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  1. Thanks, Phil. 🙂
    How is it supposed to work, if you live overseas (with the legal right to work) but your income is from the US…. does it still count towards the $100k limit you have towards tax exemption as an expat? And if it’s self-employment, what happens to that self-employment tax? You still have to pay that, in the US, even if you’re not living in the US, and you earn less than $100k?
    What would happen if I gave up my citizenship (once I get foreign citizenship)? What tax would I have to pay on that same income from the US, if I’m not a US citizen and not living in the US?
    I’ve also been researching places like Panama… where they don’t tax you on foreign earned income… I’m thinking of all possible combinations here and trying to figure out how they would work. Like, for example…
    1. Being a US citizen with a US online income source, living in Panama.
    2. Being a citizen of somewhere else, maybe an EU country, earning online income from the US, living in Panama.
    I don’t know that I would earn enough to make it worth the trouble of starting a business for it, and I want to simplify my life anyway…. not add more responsibilities and paperwork… I’m glad to contribute what I can afford to good causes, to savings, to road-building or whatever… but I have a problem when nearly every year, the IRS wants pretty much exactly as much as I’ve been able to save, if not more, setting me back every single year and stealing my life from me as if my sole purpose in life is to earn money for their debt. I’m just trying to get my life back.

  2. @Kendal,

    If you are a U.S. citizen or U.S. permanent resident (i.e., you have a green card) you will be taxable on your worldwide income no matter what. There are things you can do that will:

    • Eliminate Social Security tax or Self-Employment tax, or
    • Allow you to postpone the time you pay tax on your earnings

    Those processes involve setting up a foreign corporation to be used to run your business. It will cost you money and it will cost you some attention diverted away from your business. Whether the tax savings are worth it (attention in my opinion is more valuable than money) is up to you.

    If you are an American living in another country, it is likely that one of two things is true. The first one is that you are there on a visa status that does not permit you to work (like a tourist visa) and the country will kick you out if they find you are running a business within their boundaries, even an online business. The second one is that you are entitled to work and should be paying tax.

    There are some places where you can go and work for a while (legally) without trouble. But for the most part the digital nomad lifestyle depends on flying under the radar in the country of choice. This may make you uncomfortable. Or not.

    In my experience, the Canadian system is particularly touchy about this. I fly back and forth to Canada a lot, and usually get questioned about my intentions regarding working while in Canada.

  3. Thanks for this post! I hadn’t heard this information before, it’s definitely something to think about…. I’m wondering though if and how it might apply if you are a digital nomad, but you earn money from companies in the US, like for instance, Google Adsense? I’m trying to figure out how to arrange myself so that I’m not paying taxes in a country I don’t live in…

  4. Thank you for writing this.
    I receive a lot of questions about this from Americans and now I know where to refer them to.
    And although I know the basics, I found a number of details that I was not aware of.

    It is much simpler for the rest of the world. Just make sure that you are not resident of a high tax jurisdiction and the draconic reporting (and taxes, when done right) belongs to a thing of the past.


  5. Whoa! As a digital nomad CPA, I took a lot from this article…from all sorts of angles. Thanks for taking the time to create such a great and detailed post!

  6. @Wesley,

    Thanks for stopping by. It is indeed an honor to hear from you. 😀

    I think this question of “What is Subpart F income?” for a digital nomad is an important one and I will blog about it or stick it in my Friday Edition email. The main thing that a digital nomad’s foreign corporation is trying to *avoid* is “Foreign Base Company Income”, which is a subset of Subpart F income. Everything else is probably trivial in size, so the taxation of it (or no taxation) won’t matter much.

  7. Based on your description, I am still unsure of how and when something is defined as “Subpart F” income, can you please clarify that?

  8. This is awesome! Thanks for laying it out, many have been looking for this info from a tax authority for awhille.

    The main takeaway for me is: Yes, as a freelancer, you can avoid paying taxes by being an employee of your own foreign corporation, but the costs of doing so will likely approach the cost of your taxes. Those costs being: Filing US taxes correctly, Setting up the foreign corp, Filing foreign corp taxes correctly.

    That said, what jurisdiction do you think would be most cost and time saving for a freelancer under $100,200/yr?

    PS. Email me and I’ll fix your fonts as a thanks for this great post.

  9. This comment was sent to us by Marina Hernandez from MHTax – Cross Border Tax Planning:

    Or move to a country with a totalization agreement with the US… and free-lance away SE tax free. Problem solved. 🙂

    I always enjoy your newsletters, even when they are written for those with hacker mentality, and especially appreciate that you always provide all the cites. So refreshing!

    But seriously, let’s think for a minute about the average overseas American: by the time he forms the foreign corp., hires a service to do the payroll and keep the books according to local law, pays the extra corporate taxes (which can be quite hefty: combined gross proceeds tax and corporate income tax are not uncommon) and for the preparation of the local corporate returns and related stuff (expensive formalities abound in civil law countries!), incurs double taxation in the local country when paying dividends (unless he is smart enough to organize a foreign pass-through when that is possible), makes the inevitable local compliance mistake and pays the fine/s or a professional to get him out of the fine/s or both, pays a competent US preparer who will complete the 5471 correctly after converting the foreign books to US GAAP and without charging him an arm and a leg (look, I see a Unicorn!), how much is he really saving in current cash flow? Potential savings at the max SS salary would be around$18K gross. All this extra stuff costs how much? I haven’t even factored in the loss of social security benefits (which you mentioned) and of peace of mind as a result of the additional complexity he is now required to manage…..

    Yep, that sounds like a great plan, would say:

    a) The SSA (one fewer retiree or 2, if he has a spouse who would have received spousal SS benefits, yeah!)
    b) Foreign corporate attorneys (cha ching!)
    c) Foreign governments (cha ching!)
    d) Foreign accountants and tax specialists (cha ching!)
    e) US preparers (cha ching!)
    f) Circular 230 professionals doing tax representation (cha ching!)

    Maybe we should circle back to the idea of moving to a country with a totalization agreement instead………. Did you know that weather in Chile is really nice this time of the year? And they have beaches, and skiing and really good wine, and this really smart lady President who spoke at the Chamber of Commerce here in Philly on Tuesday (not to be confused with her pathetic neighbor to the east, ruler of my native country). Personally, I’m partial to Italy and Spain, though. I’m blaming my parents for that.

    I give this idea a high risk rating with a significant chance of negative ROI. But I’m sure that for the hacker/internet dudes in those groups you mention it sounds pretty awesoooome! At least they have a better idea of what they might be getting into after reading your post (I hope)

    Have fun in Singapore,

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Tax laws change over time, and the information in this post above may be less accurate today than it was at the time of the last revision. This post is not tax advice for your specific situation. Please contact an international tax professional to get personalized advice for your situation.