Tax Deductions for Popular Expat Remote Jobs
General guidelines on tax deductions and how to apply them to great expat jobs
Working remote from a sunny beach has always been the holy grail of expat life. With a reported 43% of people working at least some hours from home domestically in 2017, pulling it off in another country no longer need be a mythical quest. You can do it, probably thousands already do.
If you work for a company, amazing tools have evolved to keep teams on the same page. Zoom, Skype and Google Chat have made in-person meetings seem pretty quaint.
One of my personal favorites as a solo operator is a tool to help people keep track of when time zones overlap so that you always know when to schedule a call or meeting with a colleague or client in a different time zone.
I can not count the number of times I have missed online training seminars due to time zone differences. If you have clients in different countries, they often move their spring and fall clocks back and forth on different weeks than the U.S. does. It can make for all kinds of craziness.
You might want to run through this comprehensive list of tools for remote workers with an eye towards those that would be of most benefit to you as an expat working remotely.
No matter how many days a year you live in another country, you will have to file your federal and state income tax return. The basic rule of thumb is that if you have an American passport, most likely you will have to file a federal and state tax returns.
Deductions for the Self-Employed
As I prepare my own taxes from Mexico, I thought now might be a good time to remind you that if you’re thinking about working freelance from another country, perhaps as a consultant or web designer, for example, tax deductions taken for business expenses apply no matter where you live.
If Uncle Sam is going to make you pay U.S. taxes no matter what country you live in, he cannot very well not give you U.S. tax deductions, can he? He’s quite jealous of other suitors. The U.S. is one of only two countries that makes citizens file taxes even if they are full-time residents of another country.
Starting a business (being an independent contractor) is a great idea as an expat, even if you do not make a profit for the first 2-3 years, perhaps more depending on the profession. Given that most businesses take a year or two to turn a profit, you can still take the deductions while you are building it up.
You always want to reduce taxable income as much as possible. The lower the taxable income, the more of your money you keep. You have to be especially alert to projecting and decreasing your taxable income if you are trying to stay within an income tax bracket that qualifies you for subsidized healthcare plans, or just keep your tax burden down in general.
Regardless of the type of self-employment you choose, your deductions from taxable income should include all necessary and ordinary expenses associated with your work.
Here is a review of the general deductions that you can apply to any industry in which you might be self-employed or do work as a contractor. After that discussion, we’ll move on to how you might apply those deductions to specific types of remote work that are particularly appealing to expats.
Rent and utilities
A certain portion of your rent may be deduced if that space is used for business. In the past, that space had to be used solely for business. With the number of people working remotely having grown so exponentially, the IRS has loosened up on that in recent years.
To determine the deduction, if your qualifying home office takes up 20% of your apartment, you can deduct 20% of your electricity bill and 20% percent of your rent. You can even deduct a portion of the housekeeping from your taxable income. Whether you have a home office or rent office space, having it cleaned is deductible.
If you use your personal phone for business purpose, the business-use portion is generally deductible. To get the deductible amount, multiply your phone’s monthly cost by the percentage of time it’s used for business purposes.
If you work from home, you can have a shared internet account for both home and business use and deduct a portion of the monthly cost in the same way.
If you’re self-employed, you can deduct the full cost of health insurance you purchase for yourself, your spouse, and/or your dependents. The health insurance plan does not need to be a US plan or meet certain conditions long as it's purchased in the name of business owner. Plan may cover spouse and dependents. Premiums can be deducted from net business income.
As a self-employed person, you can take advantage of particular types of tax-advantaged retirement savings accounts. Ask for IRS Publication 560: Retirement Plans for Small Business to pick the one that will best help you make deposits and deduct.
Travel expense deduction
Business-related flights home are tax-deductible. Most likely, you’ll make a trip or two a year back home to meet with clients or business consultants (I come back every year to meet my CPA and book editor).
Business-related hotels, airfare, and 50% of meals can be written off. You can even extend your trips back home to see your friends as long as the number of days spent on business is longer than the number spent for pleasure. Keep very good records, however, because this category is heavily scrutinized by the IRS.
