As the world becomes increasingly interconnected, more and more Americans and permanent residents are choosing to live and work outside the United States. Whether it’s for a new job opportunity, a desire for adventure and new experiences, or to be closer to family abroad, there’s no denying that living overseas can be an enriching and life-changing experience.
However, one aspect that U.S. citizens and resident aliens can’t leave behind when they move abroad is their U.S. tax obligations. That’s right – even when living in a foreign country, Americans still need to file U.S. tax returns and pay taxes on their worldwide income to the Internal Revenue Service (IRS).
This requirement to file applies no matter how long you live outside the U.S., what your reasons are for living abroad, or whether you also have to pay taxes in the country where you live. The only exceptions are if your total income is below the IRS filing threshold or if you qualify for the Foreign Earned Income Exclusion.
The Foreign Earned Income Exclusion allows qualifying U.S. citizens and resident aliens to exclude a significant portion of their foreign earned income from U.S. taxes. For tax year 2023, the maximum exclusion amount is $126,500. To qualify, you must meet either the Bona Fide Residence Test or the Physical Presence Test.
Under the Bona Fide Residence Test, you are considered a bona fide resident of a foreign country if you live there for an uninterrupted period that includes an entire tax year. The Physical Presence Test requires you to be physically present in a foreign country or countries for at least 330 full days during a consecutive 12-month period.
In addition to the Foreign Earned Income Exclusion, there are other provisions that can help U.S. taxpayers abroad reduce their tax burden, such as the Foreign Tax Credit, which allows you to take a credit for foreign taxes paid on the same income, and the Foreign Housing Exclusion or Deduction.
However, these tax benefits and exclusions come with complex rules and reporting requirements. U.S. citizens living abroad often need to file additional forms with their tax return, such as Form 2555 for the Foreign Earned Income Exclusion and Form 1116 for the Foreign Tax Credit.
Not filing a U.S. tax return or paying taxes owed while living abroad can result in penalties from the IRS, including failure-to-file and failure-to-pay penalties, interest charges on unpaid taxes, and even criminal charges in extreme cases of tax evasion.
For Americans living overseas, it’s crucial to understand and comply with all U.S. tax laws and regulations. Working with an experienced tax professional who specializes in expat taxes can help ensure you take advantage of all eligible exclusions and credits while avoiding costly penalties.
Whether you’re a digital nomad working remotely from different countries, a corporate executive on a foreign assignment, or a retiree living out your golden years abroad, staying on top of your U.S. tax obligations is essential. With proper planning and professional guidance, you can enjoy the adventure and freedom of living overseas while remaining fully compliant with U.S. tax laws.