If you’re a U.S. citizen living abroad, you might be surprised to learn that Uncle Sam still expects a piece of the pie. The U.S. is one of the only countries that taxes its citizens on worldwide income, regardless of where they live. That means if you’re living overseas, you’ll need to keep income taxes on your radar.
Understanding your obligations and taking advantage of exclusions and credits can make the process much easier. Keep reading to get the breakdown of how to pay U.S. taxes while living abroad.
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Do U.S. citizens living abroad pay taxes?
The short answer is yes: American citizens living in another country still need to pay taxes. U.S. federal tax laws are based on citizenship, not residency. This means that, regardless of where they live, U.S. citizens must report their worldwide income to the IRS. This includes wages, investment income, and any other earnings.
“This system is unique compared to many other countries that only tax based on residency,” says certified public accountant (CPA) Andrew Gosselin, senior contributor at Coupon Mister. “For example, even if you’re working in France, paying French taxes, and not stepping foot in the U.S., the IRS still expects a report of your global income.”
Some states also charge taxes to expats
The taxes you must pay might not end at a federal level. Always check whether your home state also requires you to file state taxes while living abroad. The requirement to file state taxes while living abroad can vary. Some states may still consider you a resident for tax purposes if you maintain strong ties to the state, such as owning property or having family there. Other states have specific exemptions for expats and do not require state tax filings.
Do U.S. citizens living abroad pay double taxes?
Every U.S. citizen must pay taxes to the U.S. government, whether they live in the U.S. or not. However, U.S. citizens who live outside the U.S. also have tax obligations to the country where they reside. This can lead to the potential for double taxation, meaning they could be taxed by both the U.S. and the foreign country they live in.
How to avoid double taxation: Strategies to reduce your U.S. tax bill
Let's address how to avoid double taxation, a major question for U.S. citizens living and working abroad. Thankfully, tax treaties and provisions can help alleviate this burden. Still, these rules can get tricky for non-specialists. So it’s a good idea to work with a tax advisor who specializes in expat taxes.
You may qualify for certain tax benefits that help reduce your U.S. tax payments, such as:
This is a powerful benefit that allows you to exclude a significant portion of your foreign earnings (up to $126,500 for 2024) from U.S. taxation. This can significantly reduce your U.S. tax bill, especially if you're working in a high-paying job overseas.
Eligibility: To qualify for the FEIE, you must meet either the bona fide residence test or the physical presence test. The bona fide residence test requires you to be a resident of a foreign country for an uninterrupted period that includes 365 full days in a three-year period. The physical presence test requires you to be physically present in a foreign country for at least 330 full days during a period of 12 consecutive months.
Even if some of your income is above the FEIE limit, you might still benefit from the FTC. This credit reduces your U.S. tax liability dollar-for-dollar by the amount of income tax you already paid to a foreign government.“If you’re paying high taxes in Germany, for instance, this credit can significantly reduce what you owe to the U.S,” Gosselin says, adding: “Tax treaties between countries can also help, but they vary widely, so you’ll need to dig into the details depending on where you live.”
How it works: Let's say you owe $10,000 in U.S. taxes but already paid $8,000 in income taxes to your foreign country of residence. The FTC allows you to credit those foreign taxes paid, reducing your U.S. tax liability to $2,000.
Tax treaties between the U.S. and other countries can significantly impact how these benefits apply. These treaties can further reduce double taxation or offer other tax advantages. It's crucial to consult with a tax advisor specializing in expat taxes to understand the specific tax treaty between the U.S. and your resident country.
How to file U.S. tax for U.S. citizens living abroad
Filing taxes from abroad is manageable with the right resources. Here's a simplified guide to help you navigate the process:
Determine your filing requirements
- Residency status: Determine your tax residency status. Are you considered a resident or a non-resident alien for U.S. tax purposes? This significantly impacts your filing obligations.
- Income sources: Identify all sources of income, including employment income, investment income, rental income, and any other income received while living abroad.
Gather necessary documents
- Foreign Bank Account Report (FBAR): Gather details on all your foreign bank accounts, including account numbers, balances, and the names of the financial institutions.
- Foreign Income Documentation: Collect documents related to your foreign income, such as pay stubs, investment statements, and tax returns filed in your country of residence.
