Last Updated on December 22, 2022 by Justin Clifton
Important: This article is for people who are already digital nomads that are looking to optimize their lifestyle from a financial perspective. This article is not about how to become a digital nomad.
Becoming a digital nomad and working online exploded in popularity due to the pandemic. Now there are more people than ever before that can work remotely. But becoming a digital nomad or remote worker is only part of the equation. To truly reap the benefits of this lifestyle, there are a lot of decisions that should be made with the options that open up from remote work. Once you can work remotely, you need to choose how you will use that location independence throughout the year. Your decisions will have a a big impact on your bottom line. There are a quite a few options so let’s go over them:
4 Options for Movement as a Digital Nomad
- Stay put at home. Maybe you like where you live already, need to be there for non-work obligations. You just wanted to work remotely to spend more time with family, not waste time on a commute, etc.
- Travel quickly from place to place. Spend anywhere from a week to a month in each place. Covering a lot of territory and getting a sample of living in many different places.
- Travel slowly and spend at least a few months in different locations. Maybe split the year between a few different bases or hubs. Potentially spend enough time in one place to have an official home. Get to know a few places extremely well.
- Directly move somewhere else. Go from your current city full time to a new city full time.
Ok, so there’s absolutely nothing wrong with option number 1 if that’s truly your situation and lines up with your values. Some people strongly value being close to family. They love home and would never want to move away. I would argue that at the very least it’s a good idea to explore a lot of different places and not just assume that there’s not a better place out there for you. In terms of optimizing a digital nomad lifestyle from an economic perspective, you’re probably not going to be doing yourself any favors by staying home. Especially if you’re from a high cost of living and high tax country.
Option number 2 has some drawbacks. It’s a lot harder to be productive when you’re constantly moving. And traveling frequently can be expensive. Working less and spending more is a bad combination. Also, while you get to see a lot of places you never really make any deep connections to any one place and dig deeper than the superficial level. A one-week trip to a place can give very different impressions than living somewhere for months. It’s really important to distinguish between places that are good for short-term vacations and places that are good for long-term living. Sometimes they overlap but that’s generally not the case. You might love the honeymoon period but hate the underbelly of a place that only becomes clear after living there for months. I’m not saying that option 2 is always bad. If you are in a circumstance where you don’t need to be super productive and you just want to quickly get a sample of many different parts of the world, go for it.
Option number 3 is my preferred rhythm for living as a digital nomad. It strikes a nice balance between experiencing different places and staying put for long enough to get to know the place and also get work done. For a new city, I would recommend a month. If it’s a city that you already know you like, 3 to 6 months is a reasonable amount of time. After you have been traveling for a while, you can split up your year between a few focus cities that are your favorites. After 3 to 6 months in one city, you’re generally ready for something different.
With Option 4, you’re not taking advantage of the freedom of movement which is a major benefit of being a digital nomad. But at least for some years, maybe movement simply isn’t what you need. Maybe you just had a kid and need to be settled down for a few years. Perhaps you need to just hunker down somewhere and seriously focus on getting work done. Or maybe there’s a pandemic and countries start to limit travel. But if you’re going to be moving somewhere else to live full time, it’s obviously recommended that you spend plenty of time there before making such a big commitment. That’s why it’s so important to spend some time traveling around during years when you are free to travel. So if you do need to choose a full time home, you have a top place in mind. And of course, it’s also extremely important to take the cost of living and tax burden into account for your new home.
Cost of Living and Taxes
To truly understand how much you must spend to live somewhere, you have to take two things into consideration: the cost of living for everyday goods/services and the tax burden. If you’re a digital nomad and you’ve selected option 2, 3, or 4 above. You have an excellent opportunity to minimize your cost of living and taxes. Think of capitalism like a game. To win the game, you need to make money. So the goal of the game is to maximize your revenue/income and minimize your expenses. And of course you must do those two things legally. After becoming a digital nomad and being able to support yourself with online income, the logical next step is optimize your personal finances by spending your time in places with a low cost of living and/or low taxes. By optimizing your financial situation, you’re playing the game on easy mode. The right place for you depends on your personal circumstances. But as a general rule, if you have a high income ($100k+), it’s better to focus on optimizing for low tax. If you make less than $100k, it’s probably best to focus on optimizing for low living expenses. I’ll run through some specific examples below to illustrate this point. There are some countries with both low cost of living and low taxes, but in general I’d say that the desirable tax friendly countries tend to have relatively high cost of living since the tax friendly status and desirable living conditions attract a lot of people with money which drives up prices.
