Digital Nomad Taxes (A Guide to Income Taxation)

Digital Nomad Taxes (A Guide to Income Taxation)

Digital Nomad Taxes 

Many foreign countries offer Digital Nomad Visas for US Taxpayers and foreign nationals who want to spend some time in a particular foreign country but are not seeking permanent residence or citizenship. Unlike other types of visas, the Digital Nomad Visa basically just requires that the taxpayer earn a certain amount of money sufficient so that they would not have to use or access resources reserved for residents and citizens of the country. When a US Person has a Digital Nomad Visa, one of the more complicated aspects involves US taxation, because technically even if the person resides overseas, they are still a US person and still subject to US tax and foreign account reporting. Let’s go through some of the basics of the tax implications of it being a digital nomad.

Worldwide Income

The United States Tax System is one of the only tax systems across the globe that follows a Citizenship-Based Taxation model. Therefore, unlike other countries that tax individuals on their worldwide income only when that person qualifies as a resident of that country –– the United States taxes individuals on their worldwide income simply because they are a US Person. In fact, citizenship-based taxation is actually a misnomer because in reality, a person can be a US Citizen or Resident of the United States and still be considered to have the United States as their tax home. 

FBAR Due Date and Extension

The FBAR is used to report foreign bank and financial accounts to the US Government. The Form is due on April 15, but is currently on automatic extension. Therefore, if you did not file the FBAR (FinCEN Form 114) by April 15, you still have until October to file it. And, you do not have to file an extension form such as Form 4868 or 7004 to obtain the FBAR extension — because the extension is automatically granted.

Form 8938 (Foreign Accounts and Assets)

Form 8938 is used to report foreign assets to the IRS in accordance with FATCA (Foreign Account Tax Compliance Act). It is similar (but not identical) to the FBAR. Form 8938 is filed with your tax return and is due when your tax return is due. If you are an individual filing a Form 1040, then the form 8938 would be due in April along with your 1040 tax return — but if you extend the time to file your tax return, then your Form 8938 will go on extension as well.

Form 3520 (Foreign Gifts and Trusts)

Form 3520 is used to report foreign gifts and foreign trust information. The due date for Form 3520 is generally April 15, but taxpayers can obtain an extension to file Form 3520 by filing an extension to file their tax return for that year. Similar to Form 8938, there is no specific Form 3520 extension form required beyond requesting an extension of the underlying tax return.

Form 3520-A (Foreign Trusts)

Form 3520-A is used to report US ownership of a Foreign Trust. Unlike Form 3520, Form 3520–A is usually due in March and not April. In addition, the rules for filing an extension for Form 3520-A are different as well (subject to the substitute filing rules). In order to extend the due date to file Form 3520-A, the taxpayer must file a separate Form 7004 extension form.

Form 5471 (Foreign Companies)

Form 5471 is used to report the ownership of certain foreign corporations. The filing date is the same as when a person’s tax return is due — and if the taxpayer files an extension for the underlying tax return, Form 5471 will go on extension as well. In recent years, Form 5471 has become infinitely more complex — so taxpayers should be cognizant of the different filing requirements and plan accordingly.

Missed Prior Years Foreign Account Reporting Deadlines?

If a taxpayer has not properly reported their foreign accounts, assets, or investments in prior years, they may want to wait before filing these documents for the current year. That is because Taxpayers should try to avoid making a quiet disclosure (which may result in significant fines and penalties). To do that, Taxpayers should submit to one of the offshore disclosure programs. Taxpayers may also want to consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in international tax matters before submitting to the IRS to get an understanding of the different requirements.

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