Navigating the Foreign Housing Exclusion: A Digital Nomad’s Guide to Anxiety Free Living in a Foreign Land

The Foreign Housing Exclusion can be free money for the working Digital Nomad!  Let’s find out how to qualify.

Hey there, globe-trotting digital nomads! So, you’ve swapped your cubicle for a hammock in the Philippines, Bali, or even Thailand. Did you know the Foreign Housing Exclusion availble to Digital Nomads can reduce your income by as much as $94,060?!

Trading in the 9-5 grind for sunsets on an exotic beach and conference calls from a mountaintop (with internet) is the dream for millions.

Sounds amazing, doesn’t it? But wait, before you go posting that envy-inducing Instagram story, let’s chat about something slightly less exciting but still super important: U.S. taxes.

Yep, even in paradise, Uncle Sam wants a piece of your piña colada fund. But fear not, my wanderlust-filled friend, because the Foreign Housing Exclusion (FHE) might just be your ticket to maximizing those beach bucks while staying on the right side of the IRS.

The Foreign Housing Exclusion is for employees.  You get a paycheck with taxes withheld.  There is a Foreign Housing Deduction which is available to those who are self-employed.  Click this link for an article on the Foreign Housing Deduction.

What’s the Foreign Housing Exclusion and Why Should Digital Nomads Care?

In a nutshell, the FHE is a tax perk for U.S. expats (like yourself) allowing you to exclude certain housing expenses from your taxable income.

Sounds perfect, doesn’t it?  You can travel and work abroad while potentially excluding from your income the costs of housing WHILE IN ANOTHER COUNTRY!

Think of it as the IRS throwing you a bone for braving monsoons and mastering the art of haggling in Phuket. It’s their way of saying, “We get it, living abroad can be pricey,” and it’s designed to ease the financial burden of your overseas adventure, er, employment.

Qualifying for the FHE: The Basics

Before you can qualify to exclude your housing costs, you must qualify for the Foreign Earned Income Exclusion.  There is no way around it.  If you don’t qualify for the FEIE, you won’t qualify for the Foreign Housing Exclusion.

Second, to snag this tax break, you’ve got to pass the bona fide residence or physical presence test, proving you’re more than just a tourist with a laptop. This means either living in your country of choice for a full tax year or being physically present there for at least 330 full days in any 12-month period. And no, visa runs don’t count towards this, so nice try.

The above is imperative.  If you think of it rationally, it would be pretty tough to qualify for a FOREIGN housing exclusion if you aren’t in a foreign country.

Once you’ve got that sorted, you’ll need to show that your earnings are from bona fide work. Streaming your beach life on TikTok or Instagram might not cut it unless you’re actively treating this as a business.

This is the income to apply your Housing Exclusion against.  You gotta have foreign EARNED income, people.

Calculating Your Exclusion: The Fun Part

Here’s where it gets a bit mathy, but stick with me. The IRS isn’t giving you carte blanche to write off your entire island lifestyle. There’s a limit to how much you can exclude, based on the cost of living in your Foreign locale compared to Washington D.C. (random, right?).

For 2023, the base housing amount is 16% of the Foreign Earned Income Exclusion (FEIE), which is set at $126,500, making your baseline exclusion about $20,240.  This is the amount the US government has determined you would spend on your housing.

The above is a perfect example of why our politicians are so out of touch.  But it is what they give us, and in this case it helps.

The second part is your locale cost.  This is a table the IRS puts together outlining the limits of various areas.

Part IX shows what the IRS considers the maximum housing cost in a specific locale (or country, if small).  In the example, Thailand costs $59,000 to house yourself in 2024.  If you spent more than $59,000 in 2024, you are limited to that $59,000 amount.

Subtract the base amount ($20,240) from the amount on the table ($59,000) for a net amount of $38,760.  You can exclude this amount on your Form 2555 (Foreign Earning Income) to exclude an additional $38,760 from being taxed.

Qualified Expenses: What Counts and What Doesn’t

Eligible expenses include rent, utilities (minus telephone charges, because apparently, the IRS thinks we’re still using landlines), real estate fees, and even the cost of leasing a Buddhist Temple if that’s your vibe.  TV subscription fees are also not qualified (like Netflix or Hulu).

Additional qualified expenses are leasing fees, rental of furniture, and renters insurance.  Items that don’t qualify are payments made to purchase realty (principal, interest, and escrow fees), domestic labor, or anything that can be looked at as extravagant or unnecessary.

This exclusion is specifically for your domicile in the foreign country.  Your daily halo-halo fix and weekend getaways to Machu Picchu are on you. The key here is that the expenses must be reasonable (no gold-plated toilets) and directly related to your housing.

Let’s Take a look at a current example

Milicent has a lifestyle blog where she posts YouTube videos of life as a Digital Nomad in Southeast Asia.

She has decided to live in Thailand, Laos, Vietnam, and Cambodia for a year each before moving to the Philippines for good.

She fully qualified for the Foreign Earned Income Exclusion and is considered to have satisfied the Physical Presence Test by living in the same country for at least 330 days of a consecutive 12-month period.  You don’t have to live in the same country for the entire period, but remember that we are talking about your DOMICILE.  You won’t qualify by simply traveling around the world since you won’t have a “domicile”.

Milicent lived in Thailand for all of 2024.  She had $200k or self-employment income, of which 100% was earned as an employee while in Thailand.  We won’t be dealing with her Foreign Earned Income Exclusion here, just the Housing Exclusion.

Her qualified costs of housing for the year were $50,000.

Milicent can exclude $29,760 from being taxed ($50,000 – 20,240 = $29,760).  You are still responsible for your self-employment taxes.

Getting It Right: Tips and Tricks

This is an area the IRS will scrutinize.  For this reason, I would advise you to go a little nuts with your record-keeping.  Track everything and keep receipts.

1. Keep Impeccable Records: The IRS loves paperwork more than you love sunset selfies. Keep every receipt, lease agreement, and utility bill. If it proves you paid for housing, save it.  If your bank account is with a local bank, save the statements.  The same goes for credit card statements.

2. Understand the Local Cap: Each location has its cap based on the cost of living. Manila might have a higher cap than a remote beach town. Know your limits to maximize your exclusion.

IMPORTANT: This is also important if your cost of living is LESS than the base established by the IRS (the 16% amount).  If you don’t have $20,240 in qualified foreign housing expenses, you won’t have a Foreign Housing Exclusion.

3. Professional Help is Key: You know me.  I’m not dismissing anyone’s mental capacity, but it would be really easy to make a mistake on this.  If you make a mistake in one year, chances are the mistake will be on multiple years’ returns.  With an issue with a higher audit risk (such as the Foreign Earned Income Exclusion and the Foreign Housing Exclusion), I will always advise you to seek professional help.

4. Timing is Everything: The timing of your expenses and income matters. Planning and smart financial management can help you leverage the FHE more effectively.

Milicent made the decision to live in 5 different countries over a 5 year period.  She was planning FOR the FEIE and FHE.  She made sure to qualify for both each year knowing she could save thousands in taxes by planning properly so she could benefit from the FEIE, and by extension, the Foreign Housing Exclusion..

5. Tax laws tend to change, or be “adjusted” annually.   What’s accurate now might be outdated by your next visa extension. Keep up to date or have someone do it for you.

Subscribe and you’ll be alerted to all new posts.

Conclusion – Living the Dream Without the Tax Nightmare

So, there you have it, my wandering friends. With a bit of specific planning and a keen eye on your expenses, the Foreign Housing Exclusion can help make your digital nomad dream a bit sweeter (and more affordable). Remember, it’s not just about finding the perfect beach or mastering the art of remote work; it’s also about smart tax planning to ensure your adventure continues as smoothly as possible.

And let’s be real, nothing says “successful digital nomad” like sipping a coconut on the beach, confident in the knowledge that you’ve got your tax situation locked down tighter than your Instagram game. So, go ahead, and enjoy that sunset. You’ve earned it – both the view and the tax savings. Cheers to living your best life, wherever in the world that may be!

And with the tax savings, you can start your own Solo 401k, save for retirement, AND save even MORE on taxes!

There you have it folks.  Stay cool and talk later.

JKC

Digital Nomads Must Know These Critical FBAR Requirements!

So, what is an FBAR and why would a Digital Nomad care about its requirements?

FBAR stands for Foreign Bank Account Report. As an American living abroad, you more than likely will have a financial account at a foreign bank or financial institution.

Unfortunately, having a bank account in a foreign country can trigger a requirement to inform the US DOJ of this foreign account activity.

Sounds precarious, right!? It’s not for most of us. We’re simply letting the government know we have an account in a foreign country. The DOJ uses this as a means to find terrorist activity within our borders.

You may be required to file form FinCEN 114. Your tax responsibilities don’t end when you cross the US border.

Let’s take a look at the basics of what an FBAR entails, including:

  • What an FBAR is
  • Who files an FBAR
  • FBAR deadlines
  • Filing instructions
  • Penalties for not filing

FBAR Defined

FBAR stands for Foreign Bank Account Report. Pretty simple. If your foreign accounts held a combined amount of $10,000 or more at any point during the calendar year, you are required to file FinCEN Form 114 reporting the financial institution, account number, and highest balance during the calendar year.

There are heavy penalties for those who fail to file, so it’s a good idea to stay current with your filings.

As a Digital Nomad, you will simply report the balance in your foreign accounts, but be aware of these additional accounts you may also have to report:

  • Assets being held in a foreign branch of a US financial institution.
  • Land being held in a foreign corporation or trust.
  • Any financial account you have a financial interest in.
  • Foreign retirement (not government-held) accounts.
  • Investments in foreign companies held by foreign institutions.
  • Any foreign bank account in which you have signature authority.

Who Is Required to File an FBAR?

An FBAR must be filed by any US citizen, green card holder, resident alien, or dual citizen who has a financial account(s) with a combined $10,000 balance at any point during the year. Whether you domicile in the U.S. or a foreign country, this is the case.

Having a Financial Interest is not the same as having a Signature Authority.

A Financial Interest leans more towards ownership. You have a financial interest in your checking and savings accounts.

