Sam is Still Your Uncle

Living as an expat does not get you off the U.S. tax hook

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If you’re working in another country as a U.S. citizen or green card holder, you may think you’re off the hook when it comes to filing and paying taxes in the United States. That’s not the case: There are a number of specific rules that apply to U.S. taxpayers living in other countries. If you’re working for a U.S.-based employer while living in a foreign country, your tax liabilities will likely be relatively straightforward. If, however, you’re self-employed while living abroad—or working for a foreign employer—things can get a little complicated.

Earned Income

How your income is taxed by the IRS depends, in part, on the source of your income. Special exemptions and credits may also apply to expats based on how much foreign income they earn.

  • Regular salary income—whether you’re working for an American company or a foreign employer, the money you earn while living abroad is considered ‘foreign earned income,’ qualifying you for the Foreign Earned Income Exclusion (FEIE). This rule allows you to exclude up to a designated amount from your U.S. tax liability (the amount is adjusted for inflation each year; for tax year 2016, it was $101,300). You will only owe U.S. taxes on any earned income above that amount, which you then pay based on the tax rate applicable to your total income.
  •  Business revenue—whether your income from a business is considered foreign or not depends on where its business occurs:
    • Service business is based on where you perform the service.
    • Product business is based on where products are sold (or, if the business produces products, where they are produced).
  • Foreign Tax Credit—If you paid income tax on your income in the country where you’re living and working, this credit prevents you from being taxed by the U.S. on the same income.

Unearned/Passive Income

There are other sources of money that may be subject to taxation but may not be eligible for FEIE, such as investment income, pension or retirement payments, dividends, or rental income. Any foreign bank account or foreign investment over $10,000 must be reported to the IRS.

In addition, be aware that money invested in a tax-deferred retirement plan by an employer in another country may not actually be tax-deferred for U.S. purposes. This can get tricky—not to mention costly; be sure to consult with a qualified tax expert who understands these rules.

Other Considerations

  • If you’re self-employed or operating your own business abroad, record-keeping is essential, but not always straightforward. Some countries have practices that don’t rely on written records or systems that don’t easily track with common record-keeping programs.
  • In some circumstances, you may be able to exclude your housing expenses from your taxable income.
  • Note that, for filing as an expat, you get an automatic two-month return deadline extension to June 15. If you’re in a country that doesn’t follow a calendar year for tax purposes, be sure to request an extension to October 15.
  • Don’t forget about your state tax return. In all but nine states, the state wherein you last resided is still considered your home and requires you to file a return.

Don’t skip out on filing your U.S. return just because you aren’t living here. The IRS has a number of penalties at its disposal, including hefty fines and the ability to cancel your passport should you decide filing is optional. That being said, there is an inclination to grant amnesty for ‘non-wilfully delinquent’ expats who choose to come out of hiding.

Filing taxes is never easy, and filing as an expat can be considerably more complicated. Talk to an experienced tax professional or tax attorney familiar with the expat tax rules applicable to your situation.

United States

Beware that money invested in a tax-deferred retirement plan by an employer in another country may not actually be tax-deferred for U.S. purposes.

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