Self Employed: Living and Working Abroad? Here’s What You Need to Report to the IRS

One of the more popular trends these days is being a digital nomad. If your work can be done remotely and not at an office, why not travel the world at the same time? You can often live in an exotic location that has a significantly lower cost of living, all while earning a comfortable salary from clients who don’t need to meet with you every day.

Once you sort out the basics, like where you’re living, you might be thinking about the tax implications of such an arrangement. If you are a United States citizen or a resident alien living overseas, the IRS will still want to know about your earnings. Fortunately, the process and rules for filing income taxes and paying estimated tax are the same whether you live in or outside the United States.

How to Report Your Earnings

When living and working abroad you’ll need to report all of your income. Whether it was earned in the U.S. or abroad, the IRS wants to know what you’ve earned in US Dollars (USD). When you’re self-employed you will also still be responsible for making quarterly estimated tax payments as if you lived in the United States since the rules are the same.

The Foreign Earned Income Exclusion

The foreign earned income exclusion is one benefit you need to know about if you’re working abroad. If you have qualifying income, you can elect to exclude foreign earned income that is the result of your personal services up to $120,000 for 2023 (the taxes you file in 2024) and $126,500 for 2024. This applies to employees as well as self-employed persons.

You qualify for this exclusion if you are a resident of a foreign country for the full tax year or physically present in a foreign country for at least 330 full days in any 12-month period that begins or ends in the tax year you hope to claim the exclusion.

In addition to the income exclusion, you may be able to claim a foreign housing cost amount exclusion from your gross income. This amount is your total housing expenses minus a “base housing amount” and is 16% of the maximum exclusion amount times the number of days.

Foreign Tax Credit

If you earn foreign income, your foreign source income is taxed in the U.S. and the foreign country you work in; however, the IRS gives you a break with the foreign tax credit. The foreign tax credit is intended to relieve you of being taxed in both the U.S. and the foreign country.

You can choose to take the amount of any qualified foreign taxes paid or accrued during the year as a foreign tax credit or as an itemized deduction. Generally, it is better to take the credit for qualified foreign taxes than to deduct them as an itemized deduction because of the following reasons:

• A credit reduces your actual U.S. income tax on a dollar-for-dollar basis, while a deduction reduces only your income subject to tax.
• You can choose to take the foreign tax credit even if you do not itemize your deductions. You then are allowed the standard deduction in addition to the credit.
• If you choose to take the foreign tax credit, and the taxes paid or accrued exceed the credit limit for the tax year, you may be able to carry over or carry back the excess to another tax year.

You Get Extra Time

Finally, the IRS gives you an automatic two-month extension to file your return and pay any taxes due without requesting an extension. The due date would then be June 17, 2024, instead of the April tax deadline. If you happen to owe any penalties, these are calculated based on the extended date in June, too.

Note, tax deadlines are the 15th of the month unless the 15th falls on the weekend, then the deadline will be the following business day. If you need more time, you can request an extension by filing a Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return but you must do so before June 15th.

Don’t worry about knowing these tax laws. No matter what moves you made last year, TurboTax will make them count on your taxes. Whether you want to do your taxes yourself or have a TurboTax expert file for you, we’ll make sure you get every dollar you deserve and your biggest possible refund – guaranteed. 

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