Signature Authority doesn’t automatically come with a Financial Interest. As a CPA firm that cuts client checks, we may have Signature Authority giving us the right to sign checks. Sometimes a business gives an employee Signature Authority as a convenience. As a signatory on an employer’s foreign bank account, you have signature authority and should report the account on your FBAR.

A foreign financial account is an account located outside of the 50 states, Washington DC, and US possessions (like Puerto Rico).

Something to watch out for is foreign retirement accounts. Some countries (like Canada or Australia) set up some retirement accounts like regular portfolio accounts. These types of accounts need to be reported via an FBAR filing.

FBAR deadlines 2024

The 2024 FBAR filing deadline is the same as your income tax return due date, usually April 15. You can ask for an automatic 6-month extension to October 15th.

How to file an FBAR

If you are truly a Digital Nomad then you should have a professional file your income tax returns and include the FBAR filing.

If you prefer to file on your own, you should e-file from the FinCEN website.

The first time you file, I’d suggest downloading the .pdf to fill in and file. While doing a little more work initially, you will have a copy of the actual form, filled in with your information. Since you will need to file this report every year you have more than a combined $10,0000, it’s nice to have a copy of a previously filed report to look back on.

Penalties for not filing an FBAR

This can get ugly, fast.

Since the necessity of FBAR filing is based on finding illegal activities, like money laundering and terrorist incels, the penalties can get pretty steep.

Criminal penalties can be up to $250,000 per incident.

The IRS has the ability to fine up to 50% of the asset balance during the year. They technically have the right to a 100% penalty, but I’ve never seen one outside of criminal activity.

Now that you have been properly warned, let’s see what a typical penalty may be.

If you simply forgot to file (non-willful) the maximum penalty the IRS can assess is $10,000. This $10,000 penalty is based on the form not being filed. In the recent past, the IRS was assessing a $10,000 penalty on each ACCOUNT not reported.

As you can see, even simply forgetting to file can be expensive. As a Digital Nomad, filing your annual FBAR should be part of your annual tax filing checklist.

What if I’ve never filed an FBAR but I should have?

I thought about putting this section before talking about non-filing penalties. As you see above, the penalties can be horrific.

So, what happens if you’ve NEVER filed and you should have?

Not much, as long as the IRS hasn’t reached out to you requesting your FBARs. You’ll have to file electronically on the FinCEN website. Follow the instructions to submit a late report.

You will need to explain why you are late. Since this is a somewhat complicated, and less known requirement, not knowing can be a reasonable cause, although I’d want a better reason than ignorance.

Reasons that have proven traction are “Circumstances beyond the taxpayer’s control”, or “Information unavailable at the time needed” 

If the IRS HAS reached out to you regarding FBARs, you can then utilize the IRS Streamlined 

Filing Compliance Procedures.

My biggest takeaway from the Streamlined Procedures is the fact that you must certify that your non-filing was not willful. Willfully refusing to file may land you in a criminal complaint. The IRS isn’t very forgiving when it comes to criminal activity.

What else should I know about reporting foreign bank and financial accounts?

Form 8938

Form 8938 is the FBAR report on steroids. The thresholds are higher and different depending on the type of taxpayer you are (married, unmarried, joint filer, separate filer)

If you had foreign assets that were valued at over $50,000 you may need to look into filing form 8938. If you have to file form 8938, this does not relieve you of your responsibility to file an FBAR.

Conclusion

Hey Digital Nomads, learn the FBAR requirements.

Once an FBAR filer…ok. So you might not have to file an FBAR every year, especially if your cash position fluctuates over the $10,000 threshold.

However, the chances are good you will be filing every year.

For this reason, I suggest filling in the .pdf form. This way you’ll have a reference for subsequent years.

If you are truly a Digital Nomad, you will most likely need to file an FBAR, so knowing the requirements can save you a lot of money.

The penalties for non-compliance can be huge. Up to 100% of the balance of the year in question. These harsh penalties are generally reserved for criminal cases, but you can be fined up to $10,000 for filing late.

The Foreign Earned Income Exclusion Isn’t Scary. It’s A Wonderful Gift to Digital Nomad’s From the IRS

Digital Nomads using the Foreign Earned Income Exclusion while traveling the world is an important benefit that shouldn’t be ignored.

As a Digital Nomad, you’re probably aware of the Foreign Earned Income Exclusion. Logically, if you aren’t living in the US why would you pay tax to the IRS?  Why would you pay tax to your home state?  With regards to making an income, when you are in the USA, the state you are in determines to whom you pay tax.

Unfortunately, it doesn’t work that way.  As a US citizen with income, you will be required to file a federal return. You may even need to file a state return!

With that said, it’s not all bad news.  While it stinks that you have to file a federal return, you can exclude up to $122,000 (in 2023) of income from being taxed on your federal return

Let’s learn about the Foreign Earned Income Exclusion AND the Foreign Housing Deduction saves money for Digital Nomads. Simply put, let’s save you a lot of money.

Understanding the Foreign Earned Income Exclusion (FEIE)**

Digital nomads need to have a clear understanding of the Federal Earned Income Exclusion to properly take advantage of its benefits.  Let’s take a deep dive into the FEIE and how it can help you.

This is what the Foreign Earned Income Exclusion is.

The Foreign Earned Income Exclusion is exactly what it sounds like. It’s the perfect tool for a Digital Nomad.  It allows you to EXCLUDE $122,000 (This is the 2023 amount which will index every year) from your tax calculations on your federal return.  Unfortunately, you will be liable for self-employment tax.  To report the FEIE and the Foreign Housing deduction, use IRS form 2555.

There are 2 ways to qualify as a US citizen.  They are:

  • A US citizen or resident alien who is physically present in a foreign country (or countries) for at least 330 days of any 12-month period (must be consecutive months).  Time spent in Cuba (a violation of US travel restrictions) does not count towards the 330 days.
  • A US citizen who is a bona fide resident of a foreign country (or countries) for an uninterrupted period that included an entire tax year.
  • A third qualifier is only available if you are a US Resident alien who is also a citizen of a country with which the US has an income tax treaty in effect and who has been a bona fide resident of a foreign county (or countries) for an uninterrupted period that includes a full tax year.

How About the Foreign Housing Exclusion/Deduction?

You read that right.  Under certain circumstances you can write off, or exclude certain occupancy costs.  So how can you qualify for the Foreign Housing Exclusion!?

The first step is for the Digital Nomad to qualify for the Foreign Earned Income Exclusion.  To qualify for the Foreign Housing Exclusion, you must either:

  • Be a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year, or;
  • You must have been physically present in a foreign country for 330 or more full days over a twelve-month period.  This period can be over two tax years.
    • As an example, you moved to Mexico on Jun 1, 2022.  You can extend your return until the Oct 15 filing date next year and use 5 months in 2023 as your 12-month period.  This will give you 12 consecutive months to qualify, even though you were only in the country for 7 months of the tax year in question.

Once you pass one of these qualifications, the next step is to calculate a possible deduction.  To do this, you must know what expenses are allowed.  They are:

  • Rent for an apartment, condo or house in a foreign country.
  • All utilities paid except for phone and internet (you’ll take part on your Schedule C reporting yourself employment income).
  • Renters insurance.
  • Any leasing fees that may be charged.  One of the things I’ve noticed while researching foreign countries is that many of them treat foreigners differently and will be charged accordingly.  This means more.
  • If you had to rent furniture, this is deductible.
  • If you had to pay for parking by your residence, this would also qualify.
  • Under certain circumstances, repairs made to the rental property are deductible.

If you’ve qualified for the FEIE as a Digital Nomad, your chances to qualify for the Foreign Housing deduction is good.

Once you’ve gathered all the info you’ll need, we can calculate your potential deduction.  Your location will determine the actual amount.  

After collecting all of your qualified housing expenses you must find the max allowed by the IRS based on your locale.  For example, Moscow in 2022 would have allowed a $107,000 housing deduction.  Barcelona would allow a $40,600 deduction.  These maxes are based on the actual cost of housing in that area, hence the differences.  If your locale isn’t located on the chart, your max will be $36,000 in 2023.

After collecting all of your information the actual calculation is simple.  The equation is:

(FEIE amount x 30%) – (FEIE amount x 16%) = Amount deductible.  

The annual limits change annually to index for inflation but the equation remains unchanged.

Using the above formula and assuming your max allowable is $36,000, you would be able to deduct in 2023:

($120,000 x 30%) – ($120,000 x 16%) = X

($36,000) – ($19,200) = $16,800

Your housing exclusion would be $16,800.  This is the full tax year deduction and is calculated using annual amounts.

The reason for the disparate limits could help if you are travelling and in different cities throughout the tax year.  In this case, you would calculate your housing exclusion using the daily limits.

Let’s do one where you spent 183 days in Bermuda and 182 days in Hua Hin Thailand.  Bermuda has a $246.58 daily rate.  Hua Hin has a default rate of $98.63.

Your calculation would be:

((246.58 x 183) + (98.63 x 182) – (120,000×16%) = X

(45,124.14 + 17,950.66) – (19,200) = X

(63,074.80) – (19,200) = 43,874.80

In this example your maximum housing deduction would be $43,875.  If you spent less than the max allowable, you would take that into consideration.  If your actual expense was $40k for Bermuda and $15k for Hua Hin, the amount paid is $55k which is less than the calculated amount.

Your allowable deduction would be 55,000 – 19,200 = 35,800.  $35,800 would be your allowable housing deduction.

You Qualify as a Digital Nomad for the FEIE.  Now what?

As mentioned earlier, you needed to keep not just good, but great records. Collect your records.  They should be:

  • Full days spent in a country.  Travel days are considered US days. Driving from one country to another doesn’t count towards either country.  It is considered a USA day.
  • As a Digital Nomad trying to qualify for the FEIE, you must keep a set of books.  This should include a balance sheet and profit and loss statement.
  • You should be tracking your qualified housing expenses. Qualified expenses are:
    • Rent and utilities.
    • Renters insurance and leasing fees.
    • Rent paid for furniture and parking spots.
    • Repairs to the rental.
    • Purchasing a house or furniture does not qualify.
    • Lavish expenses do not qualify (like servants)

Once you have collected all the necessary records, you’re ready to get them to your tax preparer.  I would like a Zoom appointment to go over all your info and to answer questions you or the tax pro may have.

