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Expat Tax Essentials
As an American living overseas, you might think you’ve escaped the hassles and headaches of the US tax season. However, contrary to popular belief, you are still obligated to file a US federal tax return even after moving to another country. In this post, we’ll go over what you need to know about your taxes as a US citizen living abroad.
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.
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.
The US, however, is one of only two countries that impose citizenship-based taxation. (The other country with this system is Eritrea.) Under this system, citizens are always taxed on their worldwide income regardless of where they live.
Note: 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.
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 2021—regardless of where the income was earned (and in what currency)—exceeds any of the following minimum thresholds:
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.
Note: 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.
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, make sure to learn about all the requirements and implications of citizenship renunciation .
But as 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.
Learn where the best tax havens are, common traps, and ways to save money on your US expat taxes.
One issue that arises under a citizenship-based taxation 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 2022 FEIE, expats are permitted to exclude $112,000 of income earned abroad from their US tax obligation.
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.
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.
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 an easier, less expensive way to become compliant.
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:
When it comes to filing US taxes while living abroad, it’s important that you’re aware of everything you are required to report in your filing.
We hope this guide has helped you understand your tax obligations as an American living abroad. If you’d like to learn more, download our free guide: 25 Things You Need to Know about US Expat Taxes.
And if you have specific questions about your expat tax return, we can help. At Greenback Expat Tax Services, we give Americans around the world the support they need to manage their US taxes. Just contact us, and we’ll be happy to answer all your questions.