Freelancer on the Move? Tax Considerations for Prospective Digital Nomads

• Author: Mary Singleton
• Posted: 2024-07-27

Chances are that you know someone who's a "digital nomad", or someone who makes a living online and generally travels from place to place to explore a region or even the whole world. These lives can look enviable to those who feel stuck in one place.

In this article, we'll take a look at best-case scenarios for freelancers looking to become digital nomads but not give away all their money in taxes for the privilege. Please note that the content in this article is based on United States tax law.

Which State?

Though the term "nomad" may suggest that one freely moves about, everyone must have a state of residence. As the famous quote says, the only two certainties in life are death and taxes. However, state and local income taxes are not certainties!

Remember, even if you travel around for 75% of the time, you will be considered to be "domiciled" in the state where you have formal residency. This is usually determined by your "nexus of business", which, for a freelancer, would be your house or apartment. Out of the three major types of taxes: income, property, and sales/use, income tax is by far the hardest to legally "dodge". However, as a freelancer, you're already getting hit with a flat 15.3% in FICA dues as well as standard federal income tax and state tax, so it's hard to turn down a decrease in income tax.

Unfortunately, out of the 50 states in the country, only 6 do not have any income tax: New Hampshire, Wyoming, Nevada, Florida, Texas, and Tennessee. This gives you a rather wide range climates and cultures among which to choose. However, many states who don't have an income tax "make up for it" with higher property taxes or higher sales/use taxes.

Assuming you'll choose one of these zero-income tax states as your domicile, now let's look at where you can travel to get the most benefits.

Where To?

As a nomad, you'll need to hit the road sooner or later. While you've hit the jackpot with income tax and perhaps property tax, depending on the state, sales and use tax will probably be pretty high.

However, keep in mind that the states of Alaska, Montana, Delaware, New Hampshire, and Oregon do not charge a sales and use tax. This gives you a ton of cool places to travel. Looking for some of the most beautiful ski resorts the country has to offer? New Hampshire might be your next blogging central. Want a coastal state? You can take your pick of east or west! If you want something a bit more rural and near Canada, Montana is a good pick. If you're already paying no income tax, traveling around these states can ensure that you don't pay another cent in sales or use tax as you blog!

Taxes on the Go

Very few people consider how high excise taxes are where they're going. One major excise tax that we often hear about as a commuter's woe is the "gas tax" that's set by individual states and sometimes localities. This tax can vary drastically across the country.

Generally speaking, you'll find the highest taxes on gas in the northeast and west coast of the country. The lowest rates are usually found in the mid-South and mid-West. It makes sense to look ahead before traveling to pick a route that will save you tons of money in gas, even if it takes a bit longer to get there.

Don't Forget Your Deductions!

While the TJCA of 2017 removed the tax deduction for moving expenses, it did double the personal exemption instead. However, remember that you can have pre-FICA deductions only for business expenses. Now, if travel isn't a necessity for your business, this may not save you much.

For example, if you're a freelance writer and you begin to write about travel, there's a good chance that your "nomad" expenses like gas and rentals could be considered business deductions. You pay precisely 0% tax on these earnings, since they're considered invested into your business.

Coming Full Circle

As you can see, we have a blueprint here for the nomad freelancer. If you find a state that won't skim off of your hard-earned income, travel among states that won't skim off of services and goods you buy while there, and travel through states that charge very little for gas and other necessities, you'll be checking every box. Still remember to make those tax deductions!