Potential Problems and Issues to Consider

The Foreign Earned Income Exclusion is an AWESOME tool that can save you $1,000’s in tax.  Even though, a Digital Nomad must be aware of potential problems, specifically tax treaty and social security totalization agreement implications.

A tax treaty is an agreement between the US and a foreign country as to the treatment of tax and income related items between the two countries.  Without a tax treaty with the US, you may be required to pay tax on the same income twice with no available foreign tax credit.

If there’ a social security totalization agreement in place between the US and the foreign country, then you won’t be required to make social security contributions on the same income to two countries.  Absent this agreement, you will be responsible for paying into two systems in two countries.  And since they aren’t income tax payments, they will not qualify for the foreign tax credit.

Now You Get to Mix and Match

Due to the complexity of the Foreign Earned income Exclusion and the Foreign Housing Deduction, plus the Foreign Tax Credit (based on any income tax paid to the foreign entity, I strongly advise you to hire a tax professional with experience in expat (and digital nomad) taxpayers.

With so many options available to help reduce your tax, you must make sure to only take what you qualify for.   As an example, you can’t take a foreign tax credit on income you excluded via the Foreign Earned Income Exclusion.

Depending on the complexity of your combined returns and any tax treaties and agreements between the country you are in and the US (federal, possible state and foreign country), there are tax issues you may or may not be party to.

A lot comes down to the treaty and/or agreement the US has with your foreign country.

Conclusion to Digital Nomads And the FEIE

If you are a Digital Nomad living in a foreign country you must learn about the Foreign Earned Income Exclusion, and the Foreign Housing Deduction.

The Foreign Earned Income Exclusion will reduce your federal income tax liability.  It does not reduce your self-employment tax.

The Foreign Housing deduction will generally allow a housing deduction of $16,800, but if you are living in a high-cost area such as Hong Kong, the allowable deduction could be as much as $95,100.

You should keep detailed records regarding full days at a specific location.  Travel days are considered days spent in the US (they give you 35 travel days per year).

There are two primary ways for a Digital Nomad qualify for the Foreign Earned Income Exclusion:

  • If you live in a country for 365 uninterrupted days in a foreign country that includes a full tax year, then you are a Bona Fide resident and qualify.
  • If you lived in a foreign country for 330 days in a 12 consecutive month period, then you also qualify. You can extend your filing date into the next tax year if you don’t have 12 consecutive months in the tax year in question.

You must be careful when utilizing these US benefits given to US citizens working in foreign countries. The ability to take advantage of these benefits is predicated on the tax treaties and the social security utilization agreements between the US and various foreign countries.

All in all, a layperson (which is what most Digital Nomads are) will have difficulty with the Foreign Earned Income Exclusion calculations and qualifications required.  I advise you to find a tax pro versed in expat taxation.

That’s it for today folks.  Thanks for everything and hot me up with questions if you have any.

Stay cool.

JKC

How To Avoid State Taxes as an International Digital Nomad.

If you’re a digital nomad, crazy as it sounds, yes, they’re paying state taxes!  Or you’re supposed to and aren’t.  Either way you have a problem.  Let’s talk about what’s up with this

Generally speaking, states tax you on income earned within their borders.  Basically, if you work in California, you’ll also pay tax to California on the income earned in California.  Makes sense, right? So why would a Digital Nomad Pay State Tax?

But let’s remember, we’re discussing income taxes.  Making sense would be a bonus.  I like looking at taxation laws in much the same way a bank looks at things.

Just like a bank, the state is trying to maximize revenues while conforming to current laws.  The bank creates different fees for different “services”.  The obvious difference here is banks don’t write their own laws.

Because more and more people are becoming “Digital Nomads” and leaving their home state, there is a real risk to the states of losing a lot of tax revenue.  This article will dive into the state’s vision of taxing digital nomads.

So, What Exactly Is a Digital Nomad?

Simply put, a Digital Nomad is someone who works remotely as an expat, while living in another country.  For the purposes of all of my articles, I’m coming from the perspective of a US Citizen.

A Digital Nomad IS NOT a retiree or someone not working remotely or in their own business.  An Expat can be a Digital Nomad, but an Expat isn’t necessarily a Digital Nomad. On the flipside, an Digital Nomad is an Expat.

A Digital Nomad is someone who takes advantage of the beauty of this type of lifestyle.  The ability to fuse work and travel seamlessly.  However, a common theme for those who partake in this new adventure is the question of state taxes.

What States Don’t Have a State Income Tax?


I’m a fan of easy.  Let’s eliminate the states that don’t have income tax.  These states are:

  • Alaska
  • Florida
  • Nevada
  • New Hampshire
  • South Dakota
  • Tennessee
  • Texas
  • Washington
  • Wyoming

Washington taxes capital gains on high earners and Texas taxes entities (corporations, LLC’s, partnerships…) with what it calls a Franchise tax.  It’s still a tax.  Along those same lines, Tennessee and New Hampshire will only tax you on interest and dividends.  You will most likely have no problems with these states.

So Which States Are Going to Give You Problems?

These states have residency issues which complicate matters.  Each state has its own definition of what a state resident is for tax purposes.  As ridiculous as it sounds, some states will claim your residency for you if they think you “may” return to the state one day.  These states are:

  • California
  • New York
  • New Mexico
  • Virgina
  • South Carolina

Let’s talk about these states for a bit

California

The state of California will be difficult.  They have the discretion to tell you whether you are a resident or not.  Or whether your income is taxable in CA.

You read that right.

I had a client who lived in Oregon, but travelled to CA every month to take care of his father (he shared care with his sister).  Based on this the State of CA decided he was a resident since he had grown up in the area (duh.  He was taking care of his father).  All of his assets (including real estate) and his business were in Oregon and had been for years (at least 20).

The big concession California makes to Expats is the 546 Day rule.  This rule states “An absence from California under an employment contract for a period of at least 546 consecutive days MAY be considered an absence for other than temporary or transitory purposes”.

Evidently, without an employment related contract, a true Digital Nomad won’t qualify.  To make matters worse, California (along with New York) are states which will tax your worldwide income.

New York

As mentioned above, New York will tax your worldwide income.  The non-resident rules are a little easier than California, but if you maintain a connection to New York (much like California) you could be liable to file a return and pay tax.

By comparison, New Yorks residency rules are similar to California’s.  If New York thinks you have maintained a connection with the State, they will call you a resident and require a return and possibly tax.

New Mexico

New Mexico is another state that is notorious for refusing to terminate a taxpayer’s residency.  The general rule regarding residency qualifications is domicile or physical presence, much like the requirement to take the Foreign Earning Income Exclusion.  These rules are similar to other states.  If you were physically present for at least 185 days, you are a resident.  Obviously if your “home” is New Mexico, you are also a resident.

But what if you “did” live in New Mexico a few years ago but moved to Thailand as a Nomad and haven’t looked back.  They also reserve the right to categorize you as a resident and require a return.

Virginia and South Carolina

 These states aren’t as strict as the above three, but will tax you if you spend any part of the year in their state.  They don’t have the crazy “not-a-resident” rules, but if you are domiciled, they will tax your world-wide income.

What Can I Do as a Digital Nomad to Protect Myself?


Understanding your state tax obligations starts with your residency. Most states generally determine your tax filing requirements based on factors like how many days you were in the state, or where your income is earned.  Digital Nomads have problems when their domicile (where their home is) is still considered their home state, even if they live in another country.

Some things that can determine where your domicile is are:

  • Where is your car registered?  If you don’t sell your car and don’t want to sell it (for whatever reason), register the car in someone else’s name.  Make it legal by selling it for some nominal amount.
  • How about your ID?  If you have a state driver’s license or ID, turn it in.  You don’t need a California driver’s license in Thailand.
  • How about your vote?  If you are still registered to vote in your home district it appears that you are still a resident.  If you plan to be away for an extended period (more than a year) cancel your registration.  Most jurisdictions have a cancellation form you must submit.
  • How about rental property or other real estate?  If you own real estate in one of the above states, they most likely will consider you a resident for several years.  In any event, if you have rental property, you’ll be filing a return to report that activity anyway.
  • Any other assets in the state?  If your bank account is a local type, I suggest moving all your money to an international bank like Chase or Bank of America.  Do a Google search of US banks in the country(ies) you’re planning to visit or move
  • The last thing is where your family lives.  While something to consider, it’s a weak argument by the state if that’s the logic on which they are basing their decision.

Complexities of Digital Nomad Taxation (not just state tax)

Digital Nomads will most likely be required to file and pay tax in your host country.  This is the first step.  Your foreign tax needs to be determined so we can claim the tax paid on your US return.  This part is simple. File a foreign return.

As an expat (and a Digital Nomad), you are also required to file a federal tax return.  Renouncing your citizenship is the only way out of this requirement and that doesn’t always result in no filing requirement.  This part is also simple. File a US return.

Filing your state taxes is also simple, if required.  What’s not simple is getting out of the requirement if the state deems you a resident.  The goal should be to make it simple for the state to accept your non-residency at face value.

As has been noted, this is accomplished by you leaving as small of a footprint in your home state as possible.  Sell your car(s).  Don’t renew your driver’s license, or surrender it if renewal is in the future.  Most states have a simple form you need to submit.  Cancel your voter registration.  Change your bank to an international bank in your target country.  You’ll find one of Wells Fargo, Bank of America, Citibank or Chase almost everywhere.

Should you hire a pro?

Yes. Without a doubt. Hell, without hesitation.

My advice is to hire 2.  One in the US and one in your host country.  If you can find someone versed in both countries’ tax laws, more power to you.  But I think you’ll have a hard time finding someone competent, although this niche is growing by the minute.  Maybe I’ll put together a list of questions you can ask someone like this.  Growing niches equals more scams.  So, prudence is also the word.

What’s The Worst Thing That Can Happen If I Ignore This?

