Hey Digital Nomads!
If you are constantly traveling, let’s say a different country every month, how do you handle your taxes? Let’s say your last location of permanent domicile was Colorado hypothetically. Let’s say that was years ago, how do you handle taxes? Do you pay taxes as if you are still living in Colorado while constantly moving countries? Thanks in advance!
PS, asking for a friend 🙄
I’m a US citizen and I’ve been taking advantage of the FEIE, which allows me to pay no tax on the first $120k in income (an amount that changes every year) if I spend at least 330 days per year in other countries. This is the first thing to know about if you’re a US citizen nomad at any income level.
Since my income is more than the FEIE amount, I have recently been reducing my tax by contributing to a self-employed 401k and using the Foreign Housing Deduction to reduce my taxable income. I still had to pay self-employment tax but I got my effective tax rate down to around 10%.
However now that my income is increasing and my desire to pay taxes to a country I rarely visit is decreasing, I have a more sophisticated tax strategy. I have a Dubai Free Zone corporation, which pays me a salary equal to the FEIE so I pay no income tax. Any excess money flows into a C Corp in the US which I own. That corporate profit gets taxed at 10.5% since it owns no US entities, and I can take distributions for another 15% tax.
HOWEVER, instead of taking those taxable distributions, I can use that money in the C corp to make investments around the world, such as real estate. By using this new structure I expect to reduce my effective tax rate to under 5%.