The digital nomad life personifies the true definition of “living the dream.” One moment you’re completing a report in a Paris café and the next you’re designing a logo on a beach in Bali. But complex expat taxes looming over your head can quickly turn a sun-drenched adventure into a storm cloud.
Not to fear! You can still catch up on your taxes without missing your next destination. This guide will walk you through the SFOP process, IRS transcripts, consolidating income, gathering travel records, FBAR checks, and qualifying for FEIE and FTC.
How to Catch Up on Your Taxes While Living Overseas
The SFOP Program
First and foremost, look into the Streamlined Foreign Offshore Procedures (SFOP) program. This is the best place to begin if you’re feeling lost on where to start. You can also fill out Form 14653 through SFOP, which declares that your missed filings were non-willful.
The SFOP program helps U.S. citizens living abroad catch up on their taxes, while Expatfile SFOP software is specifically designed for streamlined filing that’s fully IRS compliant. Tax software prevents you from having to scour the web for tax forms or risk missing FBAR obligations. It guides you through the process step-by-step, starting with a questionnaire.
The earlier you start your SFOP filing, the better. If the IRS contacts you first, you may be ineligible for the program.
SFOP Timelines
Instead of filing returns for every missed year, you only have to file your three most recent returns under the SFOP program to become fully compliant. If you have FBAR obligations, you’ll need to file Foreign Bank Account Reports (FBARs) for the last six years.
The next timeline to know is the 330-day eligibility test. This rule mandates that you must have physically lived outside the U.S. for at least 330 days during at least one calendar tax year within the last three years. If you meet this rule, you may be eligible for a 0% penalty as a foreign resident, rather than a 5% penalty as a U.S. resident.
IRS Transcripts
Requesting IRS transcripts can help clarify what the IRS already knows about your income. You can request transcripts through the official IRS website.
These transcripts list all reported income by clients, payment platforms, and financial institutions. Your filed returns should reflect what is documented on these transcripts.
Income and Travel Records
As a digital nomad, your financial trail may be a bit scattered. Consolidating your income documentation can help streamline the filing process.
Start by collecting all of your bank statements, invoices, and digital wallet transactions. Next, use built-in tools to convert all foreign currencies into U.S. dollars. For example, PayPal has an easy conversion tool for this.
Organize all of your travel documentation for the last three years into a timestamped log. This log can help you prove the 330-day foreign residency requirement and calculate tax break eligibility.
FBAR Checks
If the combined balance of all your non-U.S. financial accounts exceeded $10,000 USD at any time during a calendar year, you must file FinCEN Form 114, the form for your Report of Foreign Bank and Financial Accounts (FBAR). You can prepare these forms using software or an e-filing system. Remember to indicate that you are filing these forms through the SFOP program.
FEIE vs. FTC
If you are preparing the last three years of 1040s, you can lower your U.S. taxes with two primary mechanisms: FEIE or FTC.
The Foreign Earned Income Exclusion (FEIE), which is Form 2555, allows you to exclude an annual adjusted threshold of $120,000 in foreign earnings from U.S. income tax. This is ideal for digital nomads who pay little to no local taxes.
To qualify, you must pass either the Physical Presence Test (330 days abroad) or the Bona Fide Residence Test. However, the FEIE does not exclude U.S. Self-Employment tax.
If you’re a digital nomad who is settled in a high-tax country, like Germany, Spain, or the UK, you can see if you qualify for a Foreign Tax Credit (FTC) on Form 1116. The FTC also lowers U.S. income tax, providing a dollar-for-dollar credit. Again, this does not apply to self-employment tax.
Catch Up on Your Taxes
Get your taxes together on the go. Look in the SFOP program, streamline your filing with tax software, gather all income and travel documents, and see if you qualify for FEIE or FTC credits.
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