How much a person spends to live somewhere can vary significantly. Some people live modestly and some people live extravagantly. For these examples, I’m going to aim for some middle of the road living expense numbers. Not living extravagantly, but also not living modestly. These numbers are based on my own experience living in or visiting these places. I’m also only going to focus on the personal finance situation. I’m not taking corporate taxes into account with these examples. I will also be using two different examples. One example with a single person earning $150k annually and another with a single person earning $50k annually.
Mexico City
Mexico City is one of the best large cities in the world for getting good value for dollars. Certain neighborhoods have gotten more expensive over the past few years. An influx of remote workers with relatively high salaries is part of the reason for that. That’s a controversial topic that I’ll try to cover in a future blog post. But even accounting for the recent increase in the cost of living there, you can still live a really good lifestyle with a cost of living significantly lower than any major city in a “developed” country. You can fill up on really delicious food at street food stands for a few bucks, get around by bus or metro for 5-6 pesos (25-30 cents), rent an apartment for less than $1k/month. Let’s estimate that your total monthly living costs would be around $2k. For the tax burden, I just used this online tax calculator for Mexican taxes.
Mexico City Expenses With $50k Salary
| Annual Living Costs | $24k |
| Annual Tax Burden (rough estimate) | $12.8k (26% tax rate) |
| Grand Total Cost | $36.8k |
| Net Profit (Salary – Grand Total Cost) | $13.2k |
Mexico City Expenses With $150k Salary
| Annual Living Costs | $24k |
| Annual Tax Burden (rough estimate) | $46.5k (31% tax rate) |
| Grand Total Cost | $70.5k |
| Net Profit (Salary – Grand Total Cost) | $79.5k |
Dubai
Dubai is an expensive city in terms of cost of living. You can easily spend $30+ dining out for one person. The metro and buses cost between a buck or two per ride. Rent for an apartment can easily be thousands of dollars. But the UAE, the country Dubai is located in, doesn’t have any personal income taxes. VAT is a reasonable 5%. For the sake of simplicity, I’ll just include that with cost of living since all prices are inclusive of VAT. I would say that a single person needs to spend about $4k a month in Dubai to have a decent lifestyle. So at $4k a month for living expenses and 0% in income taxes, you would need to spend around $48k.
Dubai Expenses With $50k Salary
| Annual Living Costs | $48k |
| Annual Tax Burden | $0 (0% personal income tax rate) |
| Grand Total Cost | $48k |
| Net Profit (Salary – Grand Total Cost) | $2k |
Dubai Expenses With $150k Salary
| Annual Living Costs | $48k |
| Annual Tax Burden | $0 (0% personal income tax rate) |
| Grand Total Cost | $48k |
| Net Profit (Salary – Grand Total Cost) | $102k |
Analysis & Caveats
Clearly, Mexico City is more affordable than Dubai in terms of everyday goods. Many people don’t consider the whole picture and would tell you that if you’re a digital nomad, you should just go live in a place that’s relatively affordable like Mexico City. But when you consider both cost of living and taxes, an expensive place like Dubai could actually be cheaper for you overall than Mexico City. It really just depends on your income level. For the person earning $50k a year, Mexico city has a much better net profit. For the person earning $150k a year, Dubai has a much better net profit. If you’re a digital nomad and you’re looking to minimize your expenses as much as possible, you have to consider both what you’d pay for living expenses and what you’d pay for taxes.
And now some caveats. If you’re a US citizen, you get taxed globally based on your citizenship. So even if you live full time in Dubai, you’re still liable to pay US tax on all income for Social Security plus medicare and then income tax on all income above the Foreign Earned Income Exclusion. That exclusion is set to $112k for 2022. So your tax burden would be whatever you pay to the US for Social Security, Medicare, and whatever you pay in income tax over the exclusion if your income exceeds the exclusion amount. You can be eligible for that income tax exclusion by spending 330 days outside the US (physical presence test) or by proving bonafide residence in a foreign country (bonafide residence test).
