Living abroad is a dream for many Americans, particularly retirees. Overseas locales draw expats for a number of reasons, from culture and lifestyle to cuisine and climate. In many cases, residing overseas is also less expensive than living in the U.S., particularly in destinations in Southeast Asia.
There’s one thing you still can’t avoid if you live abroad though, particularly if you are still working, and that is U.S. taxation. Read on to learn some of the top things you should know about taxes if you live abroad.
The US Taxes Worldwide Income
The United States is unique in that it taxes its citizens worldwide, even if they don’t earn income in the country. This means that if you plan to reside overseas and start a business, or even if you just want to retire and live off interest, you can’t escape the grasp of the U.S. Treasury.
In the words of the IRS, “…if you are a U.S. citizen or a resident alien living outside the United States, your worldwide income is subject to U.S. income tax, regardless of where you live.”
You Have an Automatic Extension
If you file your taxes while living abroad, you’ll have the same due date as stateside Americans, which is typically April 15 (April 18 for 2022). However, by virtue of being an expat, you’re granted an automatic two-month extension, and you don’t even have to request it, according to the IRS. In most cases, this means you have until June 15 to get in your return.
You Might Still Have To File State Taxes
In some cases, you might still have to file state taxes, even if you spend most or all of your time living overseas. Some states have a very broad definition of what the term “resident” means, even if you don’t physically set foot in the state all year.
If you have a car registered in a state, a state driver’s license, are registered to vote in a state or if you own any property there, you may still be subject to state taxes. Contact your state taxing authority to verify their requirements before you assume you are no longer liable.
You Won’t Face Double Taxation
The good news is that if you do owe taxes to the U.S., you won’t face the prospect of double taxation. In other words, if you already pay taxes to a foreign taxing authority, you can likely get a credit for those foreign taxes paid on your U.S. return.
There are two ways to go about offsetting foreign taxes paid: the Foreign Earned Income Exclusion and the Foreign Tax Credit. However, the details can get complicated, and you’ll likely want to speak with a tax expert if you’re using either of these tools to offset your U.S. taxes.
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You May Have To Declare Your Foreign Bank Accounts
A law that is becoming enforced more and more by the IRS applies to both expats and those residing in America. Under the Foreign Account Tax Compliance Act, or FATCA, Americans must declare any foreign bank accounts, under certain circumstances.
Generally speaking, this applies to overseas assets of $50,000 or more, but this is another area of tax law that can get complicated. As penalties are stiff for failure to comply, you should definitely consult with a tax advisor if you hold overseas assets.
It’s Harder Than You Think To Qualify as an Expat
If you’re planning on using the Foreign Earned Income Exclusion, you’ll have to be physically outside of the United States for at least 330 days during a period of any 12 consecutive months. This test, known as the physical presence test, is just one that the IRS uses to determine whether or not the Foreign Earned Income Exclusion should be allowed.
For purposes of determining your tax home, other factors come into play, including “your intentions with regard to the nature and purpose of your stay abroad.”
Living Abroad Doesn’t Make Your Social Security Tax-Exempt
Many retirees move abroad to lower-cost countries where their Social Security checks can cover the entire cost of their living. However, even if you’re not working overseas, you can’t escape the reach of U.S. tax law, even as it applies to Social Security. According to the Social Security Administration, “If you are a U.S. citizen or a permanent
resident of the United States…you are subject to U.S.
income tax laws no matter where you
live. This means that your worldwide
income, including up to 85 percent of the
Social Security benefits you get, may be subject to federal income tax.”
In other words, Social Security is taxed overseas the same as it is in America, based on the combined income of you and your spouse.
Even Foreign Rental Income Is Taxable in the US
Contrary to the laws in most countries, even if you derive no income that is tied in any way to the U.S., you’ll likely owe U.S. taxes on it. This even applies to foreign rental income. So if your plan is to avoid the reach of Uncle Sam by generating all your income from foreign properties, you’re out of luck. You’ll still need to report this rental income on your U.S. tax return, just as if you lived in the United States.
As with many other areas of expat taxation, foreign rental income can get tricky, and you’re advised to deal with a tax expert if you fall into this category.
You Can’t Skip Out on Past Taxes if You Renounce Your Citizenship
If you live overseas and are absolutely fed up with U.S. tax laws, one drastic step you can take is to renounce your U.S. citizenship. However, in addition to all of the other negatives that come with such a dramatic move, this action won’t allow you to escape any past taxes due.
While you can avoid any future U.S. tax liabilities — as long as you don’t remain a resident or nonresident alien still subject to taxation –you’ll still have to pay the IRS what you owe. Note that to even qualify for the renunciation of citizenship, you must be tax-compliant for the previous five years as well.
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You Might Need a CPA To Help You Choose the Right Tax Filing Classification
The bottom line is that when it comes to taxation, living abroad is far from an easy step. Whether it’s your investment income, your Social Security check, your overseas side gig or your sizable foreign bank account, the IRS is definitely interested in your financial affairs.
As many expats live on a fixed and/or modest income, facing IRS penalties for tax non-compliance could be a fatal misstep. If you’re making the move overseas, consult with a licensed CPA to keep yourself from getting snarled in the intricate web of IRS tax laws.
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