Working remotely from paradise? What it means for your taxes
- Bermuda and Barbados are among the nations with programs to attract remote workers.
- Americans abroad may be eligible for tax breaks on the income they earn while away, but that depends on a range of factors, including how long the are out of the country.
- Consult an expert in foreign taxes before packing your bags.
Forget the winter blues. Why not pack up your computer and head for the beaches of Barbados?
The coronavirus pandemic has proven that many Americans can work from almost anywhere if they have a reliable internet connection.
Several countries that have seen tourism plummet amid the pandemic are now offering special visas to entice foreign remote workers to live and work in paradise for a while.
For instance, Barbados began its Welcome Stamp program this summer, allowing people to work remotely from the island for up to 12 months.
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Meanwhile, Bermuda launched its Work From Bermuda One-Year Residential Certificate form in August.
Estonia and the Republic of Georgia have also created visas for remote workers.
"The Covid-19 environment has created a situation where most professionals can work from wherever they have a computer," said Katelynn Minott, CPA and a senior partner at Bright!Tax, which provides tax services for expats working abroad.
She currently lives in Rio de Janeiro with her husband and three children.
"It's increasingly a computer-based global work environment," Minott said. "People can travel from country to country or stay where they like."
The benefits are plentiful. You get to live in a vacation destination, improve your quality of life and possibly reduce your cost of living.
Just make sure you check in with your accountant before you board the plane.
Know your tax obligations
Would-be travelers should first consider their U.S. tax situation and how it will change if they leave the country.
All American citizens are required to file a tax return in the U.S. regardless of where they live and work, no matter how long they have resided abroad.
There is one key decision you'll need to make when you file your taxes. U.S. taxpayers can either claim a credit for taxes they pay in a foreign country or exclude foreign income from U.S. taxes.
The foreign tax credit mitigates the effect of double taxation from both the U.S. and a foreign country. You're claiming a credit for foreign taxes levied on your earnings.
Meanwhile, the foreign earned income exclusion allows you to exclude up to $107,600 in earnings from your taxable income in the U.S. for the 2020 tax year.
Generally, you can't claim both the credit and the exclusion. Deciding which one works best for you will depend on your individual circumstances, including the length of time you'll be away.
Be aware of the rules
The rules around using the credit or the exclusion are complex, so work closely with a tax professional as you plan your extended trip.
For instance, travelers must meet a set of conditions to qualify for the foreign earned income exclusion, including a "physical presence test."
You can claim credit for foreign taxes paid, but the requirement that U.S. citizens spend at least 330 days of the tax year outside the country to qualify for the foreign income exclusion is strictly enforced.
If you're looking for a six-month break from life stateside, you won't get the considerable tax benefits of a more permanent move.
"It's all or nothing," said David McKeegan, who founded Greenback Expat Tax Services in 2009 with his wife Carrie. His family is based in Bali though he is currently on vacation in Costa Rica.
"If you're gone for 329 days, there's no change [in your tax status]," said McKeegan.
Foreign account compliance
Here's another reason you'll want to speak with your accountant before you go: You may be subject to additional tax reporting.
If you have an interest in or signatory authority over at least one account outside the U.S. and the aggregate value of the foreign accounts exceeded $10,000 at any time in the year – you're required to file a report of Foreign Bank and Financial Accounts or FBAR, with the Treasury Department's Financial Crimes Enforcement Network.
Further, Americans who file an FBAR may also need to submit Form 8938 to the IRS. This is known as a statement of specified foreign assets.
Whether they're required to submit the form will depend on where they reside and whether their foreign asset holdings meet a set threshold.
Be cognizant of state filing requirements
State tax return filings can also be a sticky situation for Americans who want to work abroad.
High-tax states like New York, California or Virginia may claim that you need to pay income taxes even if the federal government recognizes you as a foreign resident.
Owning a home or even keeping a car registered in a state could trip you up.
"If you have a bank account in the state or even a library card, some states may say you should be taxed," said McKeegan.
If you intend to move abroad for an extended period, one option is to establish residence in a low or no-tax state before you go, he said.
Either way, don't board the plane before you've developed a plan.
With the numbers of remote workers and digital nomads rising, the demand for foreign travel will eventually surge, said Gene Zaino, founder of MBO Partners, a platform that matches independent contractors to firms.
"People are tired of being locked up," he said. "These visa deals won't go away and I think we will see a spike in demand for overseas travel."
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