Maybe nothing.  But if you are an affiliate marketer you undoubtedly give your affiliate marketing vendor your banking and other personal information.  If no 1099 reporting is done well, maybe they won’t find out.

But.

A lot of states will look for returns from anyone who filed the previous year.  California will send you a Request for Return if they think you owe a return. It’s also common for them to send a balance due notice for tax based on…. not much.  A client received a notice requesting over $200k in past due tax.  This specific company had never MADE $200k in a year.

Your biggest problem would possibly occur when you came home to the US for a visit.  The IRS and the states have reciprocal information sharing agreements.  They also have the ability to put a hold on your passport.  They will let you back in, but they can also prevent you from leaving until your tax situation is current.   

Conclusion: How Can A Digital Nomad Get Away From State Taxes?

There’s certainly something a little romantic about becoming a Digital Nomad.  It’s a lifestyle that wasn’t available even 20 years ago.  In the old days (back in the 1970’s and 80’s) a lot of kids graduated college and took a year off to backpack through Europe.

These days YouTube, Instagram and other platforms have created the recent wave of Digital Nomad.  From driving a van all over the continent, to sharing how they travel on a budget, to someone who simply relocates to Bali to write a blog and manage their affiliate programs.

With the amount of geographical movement involved, paying taxes to the various taxing agencies becomes an exercise in organization.

And as it relates to the state, you need to decide how you want to be seen by your state.  Are you ok with being classified as a residence going forward?  Or would you like to cut ties with your state because you have no idea if or when you will return?

If you chose to cut ties, reduce that footprint by surrendering your driver’s license, cancel your voter registration and sell your car AT A MIMIMUM.

Don’t wait to deal with your tax situation after the tax year is over.  You should be setting yourself up for success before you even leave.  Define what you want/need and put together a plan.  Don’t forget to include your tax professional(s) in your planning.  It will cost a bit up front, but it will save a lot more (not to mention any potential headaches) on the back end.  And for every year you remain a Digital Nomad.

That’s it for today.  Hit me up if you have questions.

Thanks, and stay cool.

JKC

Digital Nomad Tax Questions: 10 Important Questions You Better Have About Your Taxes

Demystifying Tax Questions and Concerns for “Location Independent”, i.e. Digital Nomad Taxpayers

With more and more people taking to the road and working remotely, how and to whom we pay our taxes has become increasingly complex. We are in a new era of Digital Nomads and the questions about their taxes are flying all over the place.

Logic says one thing, the tax code(s) say another.  Yes, multiple tax codes.  Logic says if you don’t live somewhere, you don’t have to pay taxes.

Logic is stupid.  Especially when it comes to taxes.  The tax code is NOT logical, nor has it ever been claimed to be.  The tax code is a political endeavor put together by a group of people who all have ulterior motives.  Since they are there for their constituents, their vision of the tax code will vary, sometimes substantially, from the person seated next to them.

If they’re in the other aisle, you can bet they won’t agree on much. 

With the freedom to chooe where you want to actually sit when you work, people are exploring the world and ending up in some really awesome and weird locales.  The only requirement is a good internet connection.

This nomadic lifestyle does raise a lot of questions. Specifically, where taxes are concerned, we put together a list of the top ten questions expats have asked us about their taxes.

(1) I’m a Digital Nomad Living in Mexico. I Didn’t Think My Tax Residency Would Be a Question!

This question has two answers.  For purposes of your federal taxes, as long as you are a US citizen with income, you need to file a federal income tax return.

Your state is a different beast.  Some states assign residency based on where the income is sourced.  Some look at things like vehicle registration or where you are registered to vote.

My advice is to keep good records regarding where you were during the tax year.  I would like a meeting to discuss your future plans so we can map out a strong strategy, especially as it relates to the state.

(2) Will You Pay Taxes in the Foreign Country You Live In? 

Yes.  With a caveat.  Your tax preparer must understand the specific tax treaty your foreign country has with the US.  The easiest thing to do is find a tax preparer in your new country to prepare that country’s tax return.  With this tax return in hand, you can go to a US tax preparer to prepare your US return. As a digital nomad, you will have tax questions related to two (or more) countries.

My reasoning for this is to avoid double taxation on the same income, i.e. paying Thailand tax on your income and then turning around and paying the US tax on the same income.

Some countries tax your worldwide income.  There are some that will only tax income sourced from their country.  Some will let you decide up front, but you will have to stick with this election forever.

(3) Are There Special Tax Deductions and Credits as a Digital Nomad?

Specific to Digital Nomads, no.  But you are considered self-employed, so you get all the benefits of being in business for yourself.

This can include general work expenses, travel costs, health insurance, and more. You may also be able to exclude a rather large amount of income from being taxed using form 2555, Foreign Earned Income exclusion.  For 2023 the amount you can exclude is up to $120,000.  If you are married and both of you qualify, you can exclude up to $240,000 a year.

(4) How Can I Reduce My Tax Liability While Working Remotely?

Reducing tax liability involves strategic planning and utilizing deductions and credits available for digital nomads. Investing in retirement accounts, understanding tax treaties, and optimizing deductible expenses are effective ways to reduce the tax burden.

(5) How Does the Foreign Earned Income Exclusion work and How Does It Impact My Taxes?

The Foreign Earned Income Exclusion (form 2555) allows citizens to exclude up to $122,000 of foreign earned income (2023 amount) if they meet specific requirements.

Qualifications are:

  • You must be physically present in the foreign country for at least 330 days during any 12-month period.
  • This is for earned income made while in the foreign country.
  • You can work for a foreign company.  Remember, as a US citizen, you file a return and pay tax regardless of where you live.  It’s a requirement as a citizen.

If you work for a foreign company that withholds tax on your earnings, and this tax is remitted to the foreign government but excluded the income from your US return, you won’t get your foreign tax credit.

(6) Do I Need to File Taxes in My Home Country While Living Abroad?

This will be on a country-by-country basis, but if you are a US citizen, you will have to file a US return.  You may also be on the hook for a state return.

A big caveat regarding filing your taxes.  I advise you not to miss filing.  The IRS has access to the DOJ (all part of the Treasury) and as such, has access to peoples’ passports.  If the IRS has records indicating you owe tax, or owe tax returns, you may not be able to enter the USA until all those issues are resolved.  

(7) Do I need to form a corporation or LLC or can I Work as a Sole Proprietor While Living as a Digital Nomad?

I would advise against it creating another entity initially.

Once again this is on a country-by-country basis.  Some countries require foreigners to create their version of a corporation to work there.

Most countries, however, do not have this requirement.  It would be a lot more expense and you may need to hire a tax pro in that country on a retainer basis.

(8) Is Social Security Dealt with Differently While Living and Working Abroad?

Digital nomads and social security tax questions seem to go hand in hand. If you are self-employed, you should be making monthly estimate payments on the IRS website.  Self-employment taxes are the same thing as social security taxes.  Some countries (like Austria, Germany and Sweden) have hoops you need to jump through.

If you are a US Green Card holder and receiving Social Security, you may have a problem.  In some cases you file out form SSA-21 and still receive benefits while outside the country.

(9) It Sounds Like Recordkeeping is Important.  How Important Is It?

Because your residency and domicile are imperative in determining your state return (if required) so you’ll be saving more info that when you lived in California and were getting a paycheck every week.  So yeah.  Save what proves your point.

To show you have lft your state, get a drivers license in the foreign country.  You can’t vote, but if you buy a vehicle, that will also be registered in the foreign country.

Start a bank account (you’ll probably need one anyway) but remember you now have to declare your foreign bank account to the DOJ.

Buy a small scanner and scan things to your computer so you aren’t luggin 50 lbs of paper with you.

(10) Do I need Professional Help?

Yes.  It sounds self serving, but its truth. As a digital nomad, you SHOULD have tax questions.

In the next few years I’ll be embarking on my digital nomad phase of life.  You can be sure I’m going to search out a good immigration attorney and a good Charted Accountant to help with my taxes (Chartered Accountants are what the rest of the world calls CPA’s.  USA just gotta be different)

If you’re being honest with yourself, you would hire a tax preparer to do your income tax return if you were in the US.  You know the language, are familiar with US customs and are generally familiar with how US taxes are done (everyone knows April 15th for instance).

So, it sounds a little ridiculous to consider doing it on your own.

Conclusion to 10 Tax Questions from Digital Nomads

Being a digital nomad is an exciting endeavor.  We all have fantasies about travelling the world and having great adventures.  But your responsibilities don’t evaporate once you land in your new country.

As a US citizen, you are required to file an income tax return, and pay tax, on income earned in your new country.  There are certain benefits allowed that can help with your tax bite.

Your new country most likely has tax code and tax filing responsibility as well, so be aware and search out professionals in your new country with experience with expats.

If you owe the IRS or haven’t filed all required returns, the IRS can have the DOJ put a hold on your passport.  You may not be allowed into the USA, and if they do, you won’t be allowed to leave until your tax issues are resolved.

The best tool in your quiver right now is the Foreign Earned Income Exclusion.  For 2023 you can exclude up to $122,000 of earned income on your US tax return.  There are qualifications, the biggest is you must be physically present in a country outside the USA for at least 330 days in a 12-month period.

That’s it for now.  If you have any questions a=or want to see an article on a specific topic let me know in the comments.

Thanks all.  Stay cool and talk later.

JKC

You Don’t Need To Be Making Big Time Money To Need An LLC

Four reasons why you need an LLC, and three reasons you don’t.

Do you need an LLC? The world is full of people with expectations.  These expectations are generally founded on nothing more than “Joe has one, I must need one too”.

As a business owner, you are constantly presented with choices that can affect your business and life. One such decision is whether to form a Limited Liability Company (LLC) as the legal structure for their business.

Do you need an LLC?  It depends on your situation.  Many tax guys like me suggest that your income level should determine whether you form an LLC or not.  I don’t think your income level is as important as some would lead you to believe. There’s more to this decision than saving on taxes.

I like to look at a clients financial life outside of their business to help determine their needs.  What needs protection?  Is there family or spousal wealth that needs to be considered?  Income level is an important consideration, but so many other things need to be considered.