Then, obtain the necessary tax forms:
- Form 1040: The primary tax form for individuals
- Form 2555: Foreign Earned Income Exclusion (FEIE) form
- Form 1116: Foreign Tax Credit (FTC) form
- Form 8938: Statement of Specified Foreign Financial Assets (for reporting foreign financial assets)
- FinCEN Form 114 (FBAR): Report of Foreign Bank and Financial Accounts (for reporting foreign financial accounts exceeding certain thresholds)
Understand key tax concepts
- Foreign earned income exclusion (FEIE): This exclusion allows you to exclude a portion of your foreign-earned income from U.S. taxation.
- Foreign Tax Credit (FTC): This credit allows you to offset your U.S. tax liability by the amount of income tax you paid to your foreign country of residence.
- Tax treaties: Understand the tax treaty between the U.S. and your country of residence, as it can significantly impact your tax obligations.
Consider seeking professional guidance
When in doubt, consult with a qualified tax advisor specializing in international taxation. They can provide personalized guidance, help you determine your filing requirements, and ensure you comply with all applicable tax laws.
Every time you come across an explanation like “financial accounts exceeding certain thresholds,” know there are many highly specific rules and exceptions to the regulations. Going through this process with professional guidance will make it a lot smoother.
File your taxes on time
- Deadlines: Familiarize yourself with the tax filing deadlines for U.S. citizens living abroad.
- Electronic filing: Consider electronic filing options for a faster and more efficient process.
Report foreign financial accounts
- FBAR: If you have foreign financial accounts exceeding certain thresholds, you must file an FBAR (FinCEN Form 114) with the Financial Crimes Enforcement Network (FinCEN).
- FATCA: Be aware of the Foreign Account Tax Compliance Act (FATCA), which requires foreign financial institutions to report on the assets held by U.S. account holders.
Bonus tips for simplifying your taxes while living abroad
- Use expat-friendly tax software. Programs like TurboTax and H&R Block offer versions designed for U.S. citizens abroad.
- Stay organized. Keep detailed records of your income, expenses, and tax payments to avoid headaches during filing season.
- Hire a tax professional. A CPA or tax attorney with experience in expat taxes can help you navigate the complexities and ensure compliance.
What happens if you don’t file taxes while living abroad?
If you don’t file taxes while living abroad it can have serious consequences. These can include:
- Penalties and interest: You may face significant penalties and interest charges for late filing and unpaid taxes. These penalties can be substantial and can accumulate rapidly.
- Loss of passport and travel restrictions: The IRS may impose restrictions on your ability to obtain or renew your passport. This can severely impact your ability to travel internationally.
- Bank account restrictions: You may encounter difficulties opening or maintaining bank accounts in the U.S.
- Legal action: In severe cases, the IRS may take legal action, including filing lawsuits to collect unpaid taxes.
You must also know that:
- Ignorance of the law is not an excuse. Even if you were unaware of your filing obligations, you may still be held liable for penalties.
- Voluntary disclosure is an option if you realize you have not filed taxes as required. This program allows you to come forward and correct past tax errors. While penalties may still apply, they are generally less severe than those imposed for willful non-compliance.
How to manage U.S. taxes while living abroad
By using exclusions, credits, and proper planning, you can reduce or even eliminate your U.S. tax liability while living or retiring abroad. The secret is knowing the rules and using what’s available to make paying manageable. By staying informed and taking advantage of available tax benefits, you can focus on enjoying your life abroad without worrying about unexpected surprises from the IRS.
FAQs
Do U.S. citizens have to pay taxes on foreign property?
Yes, if you own property abroad, you’ll need to report the income (in case you rent the property or sell it with capital gains) and expenses to the IRS.
What is the U.S. exit tax?
The exit tax applies to certain individuals who give up their U.S. citizenship or green card. It’s a way for the IRS to tax your assets before you officially leave the system.
Do U.S. citizens living abroad pay Social Security taxes?
It depends on your work situation. If you’re self-employed, you’ll likely need to pay U.S. Social Security taxes unless your host country has a totalization agreement with the U.S.
Do I have to pay US taxes if I retire abroad?
Retiring abroad doesn’t exempt you from U.S. taxes. You'll also still receive your Social Security payments directly deposited into a bank account, whether it’s in the U.S. or abroad.