Expatriate Tax Frequently Asked Questions

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Moving from the United States to another country can