Demystifying Expat Taxes: What to Know About Filing Taxes Abroad

Kristin Wilson, Host:    00:00:00    Hey there, Kristin Wilson from Traveling with Kristin here, and welcome to episode 216 of Badass Digital Nomads. Today I wanted to share an episode with you that I have been sending to a lot of people lately. So a lot of you have been asking me about this topic. I keep, uh, copying and pasting the link and emails and YouTube comments and all over the place. So I wanted to share it with you. And this is one of the first episodes of Badass Digital Nomads from back in June of 2019. So many of you missed it, and you didn't hear it the first time around. And this is an interview with Grace Taylor, who is an IRS enrolled agent. She's from Canada, but she has been helping expats and digital nomads file their US taxes from abroad for many years. She's also a digital nomad herself who travels around the world.  

Kristin:    00:01:01    And I recently had the pleasure of speaking with her at the Go Overseas Summit just a week or so ago. And so I wanted to share this episode with you today, in case you missed it a few years ago. And if you've ever had any questions about what to do about your taxes, then this episode will shed some light into that, and I know answer a lot of your questions and concerns, and then you can always reach out to her for more info. Well, up here in Manchester, in the United Kingdom today, it is back to the cloudy, rainy conditions, <laugh> that we all know Manchester for it, it seems like it's been a little bit in a transition time. So maybe here in the middle of July, we are already transitioning into fall, or maybe it's just like this all the time, but after a stint of very hot and sunny weather where it didn't rain for weeks, we are back to the rainy and cloudy and cozy conditions.  

Kristin:    00:02:02    But I'm excited because my mom is coming to visit this week because it's my birthday this weekend on Saturday, July 22nd. So my mom lands on Friday morning. I am not sure what we're gonna do yet. We're gonna do something fun, but I haven't made a plan yet. <laugh>. I feel like, uh, things have been moving pretty quickly lately in life. And, and I actually just realized the other day, oh my gosh, it's my birthday this week. So, uh, that's happening. And I always like spending my birthday in different countries because you just remember it more, right? Like when you travel, you form memories that stay with you for, for so much longer, I feel like, than in normal day-to-day life in your hometown, where things can often blur together. And so I'll have to see what kind of memories we make this year. Like I barely even remember my birthday last year, <laugh>, which was in Miami.  

Kristin:    00:03:04    I don't even know, I don't remember what I did offhand. I probably went to dinner with friends or something. But I also wanted to read a comment from @aaaa-pe1zi, it looks like, uh, they left a comment on my video, American in the UK, 15 British culture shocks. But it was actually about this podcast. And reading comments like this just really makes my day and it just gives me chills. Like it gives me goosebumps thinking about how connected everything is and how many synchronicities there are. So they say, "I'm from the UK. I was listening to your podcast when I received your email. And so they're referring to the, the email newsletter that I send out every week, which you can get at travelingwithkristin.com/subscribe. So they say, I'm from the UK. I was listening to your podcast that I received from your email.  

Kristin:    00:04:00    I found the part about Alan Carr books about how our culture influences us. And I read Alan Carr books 30 years ago for how to stop smoking. And the part about how our culture influences us stuck with me to this very day. It is so true. I love traveling also. And then they say our food is good quality, but very expensive. Great video. Thanks for sharing. So this was on my British Culture Shocks video, somebody from the UK watching that video who's also on my email list and listened to last week's podcast about the Easy Way to a Better Life. That's episode 215. I'll link to it in the show notes in case you missed it. And to think that they read the Allen Carr book to quit smoking 30 years ago, and it sounds like they still have, uh, stopped smoking and never went back, and that they remembered the part about how our culture influences us.  

Kristin:    00:05:04    And then it all comes full circle with me quoting that exact part in the podcast episode. I mean, that is, that is too cool. I-I think everything just really goes beyond what our human comprehension can offer. So keep sending me your messages, keep leaving those comments. And it's just, uh, such a pleasure to be on this journey together. And, uh, being able to talk about these topics, whether it's taxes, <laugh>, or quality of life, or health and wellness and travel. I feel like we're all leveling up together and making our lives better together. And, um, I know that my life is so much more fulfilling now than it was before 2018, before I started my YouTube channel and my podcast when I was living this perfect lifestyle on paper. But I felt like there was something missing. And that something is you guys, and just being able to, uh, connect with you each week through videos, through podcasts, and sharing all of these hundreds and hundreds of topics of conversation, uh, that really are, are here to help us live life in the way that we want to and, and have a more flexible and freedom filled lifestyle.  

Kristin:    00:06:28    So thanks for that comment, @aaaa-pe1zi and thank you to all of you for being here today. So, uh, I think that's all of the news I have for you.

FreshBooks:

Also, since this is a, a topic about taxes, I wanted to share with you a special offer that we have from FreshBooks where you can try FreshBooks for 50% off for six months. And FreshBooks is an accounting software that's built for business owners, especially small business owners. Now, accounting has never really been my thing. Math has never really been my thing. So if you've ever struggled with QuickBooks like me, I- I don't find it very intuitive to use. I-I think it's probably better for accountants than the, uh, regular people. Then give FreshBooks a look. Many people love FreshBooks. 97.3% of FreshBooks customers will recommend it. And it's accounting software built exclusively for non-accountants.  

