ELEVEN | Demystifying tax as a digital nomad - what do you owe and where?

No one likes paying tax.

And one of the few downsides of DN life is trying to figure out what tax you owe, who you owe it to, and what you can claim back. 

It’s easy to put it to the back of your mind and tell yourself you’ll figure it out later, once tax time rolls around. But trust us, having a basic understanding of the tax system will make your life a whole lot easier — it could even save you some cash! 

Paying tax as a digital nomad: the essentials

As a general rule of thumb, digital nomads must continue to pay tax in their home country — even if they have no fixed address. If you have a postal address, an eResidence, or pay tax in another country, it unfortunately doesn’t always exempt you from paying tax in your home country, too.

Even if you have deregistered as a resident from your home country, that doesn’t matter to the tax bureau — you’re still beholden to pay.

Sure, there are definitely grey areas and loopholes. And you might find a way to avoid your tax. But more often than not, this’ll come back to bite you in the butt. Tax evasion is a serious deal, and you’ll end up having to shell out way more than if you’d just paid your taxes on time.

Can a digital nomad get away with paying no tax?

Technically, the answer to this is yes — but we wouldn’t recommend it. 

In theory, if you spend 183+ days in a country, you’re considered a resident for tax purposes. So if you have no residency in any country, and spend less than six months in each destination before moving on, you could probably get away with paying no tax for the time you’re travelling.

However, this comes with a lot of provisos. 

You can’t have any dependents, or any fixed address that could be seen as a permanent home — even if you don’t live there. And in the future, if you choose to settle down in a country, they may need to see your previous tax statements and documentation. 

The easiest solution is to just continue paying tax in your home country, or establish a residence in a new country with low taxes and a low required number of days spent in-country, such as Andorra or the UAE. (However, this can bring on a whole new set of hoops to jump through!)

Where do you owe tax as a digital nomad?

Your “tax residency” is the country where you pay your taxes. You’re automatically a tax resident in a country where you spend 183 days in any year. If you’re constantly moving around, then you’re considered a tax resident of the country you have “strongest ties to”, or the country of your passport.

Of course, each country has their own specific rules, so it’s best to get an expert second opinion before going ahead with anything. Here’s a basic overview for some major countries:

Digital nomad tax: UK citizens

If you’re a UK citizen, you’ll have to keep paying tax in the UK unless you establish a residence in another country. Even if you’re only back in the UK for a week every year at Christmas, it’s still technically your country of tax residency and you’ll need to continue filing tax returns each year.

Digital nomad tax: US citizens

The US is one of only two countries — along with Eritrea — where being a citizen requires you to pay tax. But they’ve got a great scheme for DNs who are constantly on the road, called Foreign Earned Income Exclusion. 

If you’re outside of the country for a total of 330+ days in any year, you can exclude up to $100,000 of income from being taxed, so long as that money is earned overseas. So if all your income comes from sources outside the US, and you spend less than a month at home each year, you can avoid paying tax on the first $100k you earn.

Digital nomad tax: Canadian citizens

For most Canadian digital nomads, you’re required to pay tax in Canada as normal. Unless you establish full residency in another country, you’ll have to continue paying tax in Canada even if you’re not physically there. It’s pretty easy to lodge your tax returns online, especially if you go through a tax preparer who can ensure you’ve got everything in order. 

Digital nomad tax: Australian citizens

Similar to Canada and the UK, Australian residents continue paying tax at home even if you’re on the road for years at a time. Digital nomads have to pay taxes on their worldwide income — even if the pay is coming from another country. Again, if you stay in another country for more than six months in a year, you’ll have to pay tax there instead.

What tax do you owe as a Digital Nomad?

Again, this varies according to different factors, like your country’s laws, your income, and your work. You can just wait until filing your tax return each year to figure out what you owe, but if you like to stay on top of your finances it's a good idea to set aside tax payments periodically as the months go by.

It’s pretty easy to determine what you owe on your income, just look up the income tax rates for your income bracket in the country in which you’ll be paying tax. Be sure to also think of any other contributions that may come out of your pay check, like healthcare, National Insurance, or pension funds. 

What tax deductions can digital nomads claim?

You can get away with claiming a lot of deductibles on your tax return as a digital nomad — as long as you don’t get too carried away.

For example, if you’re a travel writer you could probably claim some portions of your flights and accommodation as a tax deduction. However, a graphic designer might not be able to reasonably claim that as a work expense. 

It’s helpful to file a tax return with an accountant or financial profession, who can make sure you’re claiming the right things. The golden rule is: any expense you incur in the name of making an income is deductible. This can include:

• Laptops, computer equipment and software

• Notebooks, pens and other stationary

• Internet and phone bills, including international SIM cards

• Co-working space, or a portion of your hotel room bill

• PayPal fees or other banking fees that you incur in the process of being paid

• Legal and accounting fees

• Memberships, subscriptions or licensing fees 

• Website hosting

• Advertising expenses, like Facebook ads

• Employees or virtual assistants

If you’re a travel blogger, or rely on travelling to generate an income, you can generally claim a portion of your costs as a deduction. You’re probably not going to be writing about every second of your day, but you can usually claim about 25% of your costs. Again, a tax professional will be able to shed more light on country-specific allowances.

Unfortunately, taxes are inevitable. As much as we’d like to ignore them and pretend they don’t exist, it’s definitely easier to stay on top of payments to avoid any nasty surprises down the road!