For many Americans, relocating to another country represents a once-in-a-lifetime chance to explore the globe. Moving to a foreign country – whether it’s to relax on the beaches of southeast Asia, learn a new language, or to step up your career in London – is easier than ever, but you still have to stay compliant with your US expat tax obligations when you’re abroad.
If you didn’t know about having to file US federal income taxes from abroad, you’ll probably have some questions. To make things easier for you, we’ve compiled and answered the most commonly asked expat tax questions. At Vista, we can assist you with your US expat taxes no matter where you are in the world.
Do Americans Who Live Abroad Have To Pay Taxes?
“Do US expats pay taxes?” is one of the most often asked questions asked by Americans living abroad.
Yes! If you’re a US citizen or Green Card holder and you make more than the minimum IRS income thresholds, you must submit a US tax return, whether you live overseas or in the United States.
Only two countries, including the United States, levy taxes based on nationality rather than residence. This means that if you are a US citizen by birth or naturalization, you owe taxes or at least a filing to the United States.
What Is Taxable Foreign Income?
Foreign earned income refers to income earned by Americans living outside the country including:
- Wages, salary income, bonuses, and tips
- Self-employment income
All other income globally is also subject to US tax, including
- Rental income
- Retirement income
- Any other income from any source
How Do You Submit Your Taxes If You’re Living Outside Of Your Country?
If you live abroad, you file your taxes like you would do if you were in the US, however you will most likely have to file additional forms.
Is It Possible For American Expats To Owe US Taxes?
US expats have to submit a tax return each year. Despite the lack of an overall tax exemption for US citizens residing overseas, there are several IRS exemptions in place to protect Americans from being taxed twice on their income while they live abroad. In most cases, US expats can reduce the US tax on their income by claiming either:
The Foreign Earned Income Exclusion: One of the best ways to avoid double taxation is the FEIE. To be eligible, you must be a tax resident of another country and pass either the Bona Fide Residence Test or the Physical Presence Test. For tax years 2021 and 2022, you will be able to deduct up to $108,700 and $112,000, respectively, if you qualify.
Foreign Tax Credit: You can use the Foreign Tax Credit to claim a dollar-for-dollar credit on foreign taxes paid on income received as an expat. If you live outside of the United States and are required to pay foreign income tax, you will be eligible to claim the Foreign Tax Credit.
Do Expats Have To Report Their Foreign Accounts?
If you have accounts, assets, or interests outside the US, you may be required to file either a Foreign Bank Account Report to FinCEN, or FACTA Form 8938 to the IRS, or both.
When it comes to reporting foreign accounts, FinCEN (the US Treasury Department’s Financial Crimes and Enforcement Network) and the IRS are two different entities, which is why you may have to file both the FBAR (FinCEN Form 114) and IRS Form 8938.
As an American Expat, you should understand the FBAR and FATCA filing obligations, as they can result in fines if you make mistakes or don’t comply. Your expat tax professional will advise you further as to whether you need to do this.
Do Expats Have To Pay US State Taxes?
It’s possible, but uncommon. You may still be required to pay state taxes if you relocate outside of the United States, depending on the state you previously lived in and the rules there.
You’ll need to consult an expat tax specialist if you’re not sure about whether or not you’ll be subject to state taxes while living overseas.
Are You A US Citizen Who Has Never Filed Your Taxes?
Don’t panic. Using the amnesty Offshore Streamlined Filing Compliance Procedures, you can catch up on many years’ worth of expat tax filing without penalty.
Many Americans who live and work abroad may not realize that they are required to file US taxes. Even if you’re a US citizen living overseas who has never filed a tax return, the Internal Revenue Service (IRS) is understanding when taxpayers make honest mistakes. The Offshore Streamlined Filing Compliance Procedures allows you to catch up on several years’ worth of US expat taxes. However, the requirements to qualify include:
- You have spent a minimum of 330 days out of the previous three years in a foreign nation
- You can confirm that your failure to file US tax returns and FBARs was due to a misunderstanding or incomplete knowledge of your US tax requirements as an expat
At Vista, we’re able to help with all your US expat tax filing needs. If you have more expat tax questions, Get in touch today.