Taxes for US Citizens Living Abroad: What to Know

Taxes for US Citizens Living Abroad: What to Know

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. 

Key Takeaways

  • Regardless of where you are residing at the time, if you are an American living abroad as a US citizen, you are required to file a US federal tax return and pay US taxes on your worldwide income.
  • 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.
  • If US citizens fail to file US taxes while living abroad, they may incur fines, interest charges, or possibly legal repercussions.

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. 

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 local residents on all income earned from both local and foreign sources. (For nonresidents in these countries, only income earned locally is taxed, similar to the territorial-based system.) 

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. 

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 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 are under age 65 
    • $26,450 if one spouse is under age 65 and one is age 65 or older 
    • $27,800 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: 
    • $18,800 if under age 65 
    • $20,500 if age 65 or older 
  • For citizens filing as a qualifying widow(er) with a dependent child: 
    • $25,100 if under age 65 
    • $26,450 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 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. 

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, 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. 

10 ways to save BIG on your tax bill as a digital nomad.

Learn where the best tax havens are, common traps, and ways to save money on your US expat taxes.

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How to Avoid Double Taxation on Foreign Income  

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. 

What Happens If US Citizens Don’t File Their 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 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. 

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: 

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. 

Still Have Questions about Your US Expat Taxes? 

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. 

Every expat should know these 25 things about US expat taxes. Find out for yourself.
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