If you intend to keep working and earning income from the United States and want to live in Mexico, you should carefully consider where you’ll be living in relation to hub cities in both countries.
Living in Mazatlán, going to and from the U.S. is unwieldy because Mazatlán lacks direct flights to the U.S. When I lived in Guadalajara, which had daily direct flights to Denver for less than $200, my whole world changed. For just that reason, the most popular expat areas tend to radiate from Mexico airport hub cities (Mexico City, Guadalajara, Tijuana and Monterrey). Fortunately, online meeting programs like Skype and Zoom makes most business visits unnecessary. However, an event like a lawsuit (god forbid), or closing a contract may require your physical presence.
If you live in a hub American city, a number of airlines are increasing service to Mexico. Check and see if new flights are anticipated. Being able to go from one country to the next in practically a morning makes the whole lifestyle much easier.
Working from another country will force you to think of marketing differently. You can’t network and develop business relationships in person like you may have always done in the past.
You may need to put more of an investment into a blog (hiring writers) and your website (hiring webmasters).
The cost of your site design, domain, graphic design services, computer service, stock photography, styling for videos, legal fees are all deductible, just like if you were working from the U.S.
You can deduct any materials you use to market your business or the cost of hiring someone to design and make promotional materials for you.
Any costs for normal replaceable supplies that you use in the course of your work can be deducted. This applies to all common office supplies, such as paper, pens, copier fees, etc. Books, magazines, and newspapers (including online materials and subscriptions) related to your business are also deductible
As an aside, paper products, like envelopes, will require you to go to a papeleria in Mexico, rather than a place like Office Max. The positive side to that is you can buy exactly the number of envelopes or pieces of paper you need. No more buying 500 envelopes that will take you two years to use up (and have your coffee stains all over them by then) because of the lower per unit price.
A little-known tax write-off often overlooked is the cost of providing yourself snacks. The cost of caffeine can also be deducted (happy hour is not yet a deduction, in spite of my petitioning).
Professional fees incurred by attorneys, accountants or other professionals can be deducted (although fees to have taxes prepared no longer are). These are general all-purpose deductions that apply to any business in which you are a subcontractor, freelancer or self-employed.
How might these deductions translate to specific freelance work in Mexico? Let's take a look at some popular expat businesses.
In addition to the general business deductions mentioned previously like a portion of the rent, utilities, and phone/internet being deductible, the cost of insurance premiums related to running a consulting business is entirely deductible as well. For consultants, this might include something like professional liability insurance or even insurance for your office. Licensing fees are deductible.
Keep receipts for everything. As one who would still find crumpled receipts in jacket pockets two years after a business lunch, I high recommend Evernote, where you can take a quick picture of the receipt and file it in the program, all nice and tidy.
Some receipts will already be in a foreign denomination, and BTW, you do not need to reinforce the impression that your business is just one big party by handing them over with tequila and salsa stains all over them.
Artists/photographers/writers and other creatives
Artists performing as contractors can deduct any ordinary expenses (camera, canvases, and supplies) and any other necessary business and travel expenses incurred in earning the U.S. income.
Having your own business as an artist, professional photographer or writer is a little grayer. When can and can't you take deductions? First you need to ask yourself...
Is your endeavor is a business or a hobby?
Granted, we are all artists, as I mentioned in my previous post, but for tax purposes, I’m afraid you must answer this question conclusively and convincingly.
How do you (and the IRS) determine whether your activity is a hobby or a business? It’s pretty intuitive actually. You probably will know, in your heart of hearts, which it is. If you truly love every part of your work so much you cannot tell your business from your pleasure, ask your accountant. If he says it's a business, start another business teaching others your secret.
Does it feel like the job to you? Have you written an actual business and marketing plan? Are you using accounting software and budgeting your expenses? Do you advertise?
Do you adapt operations when you need to in order to make it profitable even when it means more work and doing things you don’t like? Does your background indicate you could be successful at it? Does your business have a name and viable website? Do you keep business expenses separate from personal?