Let’s be honest.  Saying “I have an LLC” or “I’m incorporated” feels good.  We sound legitimate.  We sound like a real business, like Microsoft or Google.

Let’s take a look at a few reasons why you should and a few reasons why you shouldn’t.  Not everyone needs to house their business within an entity, such as an LLC or Corporation.  Let’s figure out what’s best for you.

Four Big Reasons You Need an LLC

1. Liability Protection Just In Case!

An LLC will protect it’s members (shareholders). This means that your personal assets, are kept separate from the company’s liabilities.

The business will be held liable if you, or an employee or agent of the company does something that caused loss to someone.

In the event that the business faces financial or legal troubles, your personal wealth remains shielded. This protective barrier is a powerful safety net, offering peace of mind and security to entrepreneurs.

If you have employees that drive around on company business, affording yourself additional liability coverage has a lot of benefits.  My employees do drive around to pickup documents from various clients.  I incorporated around the time this was starting up.

2. You Pick How You Want To Be Taxed

This is something that I don’t see a lot of on various “Why You Need an LLC” articles. There are two types of LLC’s you can choose from.

A Single Member LLC (SMLLC) or a Multi Member LLC (MMLLC) are the two types of LLC’s you can pick from.

A Single Member LLC is reported on Schedule C when you file your taxes.  This designation is chosen if there is only one principal to the business. This is the default selection for a one person business.

A MMLLC is a partnership and reported on form 1065.  This is a separate return from your personal return.  Form 1065 will produce K1’s for each partner.  The info on the K1’s is used to prepare each partners individual return.  A K1 is kind of like a W2 for partners.

So far, you can report your LLC’s tax activity as a Sole Proprietor or a Partnership.  You can also elect to be taxed as a corporation by filing form 8832 – Entity Classification Election.

Once you elect corporate status, you then need to decide if you want to be an S Corp or a C Corp.

How you file will depend on your personal (and your partners if any) tax and financial situation.

I’ll write an article on how to choose your entity later.

3. Easy Management Structure

Compared to a corporation, an LLC has much less required annual maintenance.  Other than a tax return, the only other thing you need to do to maintain your LLC status is generally file an information return with your state Secretary of State every other year.  This is also required for corporations, but not for unregistered businesses.  Most business not an LLC or Corp are considered unregistered.

A corporation is required to maintain minutes of shareholder meetings.  Most states require at a minimum, one annual shareholders meeting.  LLC’s have none of these requirements.

4. You’re a REAL BOY Business now!

This reason is the primary reason people form LLC’s, and it’s not a bad reason.  Housing your business in an LLC or corporation tells the world that you are serious about your business.

The cost to form an LLC on MyCorporation.com (it’s who I use) is around $500, l if you do it yourself.  It’ll cost upwards of $2,500 to have an attorney do this for you.  You could probably find a better use of your money this early into your venture.

But.  Perceptions are real.  An LLC appears more like a real business than someone selling oranges out of his trunk.  It’s a perception.  It may not even be real.  The guy selling oranges might have 1,000 other people selling his oranges out of their trunks.  That’s a real business.  But the perception is less than.

Getting financing or other funding is also easier if you are a registered entity, such as an LLC.

Three Important Reasons Why You Don’t Need an LLC

1. Additional Cost and Other Troubles

Setting up an LLC costs money.  Depending on your needs it can cost upwards of $2,500.

In California (and in other states as well) there is an LLC Gross Receipts fee.  They also charge a minimum tax of $800 each year, regardless of whether you have taxable income or not.

You can also count on a higher tax preparation fee.  A Single Member LLC is reported on form Schedule C on your federal return, but there may be additional returns needed at the state level.  These state level returns add at least an additional $250 to your return prep costs.

If you elected to be treated as a Multi Member LLC or as a Corporation (S or C) you can count on an even higher fee to prepare the LLC’s own return.  An properly prepared LLC or corporate return will usually start at around $800.

2. Ever See an LLC as an IPO?

I love LLC’s.  I think they are the perfect entity to hold your business.  You have the liability protection of a corporation, without a lot of the compulsory rules that make having a corporation too much for a small business.

But what if your dream is to build a business, sell it, then build another?  You want the life of a serial entrepreneur.  In this case, an LLC may not be the best choice.

You can absolutely sell your business if it’s not in an LLC or Corporation.  But you won’t receive proper value.  And generally the tax code has more ways to save on taxes if you  sell from a corporation.  Under some circumstances, you could even sell your corporation and reinvest the funds into another small business stock, without paying tax on any possible gains.

Compliance, compliance, compliance.  The biggest headache when having an LLC is the amount of compliance and record keeping that is required.

Let’s talk about record keeping.  Keeping books.  You are required to keep a full general ledger set of books.  A balance sheet, profit and loss, and maybe a cash flow statement are what you should aim for.

Maintaining a good, solid, accurate set of books is essential to running a business.  No one can tell how their business is doing just from “touch”.  Running your business from the seat of your pants is a slow walk to insolvency.  How can you make educated decisions without accurate information?

Compliance is actually the easy part.  Your state Secretary of State will require your LLC to file an information return every (or every other) year.  This is needed so the state has a record of your officers or managers on file.

Conclusion

Do you need an LLC?  Why?  Are you planning on growing, then selling your business?  Have you given any thought to your long term plans?  Do you have a need to protect assets not in use or owned by your business?

The decision to form an LLC to hold your business and its assets is usually the right choice.  The only fault I can find in forming an LLC and using it to hold your business, is the timing.

Here’s what I look for when determining whether an LLC is a proper choice.

  • What is the basis for your business (service or selling product)?
  • What personal assets needs protecting (home, real estate, savings)?
  • Along the same lines, how much income from other sources will you have?
  • What are your long term plans (grow, sell,…)?
  • Will you have employees out in the field?
  • What other kind of liability exposure are you concerned with?

When I mentioned timing above, I mean “When did you form the LLC?” and “Why did you choose that time to form the LLC?”

If you are in business as your livelihood (not some part time gig type endevor) and growth, and possibly passing the business on to heirs are some of your biggest concerns, you will be forming an LLC (or a corporation) eventually.  But there’s no hurry.

I’m not a fan of wasting money on unnecessary expenses.  If you’re serious about starting and growing a business, you will be forming an entity at some point.  Don’t do it before you need it.

Simplified Auto Expense Deduction Rules for the Frugal Entrepreneur in 2023

Don’t be afraid to take the auto expense deductions the law allows, even if the IRS scares the bejesus out of you!

I’ve been self-employed for close to 35 years and one of the first things I learned were the rules for auto expense deductions (gotta learn how to deduct that Dream Porsche!  Damn The Tax Reform Act of 86!).

The aforementioned Tax Reform Act of 1986 (referred as TRA86) started the higher scrutiny on what is and what is not deductible in regards to automobiles. This is our starting point with defining the auto expense deduction rules that will give you the biggest deduction.

1986 introduced the concept of a Luxury Vehicle (anything that cost more than $25k if you can believe it) and the rules for deducting high priced cars.

We’ll also learn about leases and how they are accounted for with a weird little twist at the end.

This article will provide a comprehensive look at auto expense deduction rules for self-employed individuals in 2023.

We’ll cover eligibility, types of deductible expenses, calculation methods, special considerations, record-keeping and reimbursements.

What Are The Rules for Auto Expense Deductions?

Obviously you need to be self-employed and use your car for business purposes. The vehicle can be either used exclusively for business (think like a plumbers van full of knobs and hoses and toilet stuff) or used for both personal AND business purposes (my Porsche which I might take a Sunday drive with). There is no deduction allowed unless there is a business purpose.  Personal vehicles expenses aren’t deductible other than part of the annual state registration.

What Auto Expenses Are Deductible?

Track all expenses.  Gas, oil changes, car washes, repairs and maintenence, registration, parking and tolls, monthly payments…

Track it all.  You may not be able to write it all off, but you might be able to get a bigger deduction if you do.

If you purchased the car, you can write off the interest (not the entire payment) and take depreciation.  If you are leasing the car, you can take the entire lease payment, but you’ll have to add back a “Lease Inclusion” amount based on the fair market value of the vehicle.  Leases will be explained in more detail in the next section.

Leases and why they exist

Leasing a car as a business decision can be a good thing.  A lot of people use them to “have” a nicer car than they can afford.  You’re basically renting a car long term.

This example will be for a vehicle less than 6,000 lbs GVWR (Gross Vehicle Weight Rating).  Vehicles with a GVWR over 6,000 lbs are treated differently.  I’ll discuss this a little later on in the article.

Leasing For a Business?

But leases for a business are another story.  When you purchase a car you are able to depreciate that vehicle over 5 plus years.

When you lease a car, you get to deduct the lease payments less a small amount called the Lease Inclusion.  The IRS publishes tables showing how much you must add back, based on the FMV of the vehicle.

This usually results in a larger auto expense deduction than depreciation.  But the cost of leasing the car is generally more than if you buy.

Let’s pretend you are buying a delivery van with a retail price of $50k.  At 8% over 5 years, your loan payment will be around $1,000.  If you were to lease that same van, your lease payment would be a lot less, say $650 a month.

On the surface, this looks like a great deal.  $650 is a lot less than $1,000.  But what are you getting?

At the end of the lease, you have the option of buying the car (or what’s called the residual value, which was established when you initially leased the car.  This is generally around 50-60% of the original asking price,  So after leasing the car for 48 months (I usually recommend no more than 36 month terms), you can buy it for $25-30k.

You’ve paid $31,200, the car is 4 years older and they want you to pay $30k to keep the car.  From a financial perspective, this is a lousy deal.

As a business owner, the ability to deduct the actual lease payments generally gives you a better deduction, even when taking depreciation into consideration.  It would be to your advantage to do a buy or lease comparison prior to plunking down your hard earned cash.

Vehicles with an over 6,000 lb GVWR

This is only an issue if you purchase the car (not lease).

If a vehicle has a GVWR of over 6,000 lbs its generally a large or midsize SUV or truck.  A vehicle with a 6,000 GVWR is treated differently and has the ability to deduct much more than vehicles with a GVWR under 6,000.

