Why Do I Have to Pay US Taxes if I Live Abroad?
- Why Do You Have to Pay Taxes If You Live Abroad?
- What Taxes Will I Have to Pay If I Work Abroad?
- Is There a Tax Exemption for US Citizens Living Abroad?
- What Tax Forms Do Expats Have to Use?
- Retiring Abroad Taxes
- How to File Your Expat Taxes
- Moved Abroad Recently & Have Questions about Your US Expat Taxes? We're Here to Help!
Unfortunately, moving overseas doesn’t mean you can skip out on tax season. US citizens are required to file a US tax return regardless of where they live. That means that as an American living abroad, you still have to send your taxes to the IRS. Failing to do so could result in steep penalties.
Key Takeaways
- As a US Person, you have to file a US federal tax return to report your worldwide income regardless of where you live and work.
- The only way to avoid submitting a US tax return is to renounce your US citizenship. Even doing so doesn’t always ensure you are out of the US tax system forever.
- Failing to file your taxes when required could lead to fines, interest charges, and even jail time.
Why Do You Have to Pay Taxes If You Live Abroad?
US taxes are based on citizenship rather than residence. This means that citizens are taxed by the IRS even if they live in another country. The only way to avoid this requirement is to renounce your citizenship, which can be a costly choice and is rarely wise.
If you were unaware of this requirement, you’re not alone. According to the 2024 Annual US Expat Survey, 55% of US expats are unaware that US taxation is based on citizenship alone. The US is one of only a few countries with this policy.
Still, failing to file your taxes as required can lead to serious penalties, including fines and interest on any unpaid taxes.
State Taxes
Depending on where you lived before moving overseas, you may have to file a state tax return as well. This can further complicate your annual tax obligations. If you’re unsure of whether you should file a state tax return, consult an expat tax professional.
Additional Tax Obligations
In addition to your annual tax return, you may also be required to file additional US tax forms as an American living abroad. For example, you will likely have to report your foreign assets and bank accounts on a FATCA report or Foreign Bank Account Report (FBAR).
Penalties
US citizens living abroad who fail to file US taxes risk passport denial, penalties, and even criminal charges. The IRS charges penalties for both late filing and late payments. If your lack of filing is willful — meaning you knowingly avoided your US tax requirements while living abroad — then more serious legal consequences may apply.
- Failure to File Penalty: 5% of the unpaid taxes for each month the tax return is late, up to 25%. If over 60 days late, there is a minimum penalty of either $450 or 100% of the tax shown as due on the return – whichever is less.
- Failure to Pay Penalty: 0.5% of the unpaid taxes for each month the tax payment is late, up to 25%.
Streamlined Filing Compliance Procedures
If you’re behind on your expat taxes, you can use the Streamlined Filing Compliance Procedures to catch up quickly. This is an IRS amnesty program that allows US expats to come into compliance without the usual penalties. No matter how many years you’ve missed, you’ll only have to file the past three years of federal tax returns, making it easier than ever to become compliant!
What Taxes Will I Have to Pay If I Work Abroad?
As a US citizen, you will be taxed on your worldwide income. However, because of tax treaties and certain expat tax benefits, most Americans living and working abroad don’t end up actually owing anything. But remember: Even if you don’t owe anything, you will still have to file an annual tax return.
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Is There a Tax Exemption for US Citizens Living Abroad?
While there is no blanket tax exemption for Americans overseas, the IRS does provide several tax benefits that help you reduce your taxes. These include:
- Foreign Earned Income Exclusion (FEIE): This benefit allows you to exclude a certain amount of foreign earned income from US taxation. The total amount you can exclude changes every year. For 2024, the FEIE is capped at $126,500 per person. Earned income includes salaries, wages, and self-employment income.
- Foreign Tax Credit: This is a dollar-for-dollar credit on any income taxes paid to a foreign government. For example, if you paid $10,000 in foreign taxes, you could reduce your US taxes by the same amount. This helps expats avoid double taxation.
- Foreign Housing Deduction (or Exclusion): When renting a home in another country, the IRS lets you deduct certain expenses from your US taxes.
Using these benefits, most expats can erase their US tax bills entirely.
Some countries have no income tax at all! This includes Bahrain, Monaco, and the Bahamas. Many expats choose to move to these tax-free countries to reduce their annual tax bill. However, this will not remove your US tax obligations.
What Tax Forms Do Expats Have to Use?
- Form 1040: The standard individual tax return that most Americans, including expats, use to report their income and calculate their taxes.
- Schedule 1, 2, and 3: Attach these schedules to your Form 1040 if you have additional income (Schedule 1), additional taxes (Schedule 2), or certain credits and payments (Schedule 3).
- Form 2555: Used to claim the FEIE, which allows you to exclude a certain amount of foreign earned income from US taxation.
- Form 1116: The Foreign Tax Credit form, which provides a dollar-for-dollar reduction on US taxes for income taxes paid to a foreign government.
- Form 8938 (FATCA): Required for reporting foreign financial assets exceeding certain thresholds.
- FinCEN Form 114 (FBAR): Required if the total value of your foreign financial accounts exceeds $10,000 at any time during the calendar year. This form is filed with FinCEN (Financial Crimes Enforcement Network, which is a branch of the US Treasury Department separate from the IRS.
- Form 5471: Used to report information about certain foreign corporations in which you are a shareholder.
- Form 8621: Required for shareholders in a Passive Foreign Investment Company (PFIC).
- Form 3520: Used to report certain transactions with foreign trusts, ownership of foreign trusts, certain foreign retirement and pension accounts, and receipts of certain large gifts or bequests from foreign persons
Retiring Abroad Taxes
When retiring abroad, you will still have to file (and potentially pay) US taxes on your worldwide income. This includes:
- Pensions
- Social Security benefits
- Investment income
- Retirement accounts
In some cases, a tax-free foreign retirement account won’t be tax-free under US law. Your Greenback accountant can help you understand the details of your case.
How to File Your Expat Taxes
Filing your expat taxes can be time-consuming and complicated. And with the added nuances of international tax obligations, it’s easy to make a costly mistake. If you’d like someone else to handle the headaches, we’d be happy to help.
To learn more about our one-of-a-kind expat tax services, just contact us, and one of our customer champions will gladly help. If you need very specific advice on your specific tax situation, you can also click below to get a consultation with one of our expat tax experts.
Moved Abroad Recently & Have Questions about Your US Expat Taxes? We’re Here to Help!
We hope this guide has helped you understand your tax obligations as an American living abroad. Contact us, and one of our customer champions will gladly help. If you need very specific advice on your specific tax situation, you can also click below to get a consultation with one of our expat tax experts.
