Tax Tips for Expats Living Overseas
Many countries are popular destinations for American Expats – like Mexico, Costa Rica, Panama and others. These countries are popular because the cost of living and housing is often much cheaper than in the US. Additionally, these countries offer a variety of cultural experiences and the opportunity to learn new languages.
It may sound like a great idea, but it’s not always the right move. Before you move overseas for cheaper living costs or other reasons, research whether you’ll end up paying more in taxes.
If you are living abroad, you will need to file a tax return every year and declare all your income from sources outside the United States, such as a job, investments, or rental properties.
The good news is that you will be eligible for deductions and credits (if you meet certain criteria).
This article covers the most important things you need to consider for your taxes when you are an American Expat. Just keep in mind that some people have unique situations that will require an Expat Tax professional’s expertise, and won’t be covered here.
Are You a U.S. Person for Tax Purposes?
A person who owes taxes to the United States government is considered a United States Tax Resident. This includes citizens who were born in the United States, naturalized citizens, and any other person who has obtained a US Green Card.
To be considered a tax resident, you must either meet the Substantial Presence Test or the Green Card Test.
- The Substantial Presence Test means you have been physically present in the United States for at least 31 days out of the past year, or 183 days out of the past 3 years.
- The Green Card Test applies to any person who has obtained a US Green Card.
If you are a “U.S. Person for Tax Purposes”, and earn income worldwide, you need to file a U.S. income tax return
I am a U.S. citizen working for a U.S. firm in a foreign country.
Can I deduct any wages or expenses from my Expat taxes?
The answer depends on whether you are an employee or self-employed.
If you are a U.S. citizen working for a foreign corporation, you may be able to deduct some or all of your wages, if you are physically present in the foreign country for at least 330 days of the year.
If you are receiving money from a business in the US, but not from the government, you can subtract that amount from the taxes you owe on Schedule A or B of Form 1040 if it is more than $3 million.
This could potentially result in significant savings for US citizens living abroad.
If you are self-employed:
You can only deduct expenses that are considered “ordinary and necessary” for your business – such as advertising, office expenses, utilities, or salaries.
What tax exemptions can U.S. Citizens get when living abroad?
U.S. citizens can get a number of Expat tax exemptions when living abroad, depending on the laws in the country you move to.
There are certain rules and regulations that apply across the board.
The first step is to determine whether you qualify for any Expat tax exemptions.
If you do, then you may receive a refund after filing your tax return. Otherwise, you’ll owe taxes on the money earned while living overseas.
3 Of The Common Exemptions for Expats
If you have foreign earned income and your tax home is in a foreign country, you may qualify for the foreign earned income exclusion, the foreign housing exclusion, and/or the foreign housing deduction.
1. U.S. citizens who reside abroad may claim Foreign Earned Income Exclusion (FEIE).
The Foreign Earned Income Exclusion is a tax benefit that allows you to exclude up to $112,000 (2022) of your foreign earned income from your US taxable income.
This exclusion can be significant savings for US taxpayers who earn income in foreign countries, and is available to US citizens and green card holders.
You must file either Form 1040EZ or form 990-NBEZ. These forms are used to calculate your global income. You can find both forms in Publication 515, of the Federal Income Tax Return regulations.
The benefits of claiming FEIE include:
- Tax savings – FEIE reduces how much you owe in federal income taxes. For instance, if you earn $50,000 and pay 25% tax, you would save $12,500.
- Possibility of receiving a larger refund – When you make too much money to benefit from the standard deduction, you might qualify for additional deductions. With FEIE, your refund could increase.
2. A Foreign Housing Exclusion (FHE) is available for certain amounts of overseas housing expenses paid or reimbursed by an employer.
The Foreign Housing Exclusion is available to employees who are working overseas in a foreign country. The exclusion is limited to the amount of housing expenses that are considered reasonable in the foreign country where the employee is working.
The foreign housing exclusion applies only to amounts considered paid for with employer-provided amounts.
Your foreign housing amount is the difference between your total foreign housing expenses for the year and the base housing amount allowed. This includes any amounts paid to you or on your behalf by your employer, that are taxable foreign earned income for the year.
If you want to exclude income you earned from housing outside of the United States, you must figure out how much you are entitled to before you figure out how much you can exclude from your foreign earned income.
If you’re entitled to a housing exclusion, you can’t claim less than the full amount. This means that if you choose to exclude foreign housing amounts, you can’t take a foreign tax credit or deduction for taxes on income you can exclude.
3. If you have lived abroad for an extended period of time, you may be eligible for a Foreign Tax Credit (FTC) on your taxes.
If you paid taxes to a foreign country or U.S. possession on income that is also subject to U.S. tax, you may be able to take a credit or an itemized deduction for those taxes.
The Foreign Tax Credit (FTC) allows you to deduct foreign taxes paid on income earned from employment or investment activities in other countries from your taxable income in the United States. This credit is available to individuals who pay taxes in countries where they do business.
If you are an individual, estate, or trust, and you paid or accrued certain foreign taxes to a foreign country or U.S. possession, you can claim the foreign tax credit by filing Form 1116.
Sources of Foreign Income Include:
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What about tax treaties?
The United States has many tax treaties with other countries.
A tax treaty is a type of international agreement between two or more countries that states which country’s taxes apply to the income of people who live in the other country.
If you live in a country that has tax treaties with the United States, then only US source income is taxed.
This includes social security benefits, dividends and interest payments, capital gains, and the like.
If a country doesn’t have a treaty or tax agreement with the United States, then the IRS considers all income from that country to be taxable. This includes income from investments, rental properties, work, and employment.
If you’re an American living abroad and have questions about what this means for you personally, consult with a tax professional or contact the IRS at 1-800-829-1040 to discuss how these rules may apply to your situation.
What Happens If You Don’t File Your Taxes?
If you choose to leave the United States but fail to file taxes while living abroad, you may be charged with a penalty of up to $10,000 per year, or 100 percent of your expatriate’s income that was not reported.
If you live outside the United States for less than five years and then come back, you will have seven years from the time you left until you have to pay taxes on any income you earned while you were gone.
If you haven’t filed taxes in the United States for more than seven years and you live outside of the country, then you won’t get any benefits from filing for an extension before you leave.
If you are an American living abroad and have not filed a US tax return in more than 8 years, you may be granted a 6-month extension to file.
If it has been more than 10 years since your last US tax filing with no extensions granted, it is better to file and pay what is owed rather than risk losing permanent expatriation status.
How do You avoid taxes when living abroad?
The best way to avoid paying taxes when living abroad is to renounce your US citizenship or declare yourself an Expat.
This will mean giving up your American citizenship and all the rights and benefits that come with it, including being allowed to vote in US elections. But, you will no longer have any obligation to file US taxes under their current tax code.
Giving up your US citizenship can be a complex process! The US government charges a one-time fee of $2,350 (2022) to relinquish your citizenship.
Final Thoughts
Keep in mind that every Expat’s situation is unique. There are more exemptions and deductions available, but we have covered the main ones here.
Because filing your taxes abroad is so very complicated, you should hire a professional to help you, or use any of the online tax software available. I recommend My Expat Taxes