Vehicles above the 6,000 lb limit have the ability to take more depreciation via Section 179 or Bonus Depreciation rules for 2023.  For 2023 the max section 179 deduction allowed is $28,900.  Under the 6,000 lb threshold, the maximum depreciation you can take the first year is $20,200 (including $8,000 in bonus depreciation).

Calculation Methods for Auto Expense Deductions

Self-employed individuals have two primary methods for calculating auto expense deductions:

  • Standard Mileage Rate Method:
    • The IRS sets a standard mileage rate for each tax year. For 2023, the standard mileage rate is 65.5 cents per mile (this can change mid year like it did in 2022).
    • Self-employed individuals can deduct the business-related mileage by multiplying the total business miles driven during the year by the standard mileage rate.
  • Actual Expense Method:
    • Under this method, self-employed individuals can deduct the actual expenses incurred for the business use of the vehicle. This includes fuel, repairs, maintenance, insurance, depreciation, and other eligible expenses.
    • To use the actual expense method, detailed records of all vehicle-related expenses must be maintained.

Choosing Between Standard Mileage Rate and Actual Expense Method

Miles?  Or actual costs?  Which is higher?

The mileage rate for 2023 is $ .655 per mile.  Drive 20,000 miles for business and you get a $13,100 mileage deduction.

But what were your actual costs?  Repairs, insurance, registration, gas and oil.  Depreciation?  Which is higher?  Doesn’t matter.  Whichever gives you the biggest deduction is the one you get.

The one thing to be aware of, if you do want the option to switch between mileage and actual cost, you must use mileage the first year you use the car for business.

Special Considerations for Luxury Vehicles

Luxury vehicles are treated a little differently in an attempt to not allow people to abuse the tax code and write off a $300k Lamborghini.  Luxury vehicle limits are $58,000 for 2023.  If you purchase a car that cost over $58,000 and has a GWVR under the 6,000 lb threshold, there are special rules involved.

The max allowable depreciation, section 179 and bonus depreciation are all limited.  It’s very likely you will be depreciating a $100k vehicle for up to 13 years.  Car’s are generally depreciated over 5 years.

You MUST Keep Good Records

Accurate and detailed record-keeping is vital when claiming vehicle expense deductions

Get an app for your phone that tracks mileage.  I use MileIQ, but QuickBooks Online has one available as part of its software package.

Stay current with your miles tracking.  Make sure you go out every week and identify business versus personal miles.

Always use a credit or debit card when paying for your vehicle’s expenses.  Cash expenses are harder to prove, even with a receipt.  We have to think like an IRS auditor here.  If you were an auditor, would you be satisfied with your records?

State-Specific Rules to Know

I will admit I have to look up the various state rules I don’t know (I’m in CA).  Most states allow you to deduct your vehicle expenses in the same manner as the feds.  Some are just plain strange and take a percentage of SOME of the expenses.

What I have noticed is they all play off the federal calculation in some way.  This is just one more reason to properly track our total vehicle costs. 

Conclusion

Deducting your vehicle expenses is one of the most scrutinized areas of an IRS auditor.  Knowing the rules and keeping good records will go a long way in keeping you out of trouble in the event of an audit.

There are different rules as to what’s deductible depending on whether you purchased or leased the car.

The type of vehicle also matters.  Cars with a GWVR under 6,000 lbs, cars between 6,000 and 14,000, and vehicles with a GWVR over 14,000 all have a different set of rules.

Make sure you track all your mileage in a contemporaneous manner.  I recommend you put an app on your phone (I use MileIQ) that utilizes the GPS function your phone has.

MileIQ will log all your trips and save the data to their website.  You can then go out to your log and note which trips were for business and which were personal.

At year end you can print a report to help prepare your taxes.

What is Tax Resolution? How To Solve Your IRS Tax Problems.

It’s so easy to get behind on our taxes.  We work all day, come home, eat and sleep and do it all over again the next day.

Tax resolution can be a marriage saver! I’ve seen a lot of marriages end due to tax problems. Money problems are stressful. But the biggest issue I’ve seen over the years is the shame associated with tax problems, and even sharing with your spouse can be overwhelming.

I want to state unequivocally, YOU ARE NOT THE PROBLEM. Tax problems can happen to anyone and everyone.

So, what is tax resolution?

Dealing with the IRS is also overwhelming and stressful.  When dealing with your IRS tax problem, it’s important to understand the concept of tax resolution and the available options for resolving these problems.

 In this article, we’ll explore the meaning of tax resolution, common IRS tax problems, what you can do to relieve yourself of these problems and the thinking behind these options.  We’re only discussing personal tax debts (including tax owed from your sole proprietorship.)  If you have tax debts from your business, we will address these in a later article.

Be prepared to engage a tax professional though since these processes are not always easy, depending on the details of your case.  Let’s go through the typical issues and the resolutions available to deal with them.

We’re dealing with Joe and Jill Jones.  He has a construction company and she does the books and runs payroll.  In total they owe about $75k from the past 4 tax filings.  They have filed all returns, but things are tough right now.

They own their house and are current on their mortgage, but barely.  The home has equity of around $25k.  Thankfully, assets used in your business are protected.   They have no other assets.  They have 2 kids, ages 11 and 13.

I. What’s your IRS Tax Problem?

Before delving into tax resolution, it is crucial to understand the types of tax problems that individuals may encounter with the IRS. These include unfiled tax returns, prior years unpaid taxes, tax audits and examinations, and tax liens and levies. Failure to address these issues can result in serious consequences such as penalties, interest, wage garnishments, and asset seizures.

I want to be clear about this next statement. The IRS is not in the business of putting people in jail for failing to pay their taxes. Sure, some people have spent time in jail for tax issues, but not because you got behind.

If jail is a consequence, you did a lot worse than not pay. You lied on your returns and lied a lot. If you under reported your income by more than 25% you need to talk with a criminal attorney, not a CPA.

Let’s take a look at some common problems:

Unfiled tax returns: Easily the most common problem.  If you had a 1099 or W2 issued to you, the IRS will prepare a return for you using just the Standard Deduction with a filing status of Single.  If this return renders a tax underpayment, you will start to get notices.

Individual tax past due: This can come about in several ways.  Usually it stems from a filed return not including payment at filing.  Other ways of finding yourself behind a tax debt notice from the IRS is from an incorrectly prepared return, i.e. missing 1099 or W2 (income) or deductions not matching such as a 1098 mortgage interest statement showing a smaller amount than what is on the return.

Payroll taxes:  This one is pretty common.  If you have a business that has employees on payroll, or if you work for a company as their payroll clerk, and the statutory withheld payroll taxes aren’t timely submitted to the IRS, you will be held personally liable.  The penalty is 100% of the payroll taxes owed.

Changes from an audit:  There are more kinds of audits than the one people typically think of.  Correspondence audits are the easiest and are handled through the mail.

The above are much more typical than the much feared “line-by-line” audit.  Line-by-line audits should always be handled by a tax professional. They have the training needed to deal directly with the IRS Revenue Officer.  

II. How Tax Resolution Can Resolve Your Tax Problems?

Dealing with the IRS is never an easy thing.  I think your choice with fixing your problem is directly related to the amount you owe.

When it comes to resolving IRS tax problems, here are the primary methods the IRS has given us.

  1. Installment Agreement plans: The IRS will give you up to 72 months to pay your tax off via an Installment Agreement.  This is the most used tool simply because it’s the easiest.  Without dire circumstances you will most likely be held responsible to fully pay your tax debt.   This option allows individuals to make monthly payments based on their financial situation.

    Under certain circumstances, you could do a partial pay Installment Agreement where, surprise, you don’t pay the entire debt in the 72 months
  2. Offer in compromise: This is what people want the most.  They want a reduction or complete elimination of their tax debt.

    Unfortunately, to qualify, your financial life needs to be in turmoil now and for the foreseeable future.  And due to the cost (to do this for a client  we generally charge starting at $3-5,000).

    To qualify, you must prove that your current financial situation would take on a big hardship if forced to pay the tax.  You also must prove that this financial situation
    will continue for the foreseeable future.

    Medical issues, loss of career, loss of home…As you can see, this option isn’t going to be available to many.  Just those who most need relief.  Typically, those who are granted this relief have had several years of taxes due and have shown a pattern of declining income due to an outside influence.
  3. Innocent spouse relief: This option has limited use.  Being in a community property state (California) this doesn’t have the same bang as some of the others.  I have used this option successfully several times for divorced spouses to get them out of the jointly and separate nature of taxes.

    To qualify, the damaged spouse must prove that they had no idea of the issues and may not have even benefited.  This has generally been a tool I use for Women who trusted their husbands to do the right thing, but who invariably did not.

    The cases I have seen were a husband hiding another family or girlfriend from their spouse.
  4. CNC or Currently Not Collectible status:  The relief granted with this option is time.  You still owe the tax, but the IRS has promised to stop collection activity for six – twelve months.

    Once your situation is under better control, you will most likely enter into an Installment Agreement to pay your debt off over time.  Penalty and interest charges will continue to accrue during this period.

    If granted CNC status, the IRS will stop all collection activity for the period in effect, usually 6-12 months.
  5. Penalty abatement: Penalties and interest are statutory, which means they are law and it’s tough to get out of them. FTA (First Time Abatement) is available as long as you have been a good taxpayer for the three years prior to the year you received a penalty.

III. Now What?  What do you do now?

Now we take stock of your financial situation.  This should also include your health situation since there is a direct correlation between the two. This is where Tax Resolution can really help you!

Here’s when you have to be honest with yourself.  I’ve had people walk in my office who have plenty of assets, but simply don’t want to pay ask me to prepare an Offer in Compromise for them.

If you have sufficient assets with enough value to pay your debt, you WILL NOT QUALIFY for an Offer in Compromise.  So forget this option.

  1. Gathering your financial and tax information:  Bank statements, financial statements (if you have a business).  You will need to put together a personal financial statement showing your monthly income and expenses, and what is left over after paying your living expenses.  The IRS will want three months of third party information to corroborate your financial statement (bank statements, paid bills, copies of leases, mortgage statements, etc…)

    There are limits to the amount you can claim.  If you have a $4,000 mortgage, but the max allowable deduction for your area is $2,500, you get a $2,500 deduction.

