Why Do I Have to Pay U.S. Taxes If I Live Abroad?
- Why Does the US Tax Citizens on Worldwide Income?
- Myth vs Reality: US Taxes for Expats
- What Taxes Will I Have to Pay If I Work Abroad?
- What Are the Tax Exemptions for US Citizens Living Abroad?
- What Tax Forms Do Expats Have to Use?
- How Do I File My Expat Taxes?
- What If I Haven’t Filed Taxes While Living Abroad?
- Moved Abroad Recently & Have Questions about Your US Expat Taxes? We're Here to Help!
US taxes are based on citizenship rather than residence. This means that citizens are taxed by the IRS even if they live in another country. The only way to avoid this tax system is to renounce your citizenship, which can be costly and is rarely wise. However, there are expat-specific deductions that can lower or eliminate your taxes.
You’ll always have to file, but you may not necessarily owe anything to the IRS.
By using a combination of the Foreign Earned Income Exclusion, Foreign Tax Credit, Foreign Housing Exclusion, and Child Tax Credit, expats can reduce or completely eliminate their US tax liabilities.
Why Does the US Tax Citizens on Worldwide Income?
Unfortunately for American expats, the US is one of only two countries in the world (the other being Eritrea) that taxes citizens regardless of where they live.
The system has roots going back to the Civil War, where Congress passed a new tax on US-based income by “any citizen of the United States residing abroad.” At the time, the goal was to discourage people from fleeing their civic duties during a time of crisis.
These days, the main logic is:
- Anti-tax avoidance: The US wants to prevent wealthy individuals from dodging taxes by moving their money (or themselves) overseas.
- Political inertia: Once the system was in place, undoing it became politically complicated. Since it would seem like a giveaway to the rich or multinational corporations, elected officials don’t want to support its removal.
- Expats still benefit from citizenship: We’re afforded the protection, rights, and privileges of US citizenship, even abroad, so we ought to contribute.
Myth vs Reality: US Taxes for Expats
| Myth | Reality |
| “I only pay taxes in my new country.” | The US taxes worldwide income, but allows exclusions, deductions and credits. |
| “I don’t live in the US, so I don’t owe taxes.” | US citizens must file regardless of residency. However, after allowable tax benefits, most don’t owe tax. |
| “If I ignore US taxes, nothing happens.” | Foreign banks report information to the IRS about US citizens. You can get caught, even if you live abroad. |
| “I can avoid US taxes by getting a second passport.” | Unless you renounce citizenship, you still have to file and may owe taxes. |
What Taxes Will I Have to Pay If I Work Abroad?
You’ll of course have to pay taxes to your new country. But because of certain expat tax benefits, most Americans living and working abroad don’t end up owing anything to the IRS. However, even if you don’t owe anything, you will still have to file an annual tax return.
As an expat, here are your obligations:
- Federal Income: As long as your income exceeds the minimum filing threshold, you’re required to file a US Federal Tax Return.
- Social Security: The US has totalization agreements with 28 countries dictating who receives the US Social Security tax payments. If you move to a country without such an agreement, you may have to pay into both systems.
- State Income: Depending on whether you’re still considered a resident, you may have to file a state tax return. Anything from voter registration to maintaining a mailing address or bank account may count. Check your state’s residency rules to be sure, but if you have rental income or a business back home, you definitely have to file a state return.
- FBAR Filing: If you hold over $10,000 in foreign financial accounts, you must file an FBAR. This is not a tax; it’s simply a report telling the IRS about overseas money.
- FATCA Reporting: If you own significant foreign financial assets, you may have to file a Form 8938 Statement of Specified Foreign Assets. Thresholds vary based on filing status and where you live ($200,00 single, $400,00 married filing jointly if living overseas, one quarter of this amount if living in the US).
What Are the Tax Exemptions for US Citizens Living Abroad?
Expats can reduce or eliminate their US tax obligation with a combination of the following deductions and credits. Each has unique qualification rules and thresholds; read our linked guides for detailed information.
- Foreign Earned Income Exclusion (FEIE): You may exclude a certain amount of foreign-earned income from US taxation.
- Foreign Tax Credit (FTC): You may offset US tax liability by crediting payments made to foreign countries.
- Foreign Housing Exclusion: You may deduct a certain amount of foreign housing costs from your US tax obligation.
- Child Tax Credit: You may deduct a certain amount from your tax bill for each qualifying child and may possibly get a refund even if you don’t owe any US tax.
- Tax Treaties: The US maintains treaties with over sixty countries in an effort to prevent double taxation.
Some countries have no income tax at all! This includes Bahrain, Monaco, and the Bahamas. Many expats choose to move to these tax-free countries to reduce their annual tax bill. However, this won’t remove your US filing obligations.
What Tax Forms Do Expats Have to Use?
- Form 1040: The standard individual tax return.
- Schedules 1, 2, and 3: Attach these to your Form 1040 if you have additional income (Schedule 1), additional taxes (Schedule 2), or certain credits and payments (Schedule 3).
- Form 2555: For claiming the Foreign Earned Income Exclusion.
- Form 1116: Used to claim the Foreign Tax Credit.
- Form 8938 (FATCA): Reporting foreign financial assets exceeding certain thresholds.
- FinCEN Form 114 (FBAR): Filed if you hold over $10,000 in foreign financial accounts.
- Form 5471: Used to report information about certain foreign corporations in which you are a shareholder.
- Form 8621: Required for shareholders in a Passive Foreign Investment Company (PFIC).
- Form 3520: Used to report certain transactions with foreign trusts, ownership of foreign trusts, certain foreign retirement and pension accounts, and receipts of certain large gifts or bequests from foreign persons.
When you live in the US, tax day is simple: April 15th! When you move abroad, it’s not so straightforward! Learn about all the expat deadlines and extensions you need to know to file.
How Do I File My Expat Taxes?
Filing your expat taxes can be time-consuming and complicated. And with the added nuances of international tax obligations, it’s easy to make a costly mistake. If you’d like someone else to handle the headaches, we’d be happy to help.
To file on your own:
- Gather income records & foreign bank details
- Choose your tax reduction strategy
- File Federal Income Tax Form 1040
- File additional necessary forms. FBAR and state income tax are the most common; see the above list for others.
- Submit before the expat tax deadline (June 15)
What If I Haven’t Filed Taxes While Living Abroad?
You could face penalties and interest for filing or paying late, but the good news is the IRS created the Streamlined Filing Compliance Procedure to help expats catch up on taxes. It’s an amnesty program that helps delinquent expats catch up without facing penalties. Read our linked guide to see if you qualify.
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.