Kristin:    00:07:34    It's the only cloud accounting solution designed exclusively for small business owners with more than 10 million self-employed people who use it as customers. And it's just very easy to use. It's a good way for you to invoice your clients. You can customize your invoice templates. It's great to keep things organized with your finances, help you save time, track your expenses, track your time, all kinds of amazing features and, um, great reporting tools as well. So if you're looking to get your taxes and your bookkeeping in order, then you are in the right place today with this interview that we have from Grace Taylor, and also this special deal for 50% off FreshBooks for six months. You can use our link in the show note to sign up and you get a 30-day risk-free guarantee. So if you cancel your account within 30 days because you decide it's not for you, you'll receive an automatic refund. So you don't even need to call customer service to ask for it, just try it out for 30 days, give it a go. And if you like it, keep it. If not, your automatic refund will process for you. So check that out at the top of the show notes. Enjoy my chat with Grace Taylor, which was from a coworking space in Amsterdam back in 2019, 1 of my favorite cities in the world. And have a great week. 

Podcast Interview:

Kristin:    00:09:17    Welcome back to my channel, Traveling with Kristin, where I take you behind the scenes in the digital nomad lifestyle. On this episode of Badass Digital Nomads, I am interviewing Grace Taylor, who is an IRS-enrolled agent who specializes in taxation, especially for US digital nomads and expats. And I wanted to bring Grace on the show because taxation can be an overwhelming and complex topic, and I've seen a lot of misinformation out there on social media, on forums, on YouTube. So I asked her to come on the show and kind of break down this big topic in a way that we can understand it and act on it for our digital nomad features. So welcome Grace.  

Grace:    00:10:05    Hi, Kristin. Super happy to be here.  

Kristin:    00:10:07    Tell us a little bit about, um, your area of expertise and how you, uh, became an accountant, an enrolled agent. Um, where did you start, and then how did you transition, uh, to becoming a digital nomad accountant?  

Grace:    00:10:21    One of the first things I always start with is, uh, despite the fact that I specialize in US tax, I happened to be Canadian myself. Uh, so I'm originally from around Vancouver, BC. Um, but I transferred down to the University of Washington and I finished my degree. Um, and then I ended up getting a job in Seattle. And, uh, the job I got was based on an internship that I applied for just because the word, uh, the, the wording for the job interview had international in the title. I really didn't set out to be an accountant, and I didn't set out to specialize in expat tax, but that's what happened. And I happened to like it. So I ended up working for a big four accounting firm in Seattle for a, a number of years, and that's where I came to specialize in US expat tax.  

Grace:    00:11:08    But myself, I was always, um, for that time I was very location dependent, so I was just going into an office every day, and that was my life until I got the opportunity with my previous employer to actually transfer from the Seattle office to the Dublin Ireland office. But again, it was a very location-dependent role. But while I was in Ireland, I think it was something about being outside of North America. And it just to open to my perspective a little bit, and what I realized when I was interacting with other expats in and around Europe was there was a lot of mis um, misconception, misinformation around what to do about taxes. And I found myself in the unique, um, position of really having the answers that a lot of people needed, but they didn't necessarily have access to via a big four firm, which, you know, the, the fees are prohibitive for a lot of people.  

Grace:    00:12:04    So that's when I really decided to start my own business. And I realized at the time that I started my own business that it was inherently location independent because my client base would be all over the world and I could do the work from anywhere. Um, so that's when I really became a digital nomad myself. And, and what I, what I realized was like the traditional expats, um, the same US tax provisions actually apply to digital nomads as well. So I kind of tapped into the whole community, um, that I had become a part of.  

Kristin:    00:12:35    I love that. I just noticed that both of us are digital nomads ourselves who help digital nomads in our area of expertise. You with taxation and myself with relocation. Yeah. So that's so funny. So let's go ahead and jump right in. Um, to the tax topic. What are some of the most common misconceptions that you see digital nomads talking about online? 

Grace:    00:12:58    Start out by saying that, uh, from a professional perspective, I only practice US tax, but I occasionally get asked to speak more generally about digital nomad tax issues for people from elsewhere. And when I do, one of the first distinctions that I like to make is that the US is very unique in that it has what's called a citizenship-based taxation system. And that sounds like a mouthful, but what it means is that US citizens are taxable in the US they need to file a US tax return reporting their worldwide income every year no matter where they live, no matter how long they've lived outside the US for as long as they are a US citizen. And this simply isn't the case in really any other country in the world. And most other countries employ what's called a residence-based taxation system. So when I'm speaking to people from let's say Europe, um, the biggest question they might have is have they broken their tax residency in their home country? Which isn't always an easy answer either. But for US digital nomads, the number one thing that we need to start with is, yes, you need to file a US tax return even if you don't live there, and even if none of your income is what we would call US source.  

