For many Americans, the prospect of working abroad is as exciting as it is burdensome. While moving to a new country for work presents exciting new experiences and opportunities, it also presents new tax requirements. As a US citizen living and working outside the country, your earnings are subject to mandatory IRS taxes. Here are some common tax questions every American abroad must know.
Do I have to pay taxes to both the US and my country of residence?
If you are an American citizen working in a foreign country, you must continue to pay your taxes like other Americans. You are only exempted from this duty if you renounce your citizenship as per the stipulations in the expatriation tax provisions. Alternatively, you are exempted if you abandon your green card by filling out Form I-407.
When do I need to file my returns?
US expats receive an automatic extension for filing their returns; they do not need to file returns until June 15. You can still request an extension to October 15, or for unique circumstances, December 15. However, you must note that any owed taxes will still be due by April 15, like everyone else.
As an expat, can I reduce my taxes?
You may be able to reduce your owed taxes through credits and exclusions. The former is an incentive that reduces the amount of tax you owe to the federal and state tax authorities. An exclusion refers to income that you do not have to include in your tax calculations. The Foreign Tax Credit (FTC) and Foreign Earned Income Exclusion (FEIE) offer potential tax benefits for US expats.
How does the FEIE Work?
To minimize your tax liability with the FEIE, you must stay in your selected foreign country for at least 330 days within a year. You will have to prove this, so it is important to document your time spent in the country via pay stubs, lease documents, and similar items. You can also minimize your tax liabilities by establishing a bona fide residency in your selected country.
As an American abroad, which tax forms do I need to fill out?
You need the following tax forms for tax reporting:
- Form 2555 for FEIE
- Form 1116 for FTC
- Forms 5471, 8858, or 8865 for foreign businesses
- Form 8621 for passive investments
- Forms 8938 and FinCEN form 114 for offshore financial accounts
What happens if I renounce my American citizenship?
If you decide to take up permanent residence in the country where you work, you will no longer have to pay taxes to the IRS. However, renouncing your American citizenship can be a complex and costly process, and it requires that you pay an exit tax. If you choose to pursue this option, consider working with an experienced accountant to ensure your filings are in order.
Living abroad can be an exciting and life-changing experience, but it comes with many new responsibilities and challenges. In order to build a life in a new country, it’s important to understand your tax obligations. Don’t hesitate to consult an experienced expat tax accountant to help you navigate the process.