The United States is one of the few countries that requires its citizens to file tax returns even if they live abroad. You might still have a tax obligation to the IRS even if you live abroad.
As such, you want to learn the following rules:
How to File Taxes for Expats
If you’re wondering how to file U.S. taxes from abroad, it’s the same process as you would if you lived in the country. You file a Form 1040 and report your income.
Even if most or all your income is from a foreign source, you’re required to file your tax return.
You can send a printed tax form to the IRS though this might not be the best option if you live abroad. You can’t always depend on the international postal service to deliver your tax forms on time.
But, Do I Still Have to Pay Taxes?
Only your tax professional can give you legal advice on whether you’ll owe taxes to the U.S. when living abroad.
However, as a general rule, you might still owe taxes if you meet certain conditions.
You have to be aware of the Foreign Earned Income Exclusion (FEIE). For 2021, the FEIE amount is $108,700. This means that if you earn this amount or below you might be excluded from paying U.S. taxes.
If you earn above this amount, you’ll likely owe tax on the difference. So if you earn $110,000 in 2021, you’ll likely owe tax on $1,300. You have to spend at least 330 days in a foreign country during a 12-month period.
If you spend at least 30 days within the United States, you might be subject to paying full U.S. taxes. In such a case, you won’t be eligible for FEIE!
So if you want to try to legally avoid paying U.S. taxes, you’ll have to spend as much time away from the country as possible. You’ll also have to check with your state to see if it has any rules for paying state income tax while abroad.
Double Taxation
What happens if the country you live in requires you to pay taxes? Is the double taxation for U.S. citizens living abroad?
Unfortunately, the answer is yes. However, there are ways to minimize or eliminate your double taxation requirements. There are no set rules and it all depends on your personal situation.
Nevertheless, there are possibilities to reduce your double taxation if the U.S. has a tax treaty with the country you’re living in. If there’s no tax treaty, you’ll likely be taxed twice.
As such, you want to keep this in mind as you’re growing your income. You might need to set aside money each week to meet the tax obligations of both countries.
Eliminating U.S. Tax Obligations
Is there a way for American citizens to eliminate their tax obligations?
The only way to avoid paying U.S. taxes and filing mandatory tax returns is to renounce your American citizenship. This means that you’ll no longer owe taxes to the U.S. simply because you’re a citizen.*
This requires you to make an appointment at a U.S. embassy to request to renounce your citizenship. You’ll have to pay a renunciation fee (currently $2,350) for the process.
If you have a net worth of at least $2 million you might be subject to a mandatory exit tax. You’ll still have to file one final tax return after you renounce your citizenship.
This is a serious decision that you have to consider. Renouncing your U.S. citizenship means that you’ll never be able to move back to the country. You might even need a visa to travel to the country. It’s also very rare and difficult to become naturalized as a U.S. citizen after you renounce.
You’ll have to consider if the tax burden is too high to continue being a U.S. citizen. You want to do your research on this process and avoid making a hasty decision.
*As a foreigner, you may still owe U.S. taxes if you earn an income from the country or have investments.
Best Practices
So what are the best practices you should follow as an American expat?
The first is to ensure you keep a record of all your income. Make sure you keep track of foreign and American income. If you earn foreign income, you want to keep records of the amount in the local currency. You should also convert this amount to USD and keep a record of this.
If you pay taxes, social security, or other contributions abroad make sure you keep track of this. If you’re a business owner or freelancer, make sure you keep track of your expenses. This might help you reduce your tax burden to the U.S.
If you haven’t decided where to relocate, you want to consider the potential tax burden. Are you willing to move to a place that doesn’t have a tax treaty with the U.S.? Do you want to move to a place that doesn’t tax income?
If you want to reduce your taxes as much as possible, make sure you plan before you move overseas.
Those Are the Tax Rules for American Expats
As you can see, taxes for expats are rather complex. You want to make sure you seek professional assistance to file your taxes when you move abroad.
You’ll always have to file taxes for as long as you earn income. If you earn income from foreign sources, you might have deductions to reduce your tax burden.
You want to check if your new country has a double taxation treaty with the United States. This might reduce or eliminate your tax burden to the U.S.
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