Kristin:    00:14:17    Yeah, actually I've met in my travels over the years, I've met quite a few, uh, US citizens who have never actually lived in the US. So just to clarify for the viewers, if you're born outside of the borders of the US but you have US citizenship, uh, maybe through one of your parents or something like that, even if you've never lived in the US before, you're still required to file a US tax return. And for the majority of the rest of the countries in the world, except for the US and one other country in Africa, Eritrea every other country has a residency-based tax situation. So that means that, um, depending on the rules of each country, and depending on how long you're residing in another country, you can legally change your tax domicile. So this is something that people do for a variety of reasons from their lifestyle, cost of living, or even specifically for tax reasons to lower their tax, uh, taxable income or tax liabilities. So somebody from Germany can change their tax base to Malta. Um, somebody from France can change their tax base to Bulgaria or really any country in the world from the UK to Panama. And whereas US citizens, we can acquire a dual citizenship or a second residency, but that does not relieve us of the obligation to file and pay us taxes. So that's my understanding, at least I am not an accountant or CPA <laugh>,  

Grace:    00:15:53    But, uh, Kristin, based on our conversations, you know much more than the average person, um, because unfortunately, you've had to do a lot of your own research over the years. Um, but what you said about those individuals who happen to be born with US citizenship, even though they've never lived in the US, um, that's certainly an issue that I see crop up. And I have a number of clients who are in that very position who, um, they're sometimes called accidental Americans because they acquired this citizenship by virtue of usually one of their parents, but perhaps they have never even set foot in the US, let alone ever worked there or really had any reason to know about the US tax system at all. And unfortunately there, I really, I think that this is an issue where I think we can put quite kind of uncontroversially say, this doesn't really seem fair, but nonetheless, these people do have to seek out the advice of someone like myself and, you know, go through this process of catching up on their filings. So that's, that's one area where we, we could see some improvements potentially I, I would hope in at some point in the future, but not yet. 

Kristin:    00:16:57    Yeah. When it comes to being a US citizen and an expat or a US citizen and a digital nomad, um, the key is to really be proactive about finding out what you're responsible for. Um, because the information is not, um, it's available, but it's not provided to us at a young age. So it's something that you need to uncover along the way and very proactively, um, before you start your digital nomad journey to start looking into it.  

Grace:    00:17:26    A lot of times I think it's gotten better in terms of the quality of information that's available online, but a lot of times if you were to do your own research, um, you might not know where to start and you, I would just caution people to really check your sources and don't just believe what your friend tells you or what you read on a Facebook group because taxes are so dependent on your personal circumstances. So that if it's at all unclear, um, I really, I do recommend speaking to someone directly about your personal situation, uh, because just going to the IRS website is maybe not going to give you the answer that you're looking for. I've even had people tell me that they've actually tried to call up the IRS and ask, and that's usually just an exercise in, uh, wasting your time. Yeah,  

Kristin:    00:18:11    <laugh> and waiting on hold <laugh>.  

Grace:    00:18:13    Yes.  

Kristin:    00:18:14    Yeah. And actually, if you have been working with a US accountant long term and you're now suddenly changing into a digital nomad lifestyle, and that is including travel, then don't assume that your hometown accountant is specialized in these sorts of issues, because as I found in my own life, there are quite a few CPAs who specialize in domestic tax issues, but they might not know all of the ins and outs and, um, details and implications of being a remote worker or being a digital nomad, just kind of traveling around the world. So it is something to look into for your specific situation or check out Grace's website and just try to figure it out so that you don't get any surprises along the line. 

Grace:    00:19:05    That's  absolutely right. And um, you know, maybe we might talk a little bit about some of the specific US tax provisions that are available to, uh, US citizen expats and digital nomads, um, that help them with this issue of citizenship-based taxation. Um, which really these types of provisions don't exist in other countries because they're just not required. Um, and these are really the exact provisions that, um, your hometown accountant who might be and probably is excellent at what they specialize in, if they've never seen it before, you know, you can't really fairly expect them to be fully up to speed on it, but what that means is that it leaves you with the responsibility of making sure your taxes are done properly. So that's, yeah, you know, this really, this can't constitute tax advice for anyone, but hopefully, this gets you thinking about, um, what kinds of things you should be asking and making sure that someone is looking at who knows what they're doing.  

Kristin:    00:19:57    So yeah, let's talk about that. Let's talk about, um, what are the differences for US citizens when they go to taxes? So whether they're just using TurboTax or they're using, um, a local CPA, what is the actual difference when it comes to filing their tax returns? Which types of forms should they be aware of and what sort of benefits, um, can they have by, from their new lifestyle of international travel? I would  

Grace:    00:20:28    Say that probably the number one provision that, um, expats and digital nomads can avail of is something called the foreign earned income exclusion. And we might talk a little bit in detail about exactly what that means and exactly how you can qualify for it. But this is really, it's kind of the biggest, it's not, not the only provision, but it's the biggest one that helps, I would say the most people. And basically what it is, is it is an exclusion from income tax, um, for up to a maximum amount of income that is earned while you are physically working in another country, and you have to qualify for it by claiming it via one of two tests. But before I kind of dive into what exactly those tests are, um, I just wanted to clarify that sometimes people get confused about this and they've heard someone say, oh, if you're an expat, it's fine, you don't pay tax up to a hundred thousand. And they take that to mean they don't have to file a tax return. Yeah. Which is absolutely not the case. So this provision is only available to you if you claim it on a properly filed tax return. But that being said, um, it is useful for an awful lot of people.  

