Are you a U.S. citizen or resident alien (green card holder) planning on working abroad? We’ve got some experience with this in my family: my husband and I were expats for 5 ½ years. Living in a different country can be an amazing experience! Before you relocate (or return to your citizenship country if you’re a resident alien), make sure you know the tax basics for U.S. taxpayers living overseas.
You’ll file a U.S. tax return every year
As long as you’re a citizen or resident alien, you can look forward to filing U.S. tax returns every year, regardless of where in the world you live and regardless of your income sources. The IRS has a long reach: your worldwide income — not just your U.S. income — is subject to U.S. income tax. See the IRS guidelines for taxpayers living abroad.
Whether you owe taxes and how much will be a function of your individual tax situation, but in general, if you have any U.S. income, such as salary, business income, investment income, rental income, Social Security or retirement account distributions, you should expect to pay some U.S. taxes.
If all your income is foreign sourced, remember that income from abroad is still taxable, and you must report all your sources of income, but you should usually be able to take a credit or a deduction for foreign taxes paid. Practically speaking, what this means is that if you live in a country that does not have an income tax, or has a very low income tax, you’re not off the hook — you’ll still be paying Uncle Sam.
You may also need to file a state tax return
If you still meet the legal definition of being a resident of a state, such as maintaining your voter registration, driver’s license, owning a home or earning income in that state, you may need to file a state tax return as well. Check with your state to be sure and obtain a tax professional’s advice to be sure.
You’ll need to report any non-U.S. bank and securities accounts
If you open up bank or investment accounts abroad, you’ll also need to report those once a year, even if you are just a signatory. This includes bank accounts, brokerage accounts and mutual funds, as well as any other financial accounts, even if they don’t produce income. Penalties for not reporting are significant. See more details about Report of Foreign Bank and Financial Accounts (FBAR) here.
Other tips to keep in mind
You may be eligible for the Foreign Earned Income Exclusion While working abroad, you may qualify to exclude a certain amount of foreign earned income from your income taxes. That’s what my husband did, as he worked for a foreign company located outside the U.S. A qualifying individual may also claim the exclusion on foreign-sourced self-employment income. If both spouses have foreign earned income, they can both claim the exclusion (up to $102,100 each in 2017).
To claim the exclusion, you must either pass the Bona Fide Residence Test or the Physical Presence test. In a nutshell, you need to actually live in the foreign country, not just travel there for an extended period.
You may be able to claim a foreign housing exclusion or deduction My husband received a housing allowance as part of his compensation, and we could exclude some of our housing expenses, subject to certain limits. Keep in mind you still need to meet one of the tests described above. See the IRS overview here.
You’ll probably pay foreign taxes where you live Any time you work in a foreign country and earn income there, you will also be subject to that country’s tax laws. Keep in mind that there are exclusions, deductions and credits for your U.S. tax return that soften the impact. Use this quiz to see if you qualify for the foreign income exclusion or housing deduction.
The opportunity to work abroad, even if just for a temporary assignment, can be exciting and life-changing. Just make sure you mind your U.S. taxes while you’re seeing the world.
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