    Really, the only area of life that the IRS will consider more than statutory limits is with medical expenses.
  2. So which option should you use?:  After preparing (or having prepared for you) a personal financial statement, you will have a better idea of your ability to pay.  Your ability to pay determines the options available for use.
  3. Chose your option:  Based on your personal financials, your choices could be as follows:
    • If Joe and Jill’s personal financials show they have an extra $1,000 each month after paying all their bills, they could try for an Offer in Compromise, but they would have to access the equity in their house.  And the lowest amount they could offer would be $32k (($1kx12)+$20k).
    • They would qualify for an Installment Agreement.  Under their fact pattern, this might be my first choice, although I’d fully investigate the Offer option further.
    • Since they have positive cash flow of $1,000 each month, they probably won’t be considered for Currently-Not-Collectible status.
    • They’re still married with two kids.  She is active in the business.  They won’t qualify for Innocent Spouse Relief. If the tax is derived from missing Payroll Tax deposits, she will be liable for that personally.
    • I always request penalty abatement with every case.  Although not part of the IRS’ collection process, I think they give this relief out as a courtesy.  I’ve never been denied at least a partial abatement in 40 years of doing this.
  4. After deciding which tack to take, the process of communicating this to the IRS is the next step.
    • If you will be doing an Installment Agreement, you would fill out form 9465 and submit.  You can even do this online.  There is a fee to implement but its nominal.
    • If you are doing an Offer-In-Compromise, you will fill out form 433-OIC.  I recommend you engage a tax resolution specialist at this point.  Don’t fall for those ads claiming to get you off with pennies on the dollar.  If you don’t have a tax preparer or CPA at this time, ask around.  Not all CPA’s do tax resolution, so you may have to talk with several.
    • If you are trying to get Currently-not-Collectable status, you will need to prepare forms 433A and in Joe and Jill’s case, 433B (since they have a business).  Again, I suggest you reach out to a professional.
  5. Communicating your option to the IRS:  After collecting all your supporting data (bank statements etc…) and preparing the appropriate form for submission, you file and wait.
    • There is no doubt that the IRS will ask for additional information or documents.  You must get this to them as soon as possible.
    • Regarding an Installment Agreement, they will let you know within a month or so.  During the time the IRS is in the process of approving your payment plan, you are tasked with making interim payments as if the agreement had been approved.
    • If you requested Currently-not-Collectible status, they will follow up with additional document requests before they approve.  I have had some where the IRS requested additional documents after 6 months to make sure nothing changed with your financial condition.
    • An Offer-in-Compromise will take the longest.  They may ask for additional documents within a few months, but prior to approving you will need to go through the data collection process again.
    • If you are approved for any of the above options, you must stay clean for the next 60-72 months.
    • This means, no late payments, filing your returns on a timely basis, paying your estimates on a timely basis and generally having no issues with your tax life.

IV. Working with a Tax Resolution Professional: I’ve suggested you hire a professional several times during this post.  It sounds self-serving, but it’s not.  This is incredibly complex stuff once you get past simply applying for an Installment Agreement.

In my mind, the reason for the complexity is simple.  People don’t want to pay their taxes.  So they lie.  Or fudge.  Or “forget” to report something they don’t see as relevant.

Don’t try to trick the IRS.  They have access to all banking information associated with you, your spouse and your kids.

If you attempt to “trick” the IRS, or strategically “leave out” documents they expect, you can count on them taking an even deeper look at your taxes

If you do choose to go it alone, be honest and complete with your filings.

VI. Conclusion: If you are having problems with the IRS (or your states taxing agency) don’t hide your head in the sand.  Ignoring this will make it worse.

Identify the problem year(s).  Compare what you filed to what the IRS clams.

Look at your personal financial situation.  This will determine what options are best for your situation.

If you become overwhelmed, find someone to help.  And be totally honest with them.  I’ve fired clients who lied to me about there situation.  I had one client crying poor over a $75k tax bill and him claiming he had no assets, liquid or otherwise.  Turns out he had over 25 classic cars he was storing at a warehouse in another state.  He lied to the IRS and ended up losing two houses he also forgot to tell me about.

If the IRS determines you are lying, I (or any other tax resolution specialist) can’t help you. At this time you probably need a criminal defense attorney versed in taxes.

Once you determine your direction and file the appropriate paperwork, be ready to submit additional papers at the IRS request.

Once your tax repayment (or abatement) plan has been approved, you MUST adhere to the terms of your agreement plan.  Don’t miss any payments.  Don’t file your returns late.  Make your estimated tax payments.  Don’t stray.  You don’t want to end up in this space again.

If you have any questions or comments, I check back weekly (I’m still running an accounting practice).  I will reach out to you to answer your questions.

I can’t directly discuss your issues with you, but can discuss the process and what you can expect.

Have a great day and talk later.

Stay cool people.

JKC

Learn What Dentists Claim to Save Big on Their Taxes!

We’re back!  With another of our Specific Industry articles.  Today we’ll be talking to you dentists about their best money saving tax deductions.  So here goes.

Success in any kind of business really comes down to commitment.  One of the key things you have to commit to is keeping good records of taxable income and tax deductible expenses (money-in, money-out). Running a dental practice has a few little quirks that most other small business types, while available to anyone, dental practices seem to take advantage of the most.  Experience tells me this is the industry, and due to their need for cutting edge equipment. In this article, we will explore the key deductible expenses that dentists can leverage to their advantage.

I. “Normal” Business Expenses are Tax Deductions:

Money spent in the pursuit of more money.  That’s the general rule for claiming deductible expenses.  If you spend money on something that has a DIRECT influence over your ability to make money, it’s probably deductible.  A direct expense would be something like toner for the printer that prints invoices, or coffee to brew a strong cup so your employees are wired as soon as they come to work.  Indirect expenses exist on the fringes and some are deductions.  An indirect expense might be your car which you also drive for personal reasons, or travel to a seminar where you also stay an extra day to visit your brother. Some deduction, some not.  For a dentist, these may include:

Office and Occupancy Expenses:

  • Rent and CAM charges for the office.  If you own the building and are reporting as s Sole Proprietor you may be able to write off the mortgage interest, property taxes and Insurance.  If you report your practice income on an entity return (like an LLC or corporation) you should rent the premises to your entity from you personally.  This may open up tax planning opportunities.
  • If you have an off site storage facility to store practice items, this is deductible.
  • Utilities and maintenance costs for the office space.  This includes your internet access, disposal and sewage as well as gas and electric and telephone/fax lines.
  • Office supplies such as administrative materials, paper, toner and envelopes.  The bottled water service you may have is deductible as an office expense.

Staffing and Payroll Expenses:

  • Salaries and wages for all employees (including yourself if you are reporting as a corporation).  This includes all bonuses and “commissions” paid out.
  • Payroll taxes and benefits, including contributions to employee retirement plans and health insurance premiums.  I’ll discuss the various retirement plans available in a later post.

Professional Fees and Licenses:

  • Fees associated with renewing dental licenses.
  • Continuing education courses, seminars, and conferences attended by the dentist.
  • Professional association dues and subscriptions to industry publications.
  • Practice development costs (Mastermind groups, coaching, marketing programs).

Equipment and Technology:

  • Costs of dental equipment and instruments, such as dental chairs, X-ray machines, and imaging systems.  If you purchase or lease your equipment, make sure to give your tax person all documentation.  This industry tends to “lease” their equipment, but the lease is really a purchase and should be recorded as a purchase.  This allows you to depreciate the equipment and allows for different tax planning strategies.
  • Computer hardware and software used for patient records, billing, and other practice management tasks.

II. Medical and Laboratory Expenses:

You will have outsourced and in house items here.  All are tax deductible.  Some common expenses are:

  1. Dental Supplies and Materials:
    • Expenses related to dental implants, prosthetics, and restorative materials.
    • Costs of preventive materials like dental sealants and fluoride treatments.
    • Sterilization and infection control supplies.
    • If you are doing your fabs in house, that’s a 100% deductible item.
  2. Laboratory Fees:
    • Payments made to dental labs for the fabrication of prosthetic work, such as crowns and bridges.
    • Outsourced dental services, such as denture fabrication or orthodontic appliances.

III. Facility and Operation Expenses:

Maintaining a functional and well-equipped dental facility entails certain deductible expenses:

  1. Facility Maintenance and Repairs:
    • Costs associated with office build outs or repairs to the practice premises.  Be sure to properly distinguish between repairs and improvements.  Repairs are deductible in the current year.  If there was a major renovation (not repairs) this is depreciated over 39 years.
    • Upgrades to safety equipment and compliance with health and safety regulations.
  2. Leasehold Improvements:
    • Expenses related to improving the leased space, such as cabinetry and fixture installations.
    • Flooring and painting expenses to enhance the dental office’s aesthetics and functionality.  I would typically expense painting in the current year.
    • Even amongst improvements, you should categorize properly.  A new wood floor can be depreciated over 15 years while a remodeled bathroom will be depreciated over 39 years.
    • Although not a “tax deduction” in the usual way of thinking, improvements are depreciated over a statutory period so a kind of tax deduction.
  3. Insurance Premiums:
    • Deductions for malpractice insurance to protect against professional liability.
    • Business liability insurance coverage.
    • Property and equipment insurance premiums.
    • Disability premiums can be reported in a few ways.  If you claim it on your taxes, any disability you receive will be taxable income.  If you don’t deduct the premiums then no tax is due if you receive any payments.