Kristin:    00:21:37    We have one other question, um, from my Facebook group, which is called Long-Term Digital Nomad Success, if anyone wants to join. Um, it's basically to help people achieve or sustain the digital nomad lifestyle long-term. So I'm always in there doing live videos and giving you guys info on how I've been able to do this for almost 15 years now. And so on of the questions from the group that was for Grace is, what are some of the most common write-offs for digital nomads?  

Grace:    00:22:07    And I think, again, I'll only speak to this from a US perspective, um, because every country's tax laws will differ, but, um, for US, uh, expats and digital nomads, really, I would say the biggest provision would be the foreign income exclusion that we talked about. But when it comes to write-offs, I think what this person probably means is in respect of business expenses. So if you are self-employed or a freelancer, and you're filing that form Schedule C that we talked about for your self-employment income, you are going to deduct for any expenses that you have to generate that income. And really the simple answer for that is it's any expenses that are what you would consider ordinary and necessary to generate your income. In terms of that, I'll talk about if things that I see some people sometimes have some uncertainty on, because your standard business expenses like inventory, if you're selling physical products or, um, anything that you pay to your, you know, contractors or VAs, um, of course those are obviously business expenses, but where we get into a gray area sometimes is when people talk about, um, travel expenses.  

Grace:    00:23:13    So for example, if you are a true digital nomad who's moving from place to place every few months and your travel from, you know, Thailand to Barcelona is just because you want a change of scenery, and it's not for any kind of client or business-related purposes. My personal take is I don't think that's appropriate as a travel-related business expense. Yeah. Um, because it's really, it's, it's your personal lifestyle travel, isn't it? Even though you are going to be conducting your business from Barcelona, the purpose of the trip wasn't for business. But for example, if while you're based in Barcelona for three months, you go and meet a client in Lisbon, then that trip from Barcelona to Lisbon, I would say is absolutely a business trip. So that's, I-I like to, you know, there's not necessarily a hard and fast rule, but if people are being too aggressive, I just caution them to just dial it back and really make sure that you could justify that this truly was a business trip. But then, um, sometimes people ask about something like, um, coworking spaces, and I think that's a slam dunk coworking spaces. You're only there to conduct business from the entire expense of the coworking space should be, uh, deductible,  

Kristin:    00:24:22    Right? Yeah, it's, uh, probably important to just remember that the US tax code was written long before there were digital nomads. So it doesn't really provide any like specific benefits for us. We, it's something that, you know, is good to be proactive and to work with a, a tax preparer who is specialized in these kinds of topics, you know, just because why not? You know, it's your life, it's your business. And, um, there are ways to, you know, be more efficient with your, with your own personal taxes and how you construct your business. Giant corporations do it, and we can do it too.  

Grace:    00:25:05    Um, and I just remembered there was one other question that I saw from one of your listeners that I thought was a really good one, which was, um, something along the lines of, is there anything you need to file in advance in order to claim the foreign income exclusion? And that's, I think, an excellent question. And the simple answer is no, there isn't. Um, all you need to do is keep track of your travel and then assuming you qualify for it, you just claim that on the tax return at the time that you file it. And, uh, the, the thing I would say is if you're working for an employer remotely, and they're paying you on a W2, there actually is an option that you can, um, ask your employer to turn off your W2 withholding if you're going to be qualifying for the foreign income exclusion. But if you didn't do that in advance, and you had withholding on the full amount of your salary, then you can get that back as a refund if you filed the foreign income exclusion on your taxes. So you can do it either or you can stop the withholding in advance or you can claim it back as a refund when you file. Um, but either way, there's nothing you need to do in advance of that, like registering with the IRS or anything like that.  

Kristin:    00:26:06    Yeah, that's a great tip. So if you guys are thinking about if you're a digital nomad but you haven't been traveling, and if you're thinking about traveling, there's nothing specifically that you have to do in advance or notify the government or anything like that. But just see how it goes over the course of the year and if you think that you'll qualify for the exclusion or anything else that could be relevant, and you can always take a look at that later in the year. So the foreign earned income exclusion is definitely something that gets a lot of buzz about online. So people think, like, like you were saying, yeah, I don't have to pay taxes on my first $100,000 of income, but let's specify the main ways that people can qualify for the income exclusion and then also what that actually excludes and if there are any other taxes which they still have to pay, which a lot of people don't know about. 

Grace:    00:27:00    Exactly. Those are great questions. Um, so yeah, firstly you wanna find out if you are eligible to avail of this exclusion and to be eligible, then you need to basically claim it via one of two tests. And the first test, I'll talk about more detail because it really tends to apply to more digital nomads. Um, and it is called the physical presence test. And it basically looks at how many days you have spent in a foreign country in a 12-month period. Now, the 12-month period doesn't have to align exactly with the tax year. So it doesn't have to be January 1st to December 31st. It can start or end at any date, um, in the tax year as long as it contains 12 consecutive months. And within that 12-month period, the number of days that you need to be physically present in a foreign country is 330.  

Grace:    00:27:54    So it's really, you know, we're looking at, you have to be spending the vast majority of your year outside the US and in fact, not just outside the US but more specifically in another country to avail this provision. And I'll just mention that because I happen to know that, um, Kristin and a number of my other digital nomad friends are about to go on something that I really wish I was going on, which is the nomad cruise. And one thing that I didn't used to see in my career very often, but I'm seeing more and more of is people who are spending a stretch of days in really no country. Um, for example, in days when you're crossing the Atlantic, um, and you're in international waters, you're not in any country, neither the US nor a foreign country. And the issue there unfortunately is those days don't count towards your 330 because they're not spent physically in a foreign country. So this is where I just use that example because, um, I'm jealous of the cruise and also because I think that people should be aware that counting the days can be quite sticky and you wanna get it right.  

