As people who live and work abroad, there are always going to be tax considerations that a static worker who lives in a country fulltime wouldn’t have to deal with. Such questions include, “How much tax should you pay?” “When should you pay it?” “Do you need to pay tax at all if you’re not in the country for a majority of the time?” For the US digital nomad community, high on the agenda will be the following question...
What happens when Trump IS IN power and introduces a whole new set of tax reforms whilst I’m travelling?
The reality is that it’s complicated. Even Certified Public Accounts are learning how to navigate around the new policies. Each of you reading this will be doing different things, running a variety of businesses based potentially out of different states. You could just be a freelance worker, who takes on temporary projects or you could be sitting pretty on an ecommerce business empire. Regardless of this, as the government administrations change, it’s always good to be aware of legislative updates that will affect you and your golden coins. The good news is that from some of our preliminary investigations, it looks like US digital nomads should do reasonably well out of the new tax reforms. What does appear to be clear, is that the more money you are earning, the more beneficial these tax reforms will be for you.
So without further ado, now that it’s been a good few months since the bill was signed off by President Trump himself, let’s discuss some of the changes that we feel you’ll need to watch out for both on a personal level and on a professional level. But first...
PERSONAL TAX CHANGES
Personal Taxes have been changed quite a bit so let’s take a look at the standout changes.
Income Tax Rates
US income tax rates have had quite the overhaul in the new tax bill. There are still 7 tax brackets as there were before but a majority of the rates have been lowered. The top rate falls from 39.6% to 37%, the 33% bracket falls to 32%, the 28% bracket to 24%, the 25% bracket to 22%, and the 15% bracket to 12%. The lowest bracket remains at 10%, and the 35% bracket is also unchanged.
To see the full tables please click here but essentially for digital nomads, you could be in line to keep a little more of your money in your pockets which is never a bad thing.
Personal Standard Deduction (tax free allowance)
There has been a significant increase in your tax free allowance this year with single filers moving from $6,500 to $12,000 (for married couples it;s gone up from $13,000 to $24,000, and for heads of households it’s moved from $9,550 to $18,000). For static Americans, in real terms this isn’t a huge increase, because once you account for inflation, yes you get more money in your paycheck but staying alive is far more expensive than it used to be particularly in certain states.
For some digital nomads, depending on where you are living, you stand to really notice this increase in your standard deduction. Why? Well the simple explanation is this, your dollar goes a lot further for some commodities in cheaper countries like Bali or Vietnam, than it does in the U.S. This means that whilst $12,000 in your hometown isn’t a huge amount of money, $12,000 tax free somewhere else is a hell of a lot. Basically, digital nomads have the flexibility to side step inflation depending on where they live. So if you play your cards right, you could enjoy your tax break much more than your static peers, or your nomad peers living in more expensive countries. Just putting it out there.
Personal Exemptions have been suspended for the years 2018 - 2025. This is balanced out by the increase in the standard deduction. In terms of the effect on digital nomads, it shouldn’t be massively noticeable for most of you unless you were used to submitting itemised deductions.
The law ends the individual mandate, a provision of the ACA or "Obamacare" that provides tax penalties for individuals who do not obtain health insurance coverage, in 2019. (While the mandate technically remains in place, the penalty falls to $0.) All this really means is that whereas before you’d get penalised for not getting health insurance, now it’s up to you. Most of you who travel will have some sort of health insurance anyway so for you guys, it’ll just be business as usual. Having said that, it essentially repeals cost savings that the Affordable Care Act tried to secure, which means your insurance premium could go up in price.
State and Local Tax Property Tax Deduction
The law caps the deduction for state and local property taxes at $10,000 through 2025. This will obviously be good news for those of you who own property. You have Senator Susan Collins to thank for the that particular amendment, because by the sounds of things, it wasn’t included in the draft of the bill.
Retirement Plans and HSAs
Health Savings Accounts are not going to be affected by the law, so whatever you have in place, will remain intact.
Student Loans and Tuition
The law leaves these breaks intact. So nothing changes for you there either.
So there’s a summary of the top points of concern for digital nomads on the personal tax front. The important thing to note once again, is that the individual tax reforms will expire in 2025. The general consensus is that as a result, lower earners could end up paying more taxes overall, so beware. Again, please seek specialist advice to discuss your individual circumstances. Just to give you a visual representation here's a diagram by howmuch.net.
Now let’s take some time to look at how ‘Trump Tax’ could affect all of your business operations. The good news here is that the business tax reforms are going to be permanent, so if you’re already making big bucks, things are going to be looking up for you. Here’s some of the highlights!
Corporate Tax Rate
One of the biggest changes is the reduction of the corporate tax rate; at present the highest rate sits at 35%. Under the new reform, there will be a universal fixed tax rate of 21%. Once state and local taxes are added to that, the average should rest at around 26.5% overall, thus bringing America’s corporate tax rate into line with most developed nations in the world.
How you benefit from this is dependent on a variety of factors. If your business is turning over more than $100,000 then you’ll notice the benefit of this tax reduction more.
The new Trump Tax reform now allows full expensing of short-lived capital investments — rather than requiring them to be depreciated over time – for five years. After the five years has passed begin to phase the change out by 20 percentage points per year thereafter.
This is a big one for a lot of digital nomads as I’m sure there are quite a few you who run businesses or side hustles that fall into the ‘pass-through category. Owners of pass-through businesses – which include sole proprietorships, partnerships and S-corporations – currently pay taxes on their firms' earnings through the personal tax code, meaning the top rate sits 39.6%.
The law creates a 20% deduction for the first $315,000 of qualified business income for joint filers of pass-through businesses such as partnerships and sole proprietorships. For income above that threshold, the legislation phases in limits, producing an effective marginal tax rate of no more than 29.6%. This may result in some significant tax savings.
Net Operating Losses
The law scraps net operating loss carrybacks and caps carryforwards at 90% of taxable income, falling to 80% after 2022.
Allows businesses to immediately write off, or expense, the full value of investments in new plant and equipment for five years, then gradually eliminates this 100% expensing over five years beginning in year six.
The new reform exempts US corporations from US taxes on most future foreign profits, ending the present worldwide system of taxing profits of all US-based corporations, no matter where they are earned.
The law enacts a deemed repatriation of overseas profits at a rate of 15.5% for cash and equivalents and 8% for reinvested earnings.
The law also introduces a territorial tax system, under which only domestic earnings are subject to tax.
Here, I’ve highlighted the major changes that we think our US nomads will be interested in. The Tax Cuts and Jobs Act 2017 spans many different elements of taxation across the board which we have not included here, so please check all taxes that apply to you. Our inferences on how this reform will affect all of you is speculative at this point because, when tax reforms come out, nobody truly knows what the real effects of it will be. But at the very least we hope to have given you an overview of the changes to watch out for.