Paying U.S. Taxes as an Ex-Pat
Among the many considerations for someone moving to another country is tax consequences. Do expats pay U.S. taxes? Are expats doubled taxed? What specific forms, if any, do expats have to file with the IRS? The good news is that it isn’t quite as complicated as you might think. But you still must educate yourself as you may be subject to U.S expat taxes. Here you will find the basics of what you should know about expat taxes.
We, at LifeStyleOver50, are not accountants or tax professionals. This is the research we have done for our own knowledge about taxes for expats. You should get expert advice from your tax professional or look for one of the many expat tax professionals. Much of what we learned comes from Greenback Tax Services who specialize in taxes for expats. But also know that online services like Intuit’s Turbo Tax can handle the filing of expat taxes as well.
Note- this information was compiled in November of 2019. If you are reading this in 2020 or later, some of the U.S. tax laws for expats may have changed. We recommend that you consult a professional tax advisor.
Are You an Expat for Tax Purposes?
If you are a U.S. citizen and have lived in another country for more than 330 days during a tax year you could be an expat and potentially file a Foreign Earned Income Exclusion (FEIE). To qualify to file and FEIE you must meet the Physical Presence Test or the Bona Fide Residence Test. That means that you cannot be in the United States for more than 35 days during that year even if you technically live in another country. The 35 days includes travel to and from the U.S.
If, however, you lived in another country for less than the 330-day requirement you would file taxes just as you did when you lived full-time in the U.S. The downside here is if you have foreign earned income and pay taxes on that income in the country in which it was earned. You would not be eligible to file a Foreign Earned Income Exclusion and therefore would have to pay taxes to the U.S. on that income unless you file a Foreign Tax Credit. The U.S. does have agreements with some countries that would alleviate double taxation. You need to check on this for the specific country in which you will be living.
Will You Need to Pay Expat State Taxes?
If you qualify as an expat and last resided in certain U.S. states, or maintain a residence in those states, you may have to file a state tax return. California, New Mexico, North Carolina, New York, and Virginia are states in which you will likely need to file a State Tax Return. Check your last state of residency to see if you will be required to file a state return.
Foreign Earned Income Exclusion
The Foreign Earned Income Exclusion (FEIE) is the primary way Americans reduce their ex-pat taxes on income earned in a foreign country. If you meet the requirements as discussed above, you can file the FEIE and exclude up to $105,900 (2019) of foreign earned income. The exclusion amount of the FEIE changes each year so check the amount allowed by visiting IRS.gov.
Many expats earn their income from a business back in the U.S. Income earned in the U.S. is not eligible for calculation toward the FEIE.
Foreign Housing Exclusion
If you qualify for the FEIE described above, you could also qualify for the Foreign Housing Exclusion. Expenses included in the Foreign Housing Exclusion are items such as rent, utilities, furniture rental, insurance on personal and real property, repairs, and parking. You can deduct up to 30% of the amount calculated for your FEIE. For example, if you were able to exclude $80,000 of foreign earned income in the FEIE, you could exclude up to $24,000 of qualifying expenses under the Foreign Housing Exclusion.
You are Close to 330 Days – File an Extension
If you moved to a foreign country in the middle of the year or otherwise do not meet the 330-day bar set by the IRS for the FEIE, you can file an extension. If you file an extension to October of the year after the tax year in question, it could allow you to meet the 330-day rule. Check with your tax professional or the IRS to make sure you qualify even if you file an extension.
Foreign Tax Credit
If you do not meet the FEIE rules or you exceed the total amount of the FEIE you could file for a Foreign Tax Credit. If, however, you simply choose not to take the FEIE or the Foreign Housing Exclusion, you may not use these amounts under the Foreign Tax Credit. This allows you to deduct the amount of taxes you owe to the U.S. by the amount of taxes you paid to a foreign country.
Income Earned in the United States
Income earned in the U.S. is taxable. You will not be able to qualify for the Foreign Earned Income Exclusion. However, if you are required to pay taxes on your U.S. earned income by your new country of residence, you may be able to use the Foreign Tax Credit to offset those taxes.
Affordable Care Act
If you qualify for the FEIE you are exempt from the provisions of the Affordable Care Act or Obamacare.
Child Tax Credit
If you have dependent children that are U.S. citizens or permanent residents with a Social Security number, you can file for the Child Tax Credit. If your child is born outside the U.S. and you choose to use this credit, your child will be obligated to pay U.S. taxes unless they renounce their U.S. citizenship when they become an adult.
Foreign Bank Account Report
If the total of all bank account(s) outside the United States reaches $10,000 (even for 1 day) you must file a Foreign Bank Account Report (FBAR). Even though the FBAR is filed separately from your tax return, it is due on the same day.
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Foreign Account Tax Compliance Act
The Foreign Account Tax Compliance Act (FATCA) requires U.S. taxpayers, that have aggregate amounts of $50,000 or more, to report these assets annually. This is to combat tax evasion by U.S. citizens utilizing offshore accounts.
Renouncing U.S. Citizenship to Avoid Taxes
If you choose to renounce your U.S. citizenship whether it’s to avoid taxes or not, you must be compliant in the previous 5 years and you may be subject to an exit tax. Consult your tax professional for details.
Can You Still Receive Social Security as an Expat?
There are very few countries in which you are not allowed to receive your Social Security benefits. However, if you earn additional income, up to 85% of your benefits may be taxable.
The country in which you choose to live may have a retirement program into which you have to pay if you earn income in that country. There are 26 countries with which the U.S. has an agreement that would alleviate your obligation. These are called Totalization Agreements.
Expat Taxes in Conclusion
Part of planning a move to another country is to meet with a tax professional. Just as with other tax laws, U.S. ex-pat tax laws can change. Make sure your previous tax returns are filed and you are compliant. Then based on what you now know, plan accordingly. This will relieve your stress as your big move approaches.
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