Is your operation driven by a profit-motive and activities to earn income over self-gratification? These are questions to ask yourself (Every time I wrestle with technical glitch in my website or keep a deadline that drags me unwillingly deep into the night, I know I have a business. The degree to which you have a business roughly correlates to how much sleep you lose over it.)
You do need to make a profit at some point. If your efforts result in a profit in three-out-of-five consecutive years, your activity is presumed not to be a hobby by the IRS. That’s not a hard and fast rule, however, as this landmark case proved.
An artist usually files a “Schedule C” as part of his or her regular 1040 income tax form, which is where you report your art income and expenses. The artist may file a form 8829 for the home office (studio) deduction and might also be required to pay self-employment tax (Schedule SE) on his or her net income (profit), as well as federal income tax if the profit exceeds a certain amount.
Like being an artist, in defining yourself as a writer, intent becomes a key indicator. Are you doing it full-time, earning your entire income from this source? Or do you have another job and write an article here and there for extra income?
Perhaps you’re currently living on your savings while writing your first book. If you are working toward making a living from writing, even if you have another job on which you’re subsisting for the time being or living on savings, you can declare your writing an occupation by filing a Schedule C and take deductions, even if the result is a business loss.
Just like being an artist, if you demonstrate a profit motive, you’ll be more likely to convince an auditor you’re serious about the business of writing.
You should keep receipts for all business expenses the same as other professions, such as writing-related travel costs, conference admissions, educational expenses such as writing courses, association fees, and business lunches—such as when you’re interviewing someone over lunch. Research materials (all those books, magazines and newspapers) are deductible, too. Don’t go overboard but obviously a writer needs to do a lot of reading.
Like being an artist, writer, photographer and the like, it is important to note that if you claim your writing as a business, the IRS expects you to start making money after a few of years.
If you don’t or are making a minimal amount, for tax purposes you may only be able to claim your work as a hobby until you show you are hustling to make it profitable. That means doing things like developing a serious marketing plan, a website, networking and doing all those things successful artists do.
Unlike writing, a photography business has significant startup costs. Cameras, expensive lenses, and backdrops can be a real investment. Fortunately, you can get a tax deduction for those expenses as well as those that apply to any business you may initiate.
Expensive equipment you’ll use for more than a year—including cameras, lenses, lighting, light boxes, filters, tripods, and computers might as capital expenses that you deduct a portion of for the life of the item. You might be able you upfront costs all at once using the Section 179 deduction, and to get a significant tax break the first year.
Being a photographer requires a lot of schlepping of equipment, herding people and perhaps assistance with shoots. Should you have people helping you, even if they are simply hired on a contractual basis, their pay is a tax deduction and might include their lodging and meal expenses. I do believe they can be family members, but reconfirm that with your accountant.
Bookkeepers need to have special encryption and security software as well as incur the cost of the bookkeeping software such as Quickbooks or TurboTax.
The mistake many contract bookkeepers make is underestimating their business expenses, which leads them to under-charge for their services. Industry associations advise to set a reasonable income every week and then add a profit margin to your fees. That profit can then be kept aside for unexpected costs like having to replace a computer unexpectedly.
Another common mistake is forgetting about general liability insurance that can pay for third-party lawsuits over property damage, reputational injuries, and bodily injuries. The typical general liability insurance policy for bookkeepers costs $350 to $750, right in line with the average cost for small financial services firms in general.
Laws governing the practice of bookkeeping change considerably over time. You can expect that there will be ongoing training and professional development requirements. You may want to attend conferences in the U.S to keep up to date and market for new clients. You can claim some self-education expenses back as tax deductions. If you hire extra people seasonally, educational expense deductions apply to them as well.
Virtual admin assistants
Most virtual admin assistants are either 1099 subcontractor (considered a sole proprietor by the IRS) or operating under an S-Corp. Along with the general business deductions, you may not have thought of things like content writers for your website (marketing), professional e-courses and bookkeeping software.
Software and web developers are highly compensated, making it even more important to reduce taxable income through legitimate business deductions. By maximizing deductions, a software developer or website designer can keep a significantly larger percentage of income.
