Taxes for US Citizens Living Abroad: What to Know
- Do American Citizens Living Abroad Have to Pay Taxes?
- Citizenship-Based Taxation: Why Americans Living Abroad Still Pay US Taxes
- What Taxes Do I Pay If I Work Overseas?
- How Can I Avoid Paying US Taxes Abroad?
- How to Avoid Double Taxation on Foreign Income
- What Happens If US Citizens Don't File Their Taxes While Living Abroad?
- What Else Is Required for US Taxes Living Abroad?
- Moved Abroad Recently & Have Questions about Your US Expat Taxes? We're Here to Help!
Under the US tax regulations, American citizens and residents are required to fulfill specific tax responsibilities, regardless of their physical location – whether living or traveling outside the United States. This legal requirement extends to the filing of tax returns if your income surpasses certain thresholds. Key obligations include submitting income tax, estate tax, and gift tax returns, along with the payment of any estimated taxes due.
It is crucial to comply with these regulations to prevent potential legal and financial consequences. Notably, residing in another country does not exempt you from owing taxes to the US government. Understanding and adhering to these obligations ensures compliance with US tax laws and safeguards against inadvertent tax liabilities.
So, you might ask, why must I pay US taxes if I live abroad? Read on to find out about your taxes as an American living overseas.
Key Takeaways
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Regardless of where you reside, if you are a US Person, you are required to file a US federal tax return and pay US taxes on your worldwide income.
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The only option to avoid submitting a US tax return and paying US taxes abroad under current US tax legislation is to renounce your US citizenship.
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If US citizens fail to file US taxes while living abroad, they may incur fines, interest charges, their passport might not be renewed, as well as other possible legal repercussions.
Do American Citizens Living Abroad Have to Pay Taxes?
American citizens residing outside the United States are required to adhere to US tax laws, which mandate the filing of federal tax returns and payment of taxes on worldwide income. This unique aspect of US tax policy applies to all citizens, irrespective of their country of residence. The United States distinguishes itself as one of the few nations globally that imposes taxes based on citizenship rather than residency.
For Americans living abroad, this means that their global income is subject to US income tax laws, mirroring the tax obligations of those residing within the country. It is essential for US citizens abroad to be aware of their ongoing tax responsibilities to the IRS, including reporting all income earned outside of the US.
Furthermore, there may be specific tax credits and exclusions, like the Foreign Earned Income Exclusion and the Foreign Tax Credit, which can mitigate double taxation. Nevertheless, understanding and complying with these rules is crucial to avoid legal and financial repercussions.
Given the complexity of tax laws for Americans abroad, it is highly advisable to seek guidance from tax professionals who specialize in expatriate taxation. This ensures not only compliance with US tax regulations but also a more informed approach to managing tax liabilities effectively.
Citizenship-Based Taxation: Why Americans Living Abroad Still Pay US Taxes
The United States takes a rare approach to taxing individual income. Most countries use one of two tax systems: territorial-based and residence-based taxation.
- In a territorial-based taxation system, the country taxes individuals only on income from sources earned inside that country’s borders.
- Under residence-based taxation, the country taxes residents on all income earned from both local and foreign sources. (For nonresidents in these countries, only local income is taxed, similar to the territorial-based system.)
The US, however, is one of three countries that impose citizenship-based taxation. (The other countries are Eritrea and North Korea.) Under this system, citizens are always taxed on their worldwide income regardless of where they live.
Some countries have no income tax at all, such as Bahrain, Monaco, and the Bahamas. Many expats choose to move to these tax-free countries to reduce their annual tax bill. But this does not get them out of potentially owing tax to the US government.
What 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 as an American living abroad, you will need to file a US federal tax return this year if your total income in 2023—regardless of where the income was earned (and in what currency)—exceeds any of the following minimum thresholds:
- For citizens filing as single:
- $12,950 if under age 65
- $14,700 if age 65 or older
- For citizens filing as married filing jointly:
- $25,900 if both spouses are under age 65
- $27,300 if one spouse is under age 65 and one is age 65 or older
- $28,700 if both spouses are age 65 or older
- For citizens filing as married filing separately: $5 (No, that’s not a typo! It really is $5.)
- For citizens filing as self-employed: $400
- For citizens filing as head of household:
- $19,400 if under age 65
- $21,150 if age 65 or older
- For citizens filing as a qualifying surviving spouse with a dependent child:
- $25,900 if under age 65
- $27,300 if age 65 or older
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 IRS will still demand that you file a tax return.
Depending on where you lived before moving overseas, you may also be required to file a state tax return. This can further complicate your annual tax obligations. If you’re unsure of whether you should file a state tax return, consult an expat tax professional.
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 your US citizenship. Renouncing your US citizenship is a serious and permanent decision that should not be taken lightly. Before considering this option, learn about all the requirements and implications of citizenship renunciation .
But as long as you are a US citizen or green card holder, you must 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
Under a citizenship-based taxation system, an individual may be subject to double taxation on their income by both their country of 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). Expats can exclude up to $120,000 of foreign income from US taxes under the 2023 FEIE policy. This amount has been increased to $126,500 for the 2024 tax year.
Use our simple excel calculator to get an estimate of how the foreign earned income exclusion will save you money. It will make your day!
Another provision to help avoid double taxation is the Foreign Tax Credit. This gives Americans a dollar-for-dollar tax credit for the taxes they’ve paid or owe 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.
The United States also has tax treaties with most countries worldwide that help prevent double taxation for its citizens. These treaties specify which country has the right to tax certain types of income and determine the amount of income that can be taxed by each country.
What Happens If US Citizens Don’t File Their Taxes While Living Abroad?
US citizens living abroad who fail to file US taxes risk passport denial, penalties, and 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%. If over 60 days late, there is a minimum penalty of either $450 or 100% of the tax shown as due on the return – whichever is less.
- Failure to Pay Penalty: 0.5% of the unpaid taxes for each month the tax payment is late, up to 25%
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 Compliance Procedures only require you to file the past three years of federal tax returns and the past six years of FBARs, making it a more straightforward, less expensive way to become compliant.
Use our simple excel calculator to get an estimate of how the foreign earned income exclusion will save you money. It will make your day!
What Else Is Required for US Taxes Living Abroad?
When 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! If you create and register a company outside the US, there are various forms you will likely need to file each year in order to avoid potential penalties starting at $10,000 per foreign company per year.
Make sure to familiarize yourself with these additional tax requirements for US citizens living abroad:
- Foreign Bank Account Reporting (FBAR)
- Foreign Account Tax Compliance Act (FATCA)
- Tax Rules for Passive Foreign Investment Companies
When it comes to filing US taxes while living abroad, it’s important to know everything you are required to report in your filing.
Moved Abroad Recently & Have Questions about Your US Expat Taxes? We’re Here to Help!
We hope this guide has helped you understand your tax obligations as an American living abroad. Contact us, and one of our customer champions will gladly help. If you need very specific advice on your specific tax situation, you can also click below to get a consultation with one of our expat tax experts.
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