Kristin:    00:29:03    Yes, definitely. Um, I, I think that this is something a lot of people didn't know about. They just thought they had to stay out of the US for a certain number of days, but they don't realize that there is a no man's land where you're not in the US but you're not physically present in a foreign country. So people need to be really careful about how they're transiting between countries and if they're spending a lot of days throughout the calendar year, um, over international waters or something like that, that could count against them. Yeah. And if people wanna know more details on this, you can actually look at the IRS website, and I'll link it below and you can, can see examples of what counts, um, for you and against you when it comes to the physical presence test. And, um, this is quite interesting because, um, part of the appeal of the digital nomad lifestyle is to be able to travel and be nomadic.  

Kristin:    00:29:56    Um, but what we'll see over time, and grace, and I know this as, um, because of her clients who've been doing this for many years, and I've been living, um, on and off outside the country for almost 15 years, and things tend to come full circle because people start to realize that there could be quite a few benefits of putting down roots in a country. So instead of being just completely nomadic and qualifying for the income exclusion on the physical presence test, um, if you put down roots somewhere, then you don't have to be this sort of like ninja counting your days in and out and calculating what time your flight crosses into US airspace on which day so that you can meet your quota for the year. And so that can really lead us into the next way to qualify, um, the second most common way, rather I should say. And can you talk a little bit about that?  

Grace:    00:30:49    I would, I would absolutely echo what you just said is, you know, it gets exhausting having to count your days like this, although the provision is very good and it's, you know, it's, it's lucrative, it's valuable to people, but, um, oftentimes perhaps your family needs might lead you to spend more time back in the US each year. So one thing I will say before I go into the second test is, in fact, you don't have to qualify for the, uh, exclusion using the same test every year. And in fact, you don't have to claim it every year if you don't qualify for it every year. So you can claim it for a year, maybe you go back and spend a couple more months in the US and then maybe you start your travels again, and you claim it again for the next few years. Um, it's very possible to do that.  

Grace:    00:31:29    It's, it's a year-by-year basis. And then the the second test, which is the really the only other option. So there's exactly two tests you have to use one or the other, you don't need both, but you need one or the other is called the bonafide resident test or BFR. And what that means is, unlike the physical presence test, which is a really strict, you know, binary of, you either have the days or you don't, um, the bonafide residents test is a bit more touchy-feely and it looks at whether or not the holistic picture of all of your facts and circumstances points you to being a legitimate bonafide resident of another country. And it has to be of one country. So your bonafide residents can't shift every few months as you pop around the world. And the other thing that you really have to have that's a non-negotiable is you have to have a legitimate right to live and work in another country. 

Grace:    00:32:26    Um, so in order to claim the bonafide residence test, you have to be a legitimate resident of one country, um, and it has to be via a visa that allows you the right to live and work in that country. So you can't just be doing visa runs in and out of the country, and you can't be on a tourist visa. So that would be, I would say the biggest barrier to most digital nomads who are looking to claim BFR instead of the physical presence test is, uh, getting the Visa issues sorted out first.  

Kristin:    00:32:56    So this is when digital nomads end up becoming basically remote work expats, <laugh>. Yeah. So instead of working at a physical company headquarters offshore, you're still working digitally and remotely, but you just might be staying somewhere more long term, which I of course talk about a lot on my show because I think slow travel or having a home base can be quite beneficial, especially once you get a few years into the lifestyle.  

Grace:    00:33:23    I could not agree more. And I would say that if all of your other facts and circumstances support the bonafide residents test, um, don't think that it means that you have to stay put in that country for a hundred percent of your year. You know, you still have every, um, opportunity to travel and to spend, you know, time in other places, but that country has to kind of be your home base. So it's, it's something to think about for people when they are looking to kind of settle down a bit more and put down roots a bit more. It's a bit more,  

Kristin:    00:33:51    Yeah. And on that note, with the, um, with the foreign earned income exclusion, which gets a lot of attention when we're talking about taxes for US citizens, um, what are some of the other common forms that people might not know about, um, that they would need to file in certain cases? And, um, what are the conditions for that, such as with offshore bank accounts or offshore corporations?  

