax.
- The maximum amount you can exclude in 2010 is $91,500.
- You may also apply for a housing deduction. Meaning that in addition to the tax credit, you could receive a deduction for money spent on things like rent and utilities.
- Any money you receive from the US government is NOT eligible for this credit.
More Info at: IRS Website - Form 2555 Instructions