Tax Guide for Americans Living Abroad

Posted on Jun 14 2015 - 3:16am by Ronnie

Moving abroad is a big decision. One where you should take all the advice you can get. Living abroad not only gets you familiar with a new culture, but it also takes away from you the obnoxious parts of life, those things you would never miss if you stayed. Things like dinner with the in-laws or commuting to your nine-to-five job in traffic. If you’re planning on moving abroad there’s more to consider than just buying your flights. Consider things like visas and insurance. And don’t forget about looking into the different implications regarding taxes. Unfortunately, paying taxes to the United States government is not something you can say goodbye to when you move to your new home.

Tax Guide for Americans Expats Living Abroad

There are a few tips to paying taxes while you’re abroad:

Remember, you are still a citizen. Wherever you live and however long you have lived there, if you are still a citizen or permanent resident alien (a.k.a. green card holder) of the United States, you must pay taxes to the IRS according to all the rules and rates that apply to those living in the United States, notwithstanding certain exceptions.

The source of your income does not matter. As with your non-ex-pat fellow citizens, you must report all of your income, be it foreign-earned or not. In the same vein, however, you are also entitled to the same deductions and taxes credits as those living in the US.

Foreign income is subject to the same taxation. This means wages, salary, commissions, tips, consultancy fees, pension fund, alimony, US or foreign social security, interest, dividends, capital gains, rental property, farm income, royalties, inheritance or payment in kind in the US or abroad may be subject to US tax.

Income can be also taxed in your foreign country. Just because you are paying taxes on this foreign income in the US, it does not make it exempt of taxes in the country you’re living. You may still have to pay tax to the IRS on foreign income even if that income has already been or will be subject to the taxes of the country. That said, the US will not simply cause you to be taxed doubly on the same income; there are two main kinds of exceptions, as explained below.

Keep an eye on spousal income. Even if you have not had any (foreign) income but are married to someone who does, you may have to pay US tax. The only thing that would preclude filing absolutely is not having earned more than the threshold set for US residents.

But there are exceptions!

There are two kinds of exclusions unique to US expats: the Foreign Earned Income Exclusion and the Foreign Tax Credit.

  1. Foreign Earned Income Exclusion (FEIE, IRS Form 2555): By this law, you may exclude a certain amount of your earned income, at a rate set by the IRS. Any income earned in excess of the exclusion, however, is taxed at the rate that applies to your total income. Other kinds of income do not qualify; for example, pensions, interest, dividends and capital gains.
  2. Foreign Tax Credit (IRS Form 1116): You may subtract the amount of foreign tax that you paid on foreign income from what you would pay in tax on the same amount to the US. Double taxation is too crazy, even in the eyes of the federal government. If you claim the FEIE on your income, however, this tax credit will apply only partially. You will be able to subtract from US taxes only the percentage of foreign tax equal to the amount not excluded via the FEIE. Thus, you will be subtracting a small deduction from your US tax.

The better method for your situation, as well as the possibilities of interest and capital gains, foreign housing exclusion (if you rent your lodging), earnings of a non-US spouse, business expenses, and whether to itemize deductions or apply the standard deduction are good reason to consult a professional on Community Tax Resolution.

Of course, to qualify for these exclusions, you must have a foreign income, a foreign country that serves as your tax home, and you must be any one of the following:

  • A U.S. citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year
  • A U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year
  • A U.S. citizen or a U.S. resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.

Having foreign bank accounts also brings the requirement of informing the IRS, above the threshold of $10,000 according to the Foreign Bank Account Report (FBAR); combined foreign holdings greater than $50,000 will fall under the Foreign Account Tax Compliance Act (FATCA).

Please note! I am not an expert on this subject. I am merely providing information based on research & personal knowledge. Consult an accountant who specializes in American taxation issues in your country of residence or in the United States.

Thanks to Freepik for the original version of the featured image

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  • I would love to live abroad, these are great tips! Especially as a blogger who could technically work anywhere, this provides much food for though!

  • Can you imagine how crazy it would have been 20 years ago for Americans living abroad to deal with taxes?!? At least now with the Internet you would think it would be easier. As long as you prepared and know what to expect it the experience would be worth it. Lots to consider that I didn’t even think about.

  • Lots of great advice here that I actually had to come to grips with when I moved from Chicago to London 10 years ago. TurboxTax was also quite helpful but for complex returns, would definitely recommend seeing a tax advisor.

  • I have always wanted to travel to Australia and had wondered about living there. I wouldn’t have thought about checking into any of this! Taxes always stress me out but being prepared would help keep in under control! But after reading this I would probably hire a tax person!! LOL

  • lori felix

    I never knew that you still had to pay in the United States if you were living in another country. That is very important information to keep in mind.

  • maria @ close to home

    I lived abroad in college but never received a paycheck. THis is very interesting info as we thought about moving to costa rica at some point

    • Kelly5996

      I left m­­y old j­o­b a­nd since then I get paid Eighty-Five Bucks perhr. How? I’m working online! My old job was making me miserable,s­­o I decided to take my chance with something different… After Two yrs…I say I couldn’t be happier! This is what i do…

  • I found very interesting that we must still have to pay tax to the IRS on foreign income even if that income has already been or was subject to the taxes of the country….smh unbelievable