For many US citizens, it’s a romantic and adventurous (and slightly ironic) part of the American dream to live abroad. Waking up every morning in Paris or Dubai or Sydney is a lifetime goal for lots of Americans. But one aspect of this dream life that many would-be expats fail to consider is how paying taxes fits into it. So for all the world travelers reading, here are the biggest tax rules for US expats.
1. You still have to pay US taxes even if you don’t live in the US.
Sorry to burst any bubbles on this one, but it’s true. The US is one of a few countries on Earth where citizenship, not residency, equals tax obligation. So even if you haven’t set foot in the US in a decade, you still need to report your income to the IRS and pay taxes on it. (And don’t think that being abroad can let you get away with just not filing returns, either. Not only does the IRS keep track of that, the statute of limitations on tax disputes doesn’t begin each year until you file. So by not filing, you’re keeping the timeline open for any issues the IRS might have with you.)
2. Living abroad offers several significant deductions to US taxes.
If item 1 was the bad news, this is the good news. Even though the federal government still requires expats to pay taxes, it offers a number of deductions that can greatly reduce expat tax burdens. For example:
- The Foreign Earned Income Exclusion, which allows you to deduct up to $100,800 from your reported income as long as you’ve either lived in a foreign country for a calendar year and have made no plans to return, or have spent 330 days out of that calendar year abroad.
- The Foreign Tax Credit, which allows you to deduct any taxes you paid to another country from your US tax burden. In fact, if you paid more taxes to a foreign country than you owed to the US, the difference can be used as a US tax credit in the future.
- The Foreign Housing Exclusion, which allows you to deduct some of your cost of living in another country. This exclusion varies based on your income (you must qualify for the Foreign Earned Income Exclusion to get it) and where you live, so check with the IRS to find out exactly how much you could deduct.
Thanks to these deductions and a few others like them, many expats end up owing no US taxes at all.
3. If you have offshore or foreign-held assets, you need to report them.
The IRS has cracked down hard in the last few years on people using foreign countries as tax havens for significant assets. Most banks that used to offer the kind of anonymity now report all of their deposits by US citizens to the US. So as romantic and thrilling as it may sound to hide your money in Switzerland or the Caymans, don’t try it. Getting tax resolution on offshore assets will not be fun for you. No matter where you deposit, you need to report and pay taxes.
4. You have time to become compliant—but maybe not a lot.
If you’ve been an expat for a while and you haven’t kept up with your taxes because you didn’t know you needed to, don’t panic. The IRS recently instituted Streamlined Offshore Filing Procedures to help people like you get into compliance. These procedures not only assist you in getting where you need to be, they waive all late filing fees and penalties. These procedures may not be available forever, though, so we suggest taking advantage of them while they are.
It’s actually fairly easy to owe little or no tax money to the US as an expat, but it’s also easy to wind up owing a lot. It all comes down to reporting and compliance—if you do what you’re supposed to, you have lots of chances to save. If you don’t, you don’t. It’s not a hard decision once you know you have to make it.