IV. Marketing and Advertising Expenses:

Promoting your dental practice is essential for attracting new patients. Dan Kennedy (a well-known marketing guru) claims “the company who can spend the most to acquire a client, wins”. Dentists can claim tax deductions for various marketing and advertising expenses, including:

  1. Website Development and Maintenance:
    • Costs associated with designing, hosting, and updating a professional dental practice website.  I suggest you drive this section.  Don’t let a “web” pro tell you how your website should look.  They are most comfortable creating a brochure site, which is useless and won’t generate any kind of return.
  2. Print and Digital Advertisements:
    • Expenses related to printing brochures, flyers, or business cards.
    • Costs of online marketing like Google Ads, Search Engine Optimization of your website and any consulting fees you may incur for the management of your website and online campaigns.
    • Don’t forget to include the costs of responding.  A lot of times you’ll see a practice respond by sending out a free item of importance (to the prospect) or some kind of welcome packet.
  3. Direct Mail Campaigns:
    • Expenses for targeted direct mail marketing campaigns, such as postcards or newsletters.  If you pay someone to create the copy for these campaigns, the copywriter expense is also deductible.
  4. Promotional Materials and Business Cards:
    • Costs of branded promotional items, such as pens, magnets, or toothbrushes/floss/little tooth care packages.

V. Employee Benefits and Healthcare:

This is typically the largest tax deduction. Another good investment in your practice is your employees.  And without stating the obvious, the better trained your employees are, the more billable work they can do for you.  I’ve never bought the narrative that “I don’t want to spend the money on someone who’s just going to move on to a better job as soon as I train them”.  Seriously.  Make this job the better job.   Dentists can claim deductions for the following expenses:

  1. Health Insurance Premiums for Employees:
    • Get a group plan.  You can even offer Dental!  Another option I’ve seen offered are medical reimbursement plans, Health Savings Accounts and Flexible Spending Arrangements (or accounts).  And by making these kinds of benefits available through a cafeteria plan (Sec 125 plans) you even save a little on payroll taxes.
  2. Retirement Plan Contributions:
    • While the contribution will be made from the employee’s paycheck, any matching funds you make are fully deductible.  For smaller practices I suggest setting up a SEP vs. 401k.  To administer a 401k plan costs thousands a year.  The administration fee for a SEP is usually around $30-50/employee.
    • Husband/wife teams would benefit from a Solo 401k plan.  There is an opportunity to sock away a lot more than with a SEP.
  3. Employee Training and Education Expenses:
    • As mentioned above, trained employees make you money.  There are so many products and services you can offer, with much of the work being done can be done by a non DDS person (check your states regulations on this one.  I’m in California so those are the rules I know).

VI. Record-Keeping and Documentation For Your Tax Deductions:

You have to do your books.  Monthly.  Weekly even.  If you don’t know how, or necessarily want to do your books, hire someone.  Check with your tax preparer to see if they offer this service.  If not they probably have someone they work with that they can refer.  Utilize technology by using QuickBooks Online and scan your receipts and invoices.  If you don’t have something like this set up, ask your tax preparation office if they can set you up.

I can’t stress the importance of what I just said.  The quickest way to fail is by letting this stuff go until the last minute.  And really, that last minute is usually late.

Conclusion:

I think one of the most important things for me to be aware of is that your financing agreements are properly calculated and the determination made to whether the lease is a loan or are you simply “renting’ the equipment.  The proper designation could greatly affect your taxes in the current year.  Taking advantage of the myriad available tax deductions, and understanding how different treatments can affect your tax bill can contribute to the financial success and growth of a dental practice.

Rock Solid Tax Deductions a Social Media Influencer or Blogger Can Use Save Big On Their Taxes.

So you’ve decided to take the plunge and start a lifestyle blog or start a TikTok or Instagram channel as an influencer!  It’s a great endeavor and if done right, can be really lucrative!  But what about all the nuts and bolts of running an influencer business?  What tax deductions can an Influencer or Blogger take?

As an influencer, you might be wondering what expenses you can write off. Generally speaking, any money you spend in an attempt to make more money is considered deductible.  Understanding the types of tax deductions available to Influencers and Bloggers can be challenging, but it is an important part of managing your finances as an influencer. In this blog post, we will explore tax deductions for influencers, including what they are, why they are important, and how to claim them.

What are Tax Deductions?

Let’s start with something other Tax Dudes (or Dudettes.  Or is everyone a Dude now, kinda like an Actor/Actress?) don’t usually discuss.  Direct and Indirect expenses.  Both of these deductions can be claimed by individuals, including influencers, who have legit expenses related to their work.

What makes Direct and Indirect Expenses Different?

Ok.  So direct expenses are easy to identify.  You need various microphones and a good camera to make your videos.  You only use this equipment for your Vlog.  That’s a direct expense.

An indirect expense is a little more complicated.  Generally the biggest indirect expense you may have is either your car, or your home office.  Generally, your car and your home are going to be used both personally and for business.  The best advice I can give regarding indirect expenses is to track them all and based on this data, you’ll be able to come up with a percentage used for business.

Let’s use your car as an example.  You track all mileage driven during the year and see that you drove 5,000 miles for business and 10,000 miles for personal reasons.  Math tells us that ⅓ of your vehicle costs for the year should be deducted on your taxes (5,000/1 divided by 15,000 equals 33.33%).

Why are tax deductions important for influencers?

Tax deductions are important for influencers because they can help to reduce the amount of tax they owe. By deducting eligible expenses from their taxable income, influencers can lower their tax bill and keep more of their hard-earned money. Additionally, tax deductions can help to keep an influencer’s finances organized and can make it easier to file their taxes each year.  By understanding that you will have both direct and indirect expenses, you will be able to convert what was a personal expense but is really a business expense into a deduction, thus saving money on taxes!

What tax deductions are available for influencers?

As an influencer, there are a variety of tax deductions that you may be eligible for. The following are some of the most common tax deductions for influencers:

1. Home Office Expenses

If you use a portion of your home exclusively for work, you may be able to deduct certain expenses related to your home office. These expenses can include rent (or mortgage interest, property taxes and insurance), utilities, and other costs required to maintain your home office.  If you live in a 1,000 square foot home and your office is in a 10×10 room, you’ll be eligible to take 10% of your total occupancy costs as a home office deduction.

2. Travel Expenses

If you travel for work, you may be able to deduct certain expenses related to your travel. These expenses can include airfare, hotel accommodations, meals, and transportation costs.  If the entire trip was for work (no pleasure.  You.  The IRS code talks about “Pleasure” you may derive from a trip) it’s fully deductible.

3. Advertising and promotion expenses

As an influencer, you likely spend a significant amount of time and money promoting your brand and products. You may be able to deduct expenses related to advertising and promotion, such as website hosting fees, social media advertising, and marketing materials.  I’d even toss the costs of generating organic traffic in here.  So if you’re paying someone for backlinks to your site, that’s a marketing expense.

4. Equipment and Supplies

If you purchase equipment or supplies for your work as an influencer, you may be able to deduct the cost of these items from your taxable income. This can include cameras, lighting equipment, computers, and other tools and supplies.  I’d put the cost of that rented Lamborghini and mansion you used to promote your “Make Money on the Internet” piece.  Remember, direct vs indirect.  These expenses were directly associated with something you did to make more money.

5. Education and Training

As an influencer, you may need to invest in education and training to stay up-to-date with the latest trends and techniques. You may be able to deduct the cost of these educational expenses from your taxable income.  And depending on your income, this will be a large expense.  With the internet (I’m looking at you, Google) constantly changing the way searches are done, keeping up with these trends is vital to your success.

6. Professional Fees

If you work with a manager, agent, or accountant, you may be able to deduct the fees you pay for their services. These fees can include commissions, retainers, and other professional fees.  Oh.  Make sure to pay your CPA well.  Direct costs, Baby!

7. Health Insurance and Retirement Plans

If you are self-employed, you may be able to deduct the cost of your health insurance premiums and Self Employed Pension (SEP IRS) contributions from your taxable income. This can include premiums for medical, dental, and vision insurance.  This doesn’t reduce your self-employment income, but does reduce your taxable income.

How to claim tax deductions as an influencer

To claim tax deductions as an influencer, you will need to keep accurate records of all your expenses related to your work. This can include receipts, invoices, and other documentation that shows the amount you paid for each expense. It is important to keep these records organized and up-to-date throughout the year so that you can easily file your taxes at the end of the year.

When it comes time to file your taxes, you will need to use IRS Form 1040 to report your income and claim any deductions you are eligible for. You can use Schedule C to report your business income and expenses, including any tax deductions you are claiming. If you are not sure how to fill out these forms, it may be helpful to consult with a tax professional who can guide you through the process.

Tips for maximizing your tax deductions as an Internet Professional

1. Keep Accurate Records

Keeping accurate records of your expenses is key to maximizing your tax deductions as an influencer. This can include everything from receipts for equipment purchases to invoices for promotional services. Make sure to organize your records throughout the year so that you can easily file your taxes at the end of the year.  For someone just starting out I suggest going and buying one of those accordion type storage files.  They have them that are divided up by month and are really convenient for just putting any receipts in the appropriate month folder for later categorizing.

2. Separate Personal and Business Expenses

Try not to commingle your business money with your personal money. This means having separate bank accounts and credit cards for your business expenses only using those accounts for business.  The better you can segregate your business vs personal expenses, the easier your bookkeeping will be. This yields accurate info and will make tax time easier.

3. Use Accounting Software

QuickBooks Online.  Being online allows you to “share” a login with your CPA or bookkeeper, which in turn allows for more current and accurate information.  I would also advise learning how to read your financial statements to get the most out of them.

4. Consult with a Tax Professional

I know it sounds self-serving and maybe even a little arrogant, but I think this is one area you should let someone else help you, via a bookkeeper (they should be able to classify your expenses properly) and a good tax person.  Tax rules are constantly changing. Many changes enacted in 2017 are going back to the way it was in 2026. I don’t see this changing, especially with the current political climate.  Remember, taxes (much like abortion, immigration and racial equity) are now political issues.  Let someone in the middle of all this nonsense help you.  It’ll be worth the money.

Conclusion

As an influencer, this is most probably NOT the stuff you want to do.  But keeping up with your recordkeeping is really essential to success.  By understanding the tax deductions available, you can maximize your deductions and keep more of your hard-earned money. Separate your personal and business expenses. Using accounting software like QuickBooks is a good idea. Consult with a tax geek (like me!) when you need guidance. By taking these steps, you can ensure that you are making the most of your tax deductions as an influencer.