The allowable deductions for developers and website designers follow the same guidelines as consultants and include a portion of rent/utilities, licenses, software and subscriptions (which are even more important in such a rapidly changing field). Many freelance software developers purchase software to support project management, invoicing, and team productivity.
Equipment is a big deduction for a contract software developer. The Section 179 deduction allows you to fully deduct certain qualifying property in the year purchased, rather than depreciate it over many years as would ordinarily be required (for capital assets).
Section 179 can be applied to vehicles, office furniture and equipment, certain software costs and capital improvements. Entrepreneurs who invest in business property can realize significant tax savings from taking advantage of the Section 179 deduction.
English teacher (ESL teacher)
Your tax situation will be a little more complicated if you are an ESL teacher because the source of your income may be Mexico, that is you’re being paid in pesos by Mexicans.
A source of the income is considered to be in Mexico when the service is provided in Mexican territory, regardless of where the agreement is negotiated or where the payment was made. Most likely you’ll be an independent contractor and the computer and equipment you need to work and set your schedule will be deductible on your U.S. tax filing.
However, if you are teaching English to Mexicans in person and your source of income is Mexico, you may owe taxes in that country. Special care needs to be taken that you aren’t double-taxed.
Many international companies hire contract online English teachers. Employees working for an international organization are subject to some special tax rules.
You have to report self-employment income under the Self-Employment Contributions Act (SECA). Self-employment tax is computed on Schedule SE, Self-Employment Tax, and reported on page 2 of the Form 1040.
In the case of working for an international company, you are not “self-employed” for any other federal tax purposes. You may not claim deductions for expenses or establish a Simplified Employee Pension (SEP) Plan.
You may claim deductions for non-reimbursed employee business expenses arising from your employment. These expenses are miscellaneous itemized deductions and are subject to the 2% of adjusted gross income limitation.
For these reasons, particularly the danger of double taxation, this is an area you will probably want to seek an accountant or CPA firm experienced in expat taxes.
SECA (Social Security and Medicare contributions)
If you’re self-employed in most professions, especially if you are making over a certain level you’re responsible for paying your own share of those Social Security and Medicare contributions, collectively known as SECA. The self-employment tax structure for 2017 was 15.3% on the first $127,200 in net self-employment income.
Unlike your traditionally employed peers, as self-employed, you can deduct a portion of this tax when you file your tax return at the end of the year.
2018 will harken some small changes to how you prepare taxes next year that may be of minor benefit to expats. Check in with your C.P.A. (one familiar with expat taxation) to get an update when that time rolls around next year. With proper planning and quality tax preparation, you should be able to take advantage of these and other strategies to minimize your US taxes.
In addition to your federal income tax return, you may also be required to file an informational return on your assets held in foreign bank accounts, called Foreign Bank Account Reporting (FBAR) via FinCEN Form 114 if you hold more than $10,000 in a foreign bank...but that hairy topic is for another day.
Disclaimer: While I made every effort in conducting research from a variety of credible sources and the well of my personal experience, I am not a C.P.A. This article should be used for points of discussion between you and a C.P.A. or accountant with experience in expat and business tax accounting.
This post was reviewed for accuracy by Taxes for Expats (taxesforexpats.com)
"When an artist's work is work versus a hobby: An IRS analysis." by NOLO.com legal encyclopedia.
"Tax advice for writers" by Writers' Digest
Most recent: Your life is yours. You are the creator, the artist and maybe even an expat rock star.
Kerry Baker is the author of two books. "The Interactive Guide to Learning Spanish Free Online" is a curation of the best of Spanish language tools available free online, curated into lesson plans. By using the Guide, you can create unique lesson plans every day, which will keep you motivated. Study anywhere by using your e-reader or laptop.
The second book, "If Only I Had a Place," gives you a holistic guide to securing the most luxurious places for the least cost. Avoid the pitfalls and take advantage of the opportunities of being an expat with this book. It includes a listing of rental concierges in the most popular areas, that can be your eyes and ears in your prospective destination.