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​​Never Overlook This When Planning Your Budget as a Digital Nomad

Motley Fool - Wed Apr 10, 12:00PM CDT

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In over 10 years of living abroad, two topics of conversation come up time again: Visas and taxes. Visa issues are usually very visible -- you may not be able to enter or stay in the country without one. Taxes, on the other hand, are easier to ignore. But doing so can be a silent budget killer.

Don't forget about your taxes as a digital nomad

There are many perks to life as a digital nomad. Not least that you can explore new cultures without giving up your career. As long as you have access to wifi, you can set up shop against a backdrop of idyllic beaches, misty mountains, or bustling metropolises.

If you visit places with lower living costs, there are often financial benefits too. I have one friend who swapped a shared New York apartment for a huge loft rental and still halved her housing costs. Plus, your nomadic lifestyle often won't include costs like car insurance and utility bills. Put simply, it can be a great way to save money without sacrificing quality of life.

That said, you'll still need to make a financial plan and find good ways to keep track of your money on the go. A budgeting app might help, particularly as the costs of flights, accommodation, and adventuring can quickly add up. Importantly, don't forget to factor in taxes. U.S. citizens have to file with the IRS, no matter where they live.

In addition to U.S. taxes, you may have local obligations as well. In many cases, if you spend more than half the year in the same country, you'll be a tax resident, regardless of your visa status. That means you may also have to file taxes in the country you're living in, depending on where you are and how long you spend there.

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How to file your taxes from abroad

If you're filing your taxes from abroad, the first thing to know is that it doesn't mean you'll have to pay tax twice. The U.S. has agreements in place with many countries to avoid double taxation, as well as specific tax credits for people based outside the country.

You can file your Form 1040 online or mail in the physical return. If your earnings are in another currency, you'll need to convert to U.S. dollars for the dates of each transaction. You may also have to declare any bank accounts you hold internationally.

Deadline-wise, U.S. citizens abroad may qualify for an automatic two-month filing extension, which can ease the time pressure slightly. That said, you'll have to pay interest on any tax you owe, so it's better to file on time if you can.

Here are some practical steps to take.

Plan for state taxes

Each state has different rules about digital nomad taxes. Some, such as California and Virginia, will chase you for taxes even after you've left. Some digital nomads move to other states before they leave the country to avoid this problem. Be sure to understand the rules so you don't accidentally miss a payment.

Understand tax breaks

Common tax breaks for digital nomads include the Foreign Earned Income Exclusion and Foreign Tax Credit. The former lets you exclude a certain amount of international earnings from your declaration. The latter means you can reduce your tax bill by the amount you've paid in another country. You may also be able to deduct housing and other expenses.

Keep track of your travels

If you're digital nomading within the U.S., you may need to record how long you've spent in different states as well as what you earned while you were there. If you're based internationally, keep a detailed log of the time you spend and what you earn (and spend) while you are in other countries.

Learn about taxes in the country you're visiting

Find out how taxes, medical payments, and other contributions work in your host country (or countries). Don't assume taxes in, say, Romania will work the same as those in Mexico. Pay particular attention to how many days constitute tax residency, filing deadlines, and any double taxation agreements.

Don't forget Social Security

In addition to federal and state taxes, you may also have to make Social Security and Medicare contributions. Again, this may overlap with payments you make internationally. Find out whether the U.S. has an agreement with your adopted home, so you don't have to pay double.

Consider getting professional advice

Living abroad can really complicate your tax situation. If you're not sure what to do or are worried about navigating the tax systems of more than one country, it may be worth consulting a tax professional. Some of the best tax software has help that's specifically designed for expats and digital nomads, too.

Bottom line

When you're working abroad, it's tempting to try to escape red tape. Or you may simply forget about certain financial obligations. But if you haven't budgeted for tax costs, they can completely derail your budget. And that's before we consider any fines or penalties you may incur. Ultimately, ignoring your taxes can weigh you down more than an overweight suitcase.

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