Taxes For The American Abroad 101

Living and investing overseas can create advantages when it comes to your U.S. tax burden. To benefit from those advantages and avoid costly mistakes, you need to understand how U.S. tax rules apply to expat Americans.

Here’s an overview of things to know to help you stay compliant with the IRS and also capitalize on every legal tax benefit that’s available to you.

The U.S. Government Taxes Its Citizens Regardless Of Where They Live

Most countries only tax their citizens if they live or earn money in their home country.

The United States is one of only two countries in the world to tax citizens on their worldwide income, no matter where they live.

Americans Overseas Must File A Return With The IRS Every Year

Living in a foreign country doesn’t mean you can escape the need to file a U.S. tax return. However, for many Americans abroad, filing a return is all we will have to do.

Being a non-resident has unique tax advantages that could mean that you don’t owe any taxes in the States. In fact, the requirement to file a return may simply be to inform the IRS that you don’t owe any money.

If you have a foreign bank account with $10,000 in it (or if you hold that amount across multiple accounts), you must also file a Foreign Bank Account Report (FBAR).

Tax Treaties May Eliminate The Possibility Of Double Taxation

If the United States and the country where you live have a tax treaty, it will eliminate the possibility of double taxation in almost all cases.

Double taxation occurs when both your new country of residency and your home country demand a tax from you on the same income.

If you are tax-resident in Portugal, for instance, and you pay tax in Portugal—even if you are a U.S. citizen—you won’t owe tax on that same income in the United States. The same holds true for most countries.

If your new country of residence demands a lower tax than the United States would, the IRS may demand the difference.

Americans Overseas Can Get Extensions On Filing Deadlines

Most years, April 15 is the U.S. income tax filing deadline. If you’re a U.S. citizen who lives overseas, however, you’re allowed an automatic two-month extension to file your return, taking your filing deadline to June 15.

You can also file Form 4868 for a six-month (total) extension of your filing date, taking the deadline to October 15, but you need to request this extension before April 15.

Taking this six-month extension is important because it gives you time to finalize and file foreign tax returns, which may result in U.S. tax credits.

You want to know the amount of any foreign taxes paid so you can take that amount as a credit on your U.S. return. Delayed filing with an extension to take advantage of the foreign tax credit is easier than filing an amended return with the IRS after the fact.

Of course, extending your filing deadline doesn’t extend your payment deadline. You should have paid any estimated tax due when you filed for your extension in April to avoid paying potential penalties and interest.

There’s A Difference Between Tax Residency And Legal Residency

There are two aspects of spending time in a country to consider: the first is how much time you can spend in the country without obtaining legal residency; the second is how much time you can spend in the country before triggering tax residency.

It’s possible to be a legal resident in a country without becoming a tax resident if you don’t spend more than half a year there. However, you don’t have to be a legal resident to find yourself a tax resident if you spend more than half a year in a country, legally or not.

Understand the rules for the country where you’re considering spending time before you get too far into your process.

Certain Rules In The IRS Code Can Be Used To Minimize Your Taxes

When you move overseas, you should arrange your affairs to take advantage of every legal tax benefit available to you in the place where you’ve decided you want to be.

Perhaps the most significant advantage available to Americans overseas is the Foreign Earned Income Exclusion (FEIE).

As a U.S. person, the FEIE allows you to exclude up to $120,000 in earned income on your taxes if you live and work outside the United States. If you’re married, you can exclude up to $240,000.

These figures are for 2023, and the amount generally goes up every year by a small increment to keep up with inflation.

It’s important to note that this exclusion applies to earned income, which means that the income must be the result of actual wages from an employer (including you, if you are the owner of a business). Income from social security, private pensions, dividends, alimony benefits, and the like does not qualify.

The FEIE is meant to mitigate the tax burden for United States citizens working abroad. For some workers, it may be better to forego the FEIE if they are earning a high salary in a high-tax country. In that case, they could owe less U.S. taxes if they took the foreign tax credit.

Keep in mind that once you start taking the FEIE, you have to continue to take it unless you revoke your usage. If you stop using it, you won’t be able to take the FEIE again for five years, so it’s imperative that you evaluate your potential long-term situation before deciding how to handle the FEIE.

Don’t Make Major Life Decisions Based On Taxes Alone

Taxes are a consideration when shopping options for where to spend time and money overseas, but don’t let them distract you from your real objectives and agendas.

You want to understand your tax obligations and liabilities, but you don’t want to let them keep you from making a move that, taxes notwithstanding, you’d really like to make.

When trying to size up their potential tax liability in another country, most people Google
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the income tax rates in the jurisdiction on their radar, identify the highest marginal rate of tax, and go from there.

Similar to the official tax filing date, which can change depending on the circumstances of the calendar, your actual income tax depends on the specific factors of how a country makes the calculation.

Take a look at the big picture before making a final decision on where to live or invest overseas. Jumping to a conclusion based on the top marginal tax rate alone could keep you from making a move you really ought to make.