As per American Tax for US residents living abroad policy, the US expats are required to fulfill specific tax responsibilities even if they are living abroad.
The United States taxes its citizens on income earned by them all across the world, regardless of where they reside. They are required to file federal tax returns and make the payment of taxes on their worldwide income. This unique aspect of US tax policy applies to all its citizens including the expats who are living abroad.
The United States distinguishes itself as one of the few nations globally that imposes taxes based on the citizenship instead of residency. For American Tax for US residents living abroad their global income is subject to US income tax laws, similar to the tax obligations of those residing within the country.
It is imperative for American expats living abroad to know of their ongoing tax responsibilities to the IRS including reporting all income earned outside the US.
There are specific tax credits and exclusions that can reduce double taxation and that include-
- Foreign Earned Income Exclusion – FEIE: American citizens living abroad may be eligible for Foreign Earned Income Exclusion that allows them to exclude a certain amount of their foreign earned income from US taxation.
- Foreign tax credit: US citizens may also be eligible for Foreign Tax Credit that allows them to offset US taxes by the amount of income taxes paid to a foreign country. This credit help prevent double taxation on same income.
- Tax Treaties: The United States has tax treaties with many countries that can affect how income is taxed and whether certain types of income are exempt or subject to reduced rates.
Why Americans expat living abroad need to pay US taxes?
The United States of America takes a rare approach to tax individuals based on their citizenship. Most countries use one of the two tax systems – territorial based or residence based taxation.
The USA however is one of the very few countries of the world that impose citizenship based taxation. Under this system, citizens are always taxed on their world-wide income regardless of where they live.
How to avoid paying US taxes when living abroad?
The only way to avoid filing a US tax return and paying US taxes when staying abroad is by renouncing the US citizenship.
Renouncing the US citizenship is a serious and permanent decision that cannot be taken seriously. Before considering this option, it is important to learn about all the requirements and implications of this decision.
Also Read:- What is the last date of filing income tax return in USA?
As long as you are an American citizen or a green card holder, it is mandatory to file tax return annually and pay associated taxes while living abroad to avoid huge fines or penalties of the IRS.
Given the complexities of American tax laws and to avoid fines or penalties of the IRS, it is advisable to seek guidance from a professional tax expert who specializes in expatriate taxation.
Collaborating with a dedicated tax expert will ensure not only compliance with US tax regulations but also a more informed approach to managing tax liabilities effectively.