Tax Residence
Countries tend to classify you as a tax resident (someone liable to pay their taxes) when you spend more than 183 days per calendar year in their territory. That is a general rule of thumb. Many people choosing movement options 2 or 3 could easily avoid spending that much time in any one country. So the question arises: Why not just split your year with 4 months each in 3 different low cost of living countries? Then you’re not a tax resident anywhere and you get the best of both worlds. Low cost of living and minimal taxes.
While that sounds good in theory, it doesn’t necessarily work in practice. First of all, the rules for being a tax resident vary from country to country, and it’s necessary to know the exact rules for your country of nationality/residence. US citizens are always tax residents of the US. For some countries, you might be a tax resident until you demonstrate that you have residency somewhere else. You could be a tax resident if you simply maintain a home in that country. If most of your income comes from that country, you could be a tax resident. You might be a tax resident if you exceed limits for time spent this year plus time spent in previous years. Sometimes you’re a tax resident until you notify the government that you’re officially checking out and leaving. In some cases, even after you leave you might still be a tax resident for the first few years after leaving. The big point here is that the rules vary. Do your research and don’t just assume that you won’t be a tax resident as long as you spend less than 183 days per year in a country. A great starting point is to use the PWC tax summary. Simply select the country you want to learn about and then go to the section on individual residence. With that site you can also see tax rates, tax treaties, etc.
Tax Treaties
So depending on your exact situation, it’s possible to be a tax resident in multiple countries, in only one country, or to be tax resident nowhere. Hopefully, you’re only a tax resident in one country or a tax resident nowhere. And if you’re a tax resident of one country, then ideally it’s a country with low taxes. But in the event you’re a tax resident of two or more countries, it’s important to have a basic understanding of how tax treaties work.
So if there is no tax treaty between the countries where you’re a tax resident, then there’s likely a system for a foreign tax credit (FTC). E.g. if you paid tax to one country already then you can use that paid tax as a credit to offset your tax burden in the other country. If the tax rate for one type of income is 15% in one country and 30% in the other, you’d ultimately end up paying 30%. So you’re not getting a great deal. You’re always paying the higher rate between the two countries. This FTC system isn’t necessarily available for all types of taxes or available for all countries. It’s better than nothing, but not a great system overall.
Fortunately, many countries have developed tax treaties to prevent double taxation. In the event you’re a tax resident of two countries with a tax treaty, the tax treaty is designed to give clarity on how income gets taxed between the two countries. Tax treaties have a list of tiebreakers to determine where you have the most significant ties. Generally, the vast majority of your income will be taxed by your main country and the other country is ok with that since everything is outlined by the treaty that was agreed to by both countries. Here’s an example from an actual tax treaty:
- The person is a resident of the country where a permanent home is available
- If a permanent home is available in both countries, the person is a resident of the State with which personal and economic relations are closer (center of vital interests)
- If no permeant home is available in both States and the center of vital interests cannot be determined, the person is a resident of the Contracting State in which the person has a habitual abode
- If there is a habitual abode in both States or neither of them, the person is a resident of the State of nationality
- If the person is a national of both states or neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement
So as you can see, there’s no mention whatsoever of a 183 day rule in these tiebreakers. According to these tiebreakers, you could spend more than 183 days in a low tax country, but you could ultimately be liable for paying the relatively high tax country you spend less or no time in that year. E.g. country X has low taxes, country Y has high taxes. You’re a tax resident in both and there’s a tax treaty with the terms above. You rent hotels or airbnbs in country X for 7 months and don’t have a permanent home there. You have a vacant home available in country Y for the entire year. According to the first tiebreaker your main country for taxation is country Y.
It’s important to understand tax treaties. Both to avoid bad outcomes like the one explained above and also to pursue good outcomes when you know you’ll be tax resident between two countries with a treaty. In fact, maybe you even to choose to base yourself in one country because it has relatively low tax and a good tax treaty with another high tax country where you have ties. According to the treaty, if your main country is the low tax one, then you pay the low tax country and significantly limit your taxes owed to the high tax country. Again, the recommendation is to only be a tax resident in one country maximum. But in many cases, that’s simply not possible. And in those cases, simply make the best of the situation.