Grace:    00:34:17    Absolutely. And in fact, actually before we jump into that, um, I kind of wanted to wrap up on the foreign income exclusion because it is such a big issue for so many people. Um, and there's a few other things that just that I wanted to not overlook. So one of them is, um, right, so let's assume that you do qualify for the full maximum exclusion, um, which Kristin and I threw out the a hundred thousand number. Um, that's pretty accurate, but it goes up a little bit each year for inflation. So it's around $104,100, um, in 2018. So let's say you qualify for that, all of your income is foreign source, and let's say it's all below the exclusion amount, but the one --

Kristin:    00:34:54    yes, it doesn't end there. <laugh>,  

Grace:    00:34:56    There, there is a catch. Um, and this really does apply to an awful lot of people in our community just because we tend to be entrepreneurs or freelancers. Um, and when you are, there's this other tax that isn't always well understood, but it's the, uh, for us purposes, it's the self-employment tax. And I find there's an awful lot of confusion out there about it. And there I think would be confusion even for regular US self-employed people. Um, they get hit with this bill with the first year that they're self-employed and they don't know why. But it's because when you're a regular employee, your earnings have social security and Medicare withheld from them automatically. And in fact, you pay half and your employer pays the other half. Um, if you're working for a US employer when you're working for yourself, the government still wants that money, um, but they're gonna ask you to pay both halves of it because you're both the employer and the employee. And this unfortunately is not eligible for the foreign income exclusion because it's not related to the ordinary income tax at all. It's related to social security, right? So what happens is if people don't really understand this and they, for example, become both self-employed and a digital - digital nomad at the same time, then they can find they're really confused about their taxes, and they don't know why they have this tax bill to pay in April. And oftentimes it's because of the self-employment tax.  

Kristin:    00:36:26    Yes. So that's something that I didn't know before I became a digital nomad, either or an expat.  

Grace:    00:36:33    Yeah, absolutely. And you know, it was, it's something that I was getting so many questions about, and I realized there's so much misinformation and confusion on and understandably so. Um, so I actually recently launched a course on Teachable that really intends to address exactly that. It's for kind of your intro to when you're a new digital nomad and newly self-employed or freelancing at the same time, what you should know about how your taxes are gonna change.  

Kristin:    00:37:00    Great. We'll definitely link to that. Um, what is the, where can they find that course? 

Grace:    00:37:05    That  is gracefullyexpat.teachable.com.  

Kristin:    00:37:08    Awesome. I wish I had access to that 13 years ago. <laugh>, where were you Grace in college,  

Grace:    00:37:16    <laugh>? I was, uh, I-I was actually, but um, right after that I was still, you know, a corporate drone sitting in a cubicle, so.

Kristin:    00:37:23    Yeah. Well, better late than never. We're here now and anyone who's catching this video who hasn't had this introduction to taxes, you're welcome, <laugh>, we just saved you 10 years of headaches, <laugh>,  

Grace:    00:37:37    And, you know, we're laughing, but they are, they can be costly mistakes as well. Yeah. Um, and, and perhaps that kind of leads us well into, um, your next question, which was a good one, which is what are some of the other forms that people should know about qualify for it? You're very welcome to claim it, but you don't have to. It's not a mandate. Um, and the reason is because it helps you, not the IRS. So the IRS says, if you don't claim it, we're not gonna tell you and we're not gonna really say anything about it. But for some of these other forms, um, they can come with hefty penalties for non-compliance, even if your non-compliance was non-willful and it was because you didn't know. And perhaps even more worrisome is failure to file some of these other foreign reportings can also leave your tax returns open for IRS audit indefinitely. Whereas normally the IRS has, um, a statute of limitations wherein they can audit you failure to file, for example, foreign bank account reportings or foreign corporate reporting leaves you open to IRS scrutiny indefinitely. Um, so...

Kristin:    00:38:41    yeah, that's a very good distinction because this is the tax, the US tax code is known for being quite complex, but people need to know that just ignorance of the rules or the law doesn't mean that, you know, they don't have to follow that. So everyone take notes  

Grace:    00:38:58    That that's exactly it. And unfortunately, um, this information isn't always well understood again, even by, uh, tax preparers themselves. So I would really urge people if there's any ambiguity or if you are dealing with some of these more complex, um, filings, do get some personalized advice. Um, because one thing I was gonna say is, you know, we, I was looking over some of the questions that came in from your community and one of the questions was, well, how do you actually file, and I-I double checked it today, um, just to make sure TurboTax all the paid versions, not the free version, um, the paid versions of TurboTax actually do support the foreign income exclusion. Now, if you're checking with your tax software provider and you wanna DIY it and you think you've got a relatively straightforward situation, go ahead if you're comfortable with it, but the form number to look for is form 25 55.  

Grace:    00:39:54    That's the form that you claim the foreign income exclusion on. So if you, if you look, your tax software should list all the forms it supports, um, and that's gotta be on there. Yeah. And then, um, some of the other forms that you'll see is if you're self-employed, you'll have a Schedule C. So make sure that any software you're using supports schedule C as well. And that would be, I would say, kind of entry-level. And if that's all you've got going on and you're comfortable enough to DIY, then you know, you, you can probably do that. Some of these other forms, I don't suggest that anybody tries to do it yourself because they are too complicated and the risks are too high. And namely what I'm thinking of is if you have any foreign corporations that you own, if you have any foreign partnerships, foreign trusts, um, these would all have separate reportings, um, foreign corporations are on form 54 71, and it's notoriously one of the most complex, uh, reportings and the problem is if you don't get it right or if you don't file it at all, then you do leave the door open to some of these nasty effects that we talked about earlier.  

Kristin:    00:40:59    Yeah. And don't assume that your tax preparer knows about these forms <laugh> you, you know, the burden is still on you to make sure that they're being filled out at all and correctly.  

