US Citizens Living Abroad: Taxes and Regulations

If you are an American living abroad, you will need to file a US Federal tax return

If you’re a US citizen living abroad, taxes are still something to consider, even if it might be tempting to think that you have escaped the common rush stateside that comes with filing a federal tax return every April. However, contrary to popular belief, you are still obligated to file a US federal tax return even when you take up residence in a new country. In this post, we’ll explain why.

Do American Citizens Living Abroad Have to Pay Taxes?

Yes, if you are an American living abroad as a US citizen, you must file a US federal tax return and pay US taxes on your worldwide income no matter where you live at that time. In other words, you are subject to the same rules regarding income taxation as people living stateside.

While nearly all of the 244 sovereign territories employ territorial, residence or no income taxation at all, there are two countries, the US and Eritrea, that have citizenship-based taxation systems. This answers the question: do American citizens living abroad have to pay taxes?

Citizenship-Based Taxation: Why Americans Living Abroad Still Pay US Taxes

It’s safe to say that the United States takes a relatively unique approach when it comes to taxing individual income.

For countries that do tax income—countries like Monaco and Qatar, for example, don’t tax income at all—there are two generally used systems: territorial-based and residence-based taxation.

In a territorial-based taxation system, countries like Singapore and Lebanon tax individuals only on income from sources earned inside the country’s borders. Under residence-based taxation, countries like Germany and France tax their local residents on all income earned from both local and foreign sources. For non-residents in these countries, only income earned locally is taxed, similar to the territorial-based system.

How Much Taxes Do I Pay if I Work Overseas?

In the US tax system, foreign income is taxed at the same marginal rate as any income earned inside the country.

This means that you as an American living abroad or a Green Card holder will need to file a US federal tax return this year if your total income in 2021—regardless of where the income was earned (and in what currency)—exceeds any of the following minimum thresholds:

  • For citizens filing as Single:
    • $12,550 if under age 65
    • $14,250 if age 65 or older
  • For citizens filing as Married Filing Jointly:
    • $25,100 if both spouses under age 65;
    • $26,450 if one spouse under age 65 and one age 65 or older
    • $27,800 if both spouses age 65 or older
  • For citizens filing as Married Filing Separately: $5 (no, that’s not a typo! It’s actually $5)
  • For citizens filing as Self-Employed: $400
  • For citizens filing as head of household:
    • $18,800 if under age 65
    • $20,500 if age 65 or older
  • For citizens as qualifying widow(er)s with dependent child:
    • $25,100 if under age 65
    • $26,450 if age 65 or older

Therefore, even if you have not lived in the US at any point during the year and have earned all of your income in a foreign territory, the IRS still expects you to file a tax return.

Furthermore, you may also be required to file a state tax return depending on where you lived prior to moving abroad. This can further complicate the question of how much taxes do I pay if I work overseas.

How Can I Avoid Paying US Taxes Abroad?

Based on the current US tax laws, the only way to avoid filing a US tax return and paying US taxes abroad is to renounce US citizenship. Renouncing your US citizenship is a serious and permanent decision that should not be taken lightly. Make sure to learn about all the requirements and implications of citizenship renunciation before considering this option.

So long as you are a US citizen or green card holder, you will be required to file a tax return annually and pay the associated taxes while living abroad. However, it is possible to avoid double taxation and reduce your US tax bill using special tax credits, deductions, and exclusions available to Americans living abroad.

How to Avoid Double Taxation on Foreign Income 

One issue that arises in this tax system is that an individual could theoretically be doubly taxed on their income earned – both by their country of current residence and the US. This scenario is especially relevant for an American living abroad full-time who may qualify as a resident in other local tax systems.

To help avoid this negative consequence, the US tax code contains a provision called the foreign earned income exclusion (FEIE). Under the 2021 FEIE, expats are permitted to exclude $108,700 of income earned abroad from their US tax obligation.

Another provision to help mitigate double taxation is the Foreign Tax Credit. In this case, Americans earning income internationally may reduce their US tax obligation beyond the limits of the FEIE if they have paid or accrued tax to a foreign government. What makes this provision complex, however, is that it applies to only certain types of income, and there are unique considerations related to each foreign country.

What Happens If US Citizens Don’t File Taxes While Living Abroad?

US citizens who don’t file US taxes while living abroad may face penalties, interest costs, or even criminal charges. The IRS charges penalties for both late filing and late payments. If your lack of filing is willful—meaning you knowingly avoided your US tax requirements while living abroad—then more serious legal consequences may apply.

  • Failure to File Penalty: 5% of the unpaid taxes for each month the tax return is late, up to 25%
  • Failure to Pay Penalty: 0.5% of the unpaid taxes for each month the tax payment is late, up to 25%
  • Over 60 Days Late: The maximum for this penalty is 25% of your unpaid taxes.

Fortunately, the IRS does offer a way for Americans abroad to get caught up penalty-free if they didn’t know they needed to file US taxes while living overseas. Regardless of how many years you’ve missed, the Streamlined Filing Procedures only requires you to file the past three years of Federal tax returns and the past six years of FBARs, making it an easier, less expensive way to become compliant.

What Else Is Required for US Taxes Living Abroad?

When it comes to filing your US expat taxes, there are more items you’ll need to report in addition to your earned income. The IRS also requires that you disclose your foreign accounts and assets that cross a certain value threshold. Even your retirement contributions in foreign retirement accounts, which may seem tax-deferred might be taxable!

Make sure to familiarize yourself with these additional tax requirements for US citizens living abroad:

Especially when it comes to filing US taxes living abroad, it’s important that you’re aware of everything you are required to report in your filing.

Have Specific Questions Related to Your US Expat Tax Return?

We can help! Our dedicated team of CPAs and IRS Enrolled Agents have specific expat tax expertise to help U.S. citizens living abroad. Taxes and regulations can be complicated, but we can help navigate federal tax returns in a way that makes sense for each individual situation. 

If you’re ready to file, get started today to be matched with one of our expat-expert accountants.

Have questions before you get started? Contact us today for the answers you need.