Another important thing to consider is that banks might ask you about your tax residency status and request a tax ID number. Saying I don’t live anywhere, don’t have a tax number, and don’t pay taxes anywhere isn’t going to improve your chances for getting an account opened. Basically, the bank just needs to fill out the info in their system. Simply giving a tax number to the bank and saying you’re a tax resident in country X doesn’t necessarily mean you’re actually a tax resident in country X. The bank will likely share your info with country X, but if you can prove that you don’t meet the conditions to be a tax resident in country X every year then it shouldn’t be an issue. Tax residency is a matter of facts and your center of life. Not a matter of what you said to a bank one day.
Final Thoughts For Non-US Citizens
If you are a non-US citizen digital nomad and you want to truly optimize for cost of living and tax, the ideal movement option is number 2 or 3 depending on your situation and preferences. There are really 2 categories of non-US citizen digital nomads. Those that need to prove residency elsewhere to end a previous unfavorable tax residency and those that don’t.
So for people that need to prove residency elsewhere, number 3 is the best option. One of your locations for the year should be a tax friendly country where you qualify for tax residency. And generally that would require actually living there for at least 183 days. Any other ties you can have to that tax friendly country are helpful (residency, real estate, lease contract, etc). All of these are things that would back up your case that you live there. You can clearly demonstrate that your center of life is in a tax friendly country and you pay taxes there (even if those taxes are really low), so you don’t owe anything to your home country or previous country of tax residence. And having these official ties could also be helpful if you’re trying to open up bank accounts in other countries as you can say you officially live somewhere. For the other 6 months of the year, feel free to travel around at a rhythm that suits you. If your tax friendly country is relatively high cost, then try to spend the rest of the year in some lower cost of living areas to balance things out.
For people that don’t need to prove residency elsewhere, options number 2 and 3 are the best. What’s best for you is simply a matter of personal preference. Number 2 could result in tax or cost of living savings by being a tax resident of nowhere and spending most of the year in low cost of living areas. But that can make some things in life complicated. Interfacing with banks, immigration, government offices, etc. And that could quite possibly get even more difficult over time. Number 3 would make it easier to do official business as you live somewhere officially. You’d also probably be more productive with number 3 due to the nature of having a home base for a large portion of the year.
But do make sure that you are still complying with all requirements to not be a tax resident in the country you left. If the tax residency test for the country you’re leaving is a simple day test, then great. Just be mindful of your days there and then travel around other places as you please. But while you might not need to show the country you’re leaving proof that you live somewhere else, you might need to prove you no longer maintain a domicile or habitual abode there. That’s a common condition that can make you a tax resident in many countries. Don’t have a lease there. If you have a property, sell it or rent it out. Just leaving a property empty while you’re gone doesn’t support a case that you’ve checked out. And if you want to strengthen your case, try to have a residency, a property, or a lease in a tax friendly country. So if there’s ever any questions about where you live, you have an address to use.
Number 4 could also be a viable option in either case, but only if you choose to live in a tax friendly country full time. It’s really a matter of preference. Some people prefer to mix things up and split the year between a few different places and others prefer to hunker down in one place for the vast majority of the year.
Final Thoughts For US Citizens
If you’re a US citizen digital nomad, your options for tax optimization are limited. But first of all, leave the US to qualify for tax breaks that are available to US citizens abroad. The ideal situation is to move around the world with option 2 or 3. Try to avoid picking up a second tax residency anywhere else. Rule of thumb is don’t exceed 183 days in any country, but remember that’s just a rule of thumb and do your research for each country. And if you do pick up another tax residency, make sure it’s a low tax country or at least a country with lower taxes than the US that also has a tax treaty with the US. Your ability to minimize tax is limited as a US citizen. So the best option is to avoid a second tax residency altogether by bouncing around. The second best option is to have a second tax residency in a tax friendly country. In both case you take advantage of tax breaks for US citizens abroad. By bouncing around you reduce your US taxes via tax breaks without adding non-US tax. With the second tax residency in a tax friendly country, you reduce your US taxes via tax breaks while adding minimal non-US tax. Once you’ve done one of those two things, you’ve optimized for US tax from a personal perspective. Since tax optimization is limited as a US citizen, you have to give a bigger focus to keeping your cost of living down. If you’re bouncing around and avoiding tax residency in another country, it makes sense to spend most of your time in low cost of living countries.
Disclaimer: This article is for informational purposes only, you should not construe any such information or other material on this site as legal, tax, investment, financial, or other advice.
