Guide To Paying Taxes in Multiple Countries
The world is becoming an increasingly smaller space. Between borders opening up, flights expanding to new destinations and countries issuing more visas to retirees and nomadic workers, the trend of U.S. citizens earning money overseas is on the upswing.
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This can create some confusion regarding the taxation of earnings. If you work overseas, do you owe taxes to that country? Do you still have to pay taxes in the United States? Or do you owe money to both taxing authorities?
As this topic can get complicated, you’ll definitely want to speak with a tax advisor specializing in overseas income. However, here are the basic rules when it comes to paying taxes in multiple countries.
General Rule on US Citizens Earning Income Overseas
There’s an unfortunate truth about being a U.S. citizen and earning money overseas. Unlike nearly every country in the world, the U.S. taxes its citizens on all of their worldwide income. In fact, the only other countries with the same tax policy are Eritrea and North Korea.
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This means that even if you live full time in Mexico, for example, you’ll have to file a tax return in the U.S. and report all income — and pay tax on it, just as if you were still living in the United States.
While this can be frustrating, especially for those who never or rarely set foot in the United States, it becomes even more of a problem when the country you live in also taxes your income. In that case, there’s always a concern that you are being taxed twice on the same income. Fortunately, the U.S. has a few provisions in the Tax Code that can guard against this.
Foreign Earned Income Exclusion
If you qualify, you can exclude a certain amount of your foreign-based income from your U.S. tax return. The amount is adjusted annually for inflation. It was $112,000 in 2022 and will be $120,000 for 2023. You must meet at least one of the following requirements to qualify for this exclusion, per the IRS:
- A U.S. citizen and a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year
- A U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year
- A U.S. citizen or a U.S. resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.
Foreign Housing Exclusion
In addition to claiming the foreign income exclusion, you also might qualify for the foreign housing exclusion. This provision allows you to deduct the amount you pay for your housing overseas as long as you meet the bona fide residence test and the physical presence test.
There are numerous limitations to the foreign housing exclusion, so you’ll have to speak with a tax advisor or thoroughly review IRS regulations on your own. For example, your housing expenses cannot be considered lavish and will vary based on where you’re living. It also cannot exceed the amount of your foreign income exclusion.
Foreign Tax Credit
Another available option to avoid paying double tax is to claim the foreign tax credit. The U.S. generally allows you to take a credit equal to the amount of taxes you paid to a foreign nation. Alternatively, you could choose to itemize your foreign taxes on Schedule A, but a direct credit usually will result in the greater reduction of your U.S. taxes.
Important to note is that you cannot take a tax credit for foreign taxes paid if you already have taken the foreign income exclusion or the foreign housing exclusion.
If you work remotely and draw U.S.-based income, you’ll definitely have to pay U.S. taxes. However, you may still owe tax to your country of residence. This is an important distinction for so-called “digital nomads” who may think they can escape foreign taxes by working for a U.S. employer.
Generally speaking, if you’re a resident of a foreign country — often defined as spending 183 days or more per year there — that country will assess income tax on you, regardless of the source of your income. However, some countries do have a “territorial” tax system, in which you’re taxed only on income sourced within that country’s borders. As this is a critical distinction, it pays to work with a tax expert who specializes in international income.
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