Grace:    00:41:11    That's right. And I would say, you know, in practice, um, if I do see these forms being omitted, it's probably because your tax preparer didn't think to ask you about it because they're relatively uncommon, at least, you know, if, if your tax preparer is just, you know, has a US domestic base of clients, um, they just wouldn't see them on a normal basis. Whereas someone like myself, I see them all the time. So I'm, I'm well used to reminding people to give me their information, but somebody else just might not even think. And if you don't ever bring it up, then that's how the omission can take place.  

Kristin:    00:41:45    So especially in 2018 and in the future, I think it's going to be very important for people to really keep track of their bank accounts that are online as well as offshore. Um, because some bank accounts, um, some banks might be based in foreign countries, but they might offer a completely online account. And there's a lot of digital nomad-related accounts like TransferWise and N26 and Revolut, and there's all sorts of new online banks popping up all around the world. So everyone should be very proactive about, um, declaring their foreign bank accounts, um, when the combined balances reach a certain amount. So Grace, can you talk to us a little bit about, about that and how to file those forms?

Grace:    00:42:32    That was the most perfect lead in I could have asked for. Um, so the, the FBAR is a really, really important, um, form to be familiar with and to file if you have a requirement. And the filing threshold for it, it was set I think back in the eighties or even the seventies, and it hasn't been increased ever for inflation. So it was a figure that I think once upon a time was, you know, a rather hefty sum. And now really any of us in our businesses might expect to have that if we bank outside the us. So that number is, if the combined value of all of your non-US accounts exceeds 10,000 US dollars at any point in the tax year for a short a period as even one day. So a big deposit from a client or, you know, you can think of a number of scenarios where you could exceed that for a day and then never exceeded again for the rest of the year.  

Grace:    00:43:25    But that filing, uh, requirement has been triggered, and now you have to file the FBAR. And the interesting thing about the FBAR is, even though it's related to your tax return in that when you file your tax return, you're actually signing under penalty of perjury that it's complete and correct. And not filing the FBAR means your tax return is not complete and correct, but the form itself is filed with the Treasury Department, so you actually have to e-file it completely separately and it's information only, so you don't pay any tax with it. That's probably a big, um, concern that I hear people have is, well, I've already paid tax on the income in-in my bank account. I don't don't wanna pay on the entire value. You won't, but you do have to provide this information. Um, and it's, it's a little invasive, I suppose, and people, um, don't really like having to report all of their non-US accounts, but the problem is they've set the penalties at such a level that, um, non-compliance becomes just, I think, a risk that isn't justified.  

Kristin:    00:44:26    So one of the other things that I see a lot of buzz about online is about the new and very exciting different types of e-residency programs and digital nomad visas that are available in different countries around the world. And, and I have actually looked into that a few times, but due to my status as a US citizen, sometimes the advantages don't seem very compelling or necessary. Um, for my particular line of work, I could see maybe, um, European, uh, citizens or even non-European international citizens being interested in some of these programs because they can change their tax domicile and their tax base and, um, you know, it might be more valuable for them to have a second residency or a second citizenship or a permanent residency in another country. But can you, um, touch upon for a minute, uh, what would some of the benefits be for a US digital nomad to get a dual citizenship in another country or to get a permanent residence somewhere else with regard to taxes?  

Grace:    00:45:36  So I would say the first thing that comes to mind in terms of the specifically tax benefits, um, would be if you, and it goes back to claiming the foreign income exclusion. Um, so if you do have, um, a permanent residency in another country and your other facts and circumstances point you to that country as well, then you could use that to claim the bonafide residence test. Having an avenue to claim the bonafide residence test can be very valuable. And then, you know, from a lifestyle perspective as well, I think that in a number of countries, um, if you have a permanent residency, it can sometimes be an avenue into another citizenship, which doesn't really have any tax benefits specifically as such, except that it opens up more doors for you, um, generally in your travels and your life. 

Kristin:    00:46:18    Yeah, Just being able to stay in a place longer term, that's definitely a great benefit.  

Grace:    00:46:23    Absolutely. And you know, you and I, we both love spending a lot of time in Europe and we end up counting our Schengen days, you know, it, it becomes a bit of a pain.  

Kristin:    00:46:31    Oh yes. I have a video on understanding the Schengen zone and the Schengen visa, which is coming out shortly on this channel. So stay tuned, make sure to subscribe everybody <laugh>.  

Grace:    00:46:42    I will be watching that for sure because it's, it's a, a challenge for us. Um, and then, you know, the other thing I would just say is, um, another thing to consider is separately to your personal tax residency is, um, many of your listeners, they may at some stage, if they're not already there, be at the point where they are looking to, um, set up a company for their business ventures. And oftentimes people look to which jurisdiction doesn't make sense to register a company in. Now this is a very, I would say, high-level tax, uh, strategy, and it is certainly not one to do it yourself. Um, and it's one to really go into with an awful lot of professional advice and an awful lot of thought and planning. But at some stage in many digital nomads, uh, journey, they may find that operating through a foreign company can be beneficial for them. Their overall business and their overall facts and circumstances really have to align to support that. Um, but if it does work, it works well for some people. So I'm just putting that out there just so people know that, you know, the kind of baseline level stuff, um, that you can handle yourself once you've got a handle on that, um, then at some stage it may be appropriate for you to look to some of these other strategies.  

Kristin:    00:48:06    Yes. Thank you for mentioning that. So just to kind of like sum it up here, for people who are watching and listening, the moral of the story is that, you know, as a US citizen specifically, you need to be really proactive about, uh, what you need to be filing on your US tax return. But also depending on where you are in your digital nomad journey, there really might not be any difference at all to how you file your taxes, what your tax liability actually is. Um, so especially for people who might only be traveling a few months out of the year and they haven't changed jobs or they haven't started a new business, they might not have any changes at all. And then also for people who are thinking about becoming digital nomads, but are overwhelmed with all of the many, many things to take into consideration, especially when you are traveling as a digital nomad, you, you also might not have to, um, be concerned with like, uh, international bank accounts or companies at the beginning.

Kristin:    00:49:06    So you know, first maybe get acquainted with the lifestyle and then you could find your way. So I know, uh, for example, I still have, uh, US bank accounts, US company, you know, US LLC and I also like to use US credit cards and, and banks, um, because with the US credit cards, I can get more bonus points in some cases versus using like an international debit card for my purchases. So you, it's actually a amazing with technology today that you might be able to keep your business structure exactly how it is and just travel on and off around the world without really making many changes. But it's really good to know about, uh, the opportunities, um, and the different tax rules and things that you might have to do at some point. So that's really why we're having this conversation with Grace today because too many people start off in the digital nomad lifestyle without knowing a lot of these things, and they might not figure it out for a year until years later. So on the plus side, it could be more straightforward than you think, but you know, always now that you've, you guys have heard this interview, make sure to check on all of these, uh, things to see if they apply to you and also to keep in mind that you could have some more high-level check strategies in the future. Um, should you want to spend more and more time outside of the US or grow your business in different markets that might make sense to, uh, create a physical basin?  

Grace:    00:50:42    Absolutely. I could not agree more. And I think that the, the takeaway I like to leave with everyone really that speaks with me is as much as I'm a tax person and I do kind of live and breathe this stuff, um, I'm aware that it shouldn't be your main focus. If you are in need of, you know, some catch-up or some assistance or maybe you think you've made a mistake, um, just contact someone because there's always something we can do. And you know, I just don't let the tax stuff kind of stop you from making the step into this lifestyle because I think that it has so many benefits and so many areas of customization and flexibility that, um, you'll find a way to make it work for you. I think.  

Kristin:    00:51:19    Yeah, and also I would like to add that there's so much attention given to how to reduce your US tax liability and how to qualify for the foreign earned income exclusion and you know, how to stay out of the US or how to pass the physical presence test. And I think that a lot of, of remote workers and digital nomads, especially those who are self-employed or entrepreneurs, would really be better served focusing on how to generate more revenue and how to grow their businesses and having more of like an abundance mindset versus a scarcity mentality. Um, because I have seen people, uh, actually hold themselves back monetarily because they subconsciously don't wanna surpass a certain level of income because they don't want to have to pay more taxes. And like that's kind of, uh, <laugh> defeating the purpose of, you know, what we're all doing out here.  

Kristin:    00:52:14    Uh, of course, money is not the main motivation, but um, there's no way to limit yourself and your value and what you're providing to the world, um, just because you don't wanna pass the, uh, the $104,000 mark or the $106,000 mark. You know, I think everybody's expected, uh, you know, as a human being, we all should probably be paying taxes somewhere and no matter what. So, you know, think of it as a way of like contributing back to your country or back to the world and don't cap yourself at a certain income because you want to save money on taxes.  

Grace:    00:52:54    Yeah, absolutely. I agree. And then, you know, as your business grows, um, you can work with someone and you can, you know, employ some strategies that make sense and allow you to reinvest in your business, et cetera. Um, but these are all things that you can figure out as you go. So I would say, you know, wherever you are today, um, just, you know, keep moving forward and get the appropriate assistance and advice as and when you need it. And that's really all you can do.  

Kristin:    00:53:19    Yes. And I would definitely recommend for, um, our viewers to watch your Nomad Summit speech. So Grace and I actually met at the Nomad Summit this summer in Las Vegas. Um, she gave a talk on taxation and I gave a talk on relocation and you can hear, um, more details also about a state by state taxation, how to change your residents from one state to another and a lot of other interesting stuff. So I'll link to that below. And Grace, where can people get in touch with you if they wanna learn more, um, take your course, get a consultation or anything like that.  

Grace:    00:53:54    Yeah, absolutely. So any of your listeners, I would be more than happy to chat with them if they wanna send me an email, um, it's grace@gracefullyexpat.com and you might just wanna send me a quick mail just to make sure it's a good fit. And if it is, then you're very welcome to schedule a consultation with me. Um, you can book them online via my website, which is just gracefullyexpat.com. But I'd be very happy to give Kristin's listeners some, uh, access to my rates as they currently stand. And then, yeah, my, my course is on Teachable at uh, gracefullyexpat.teachable.com.  

Kristin:    00:54:27    I hope that you found so much value in my conversation with Grace. And if you want more info on filing your taxes abroad as an expat, I will link to all of our episodes in the show notes as well as our special deal for you to get 50% off of six months using FreshBooks, the cloud accounting software for freelancers and small business owners as well as non-accountants. So check that out, risk-free for your 30-day free trial using our link in the show notes, and look forward to seeing you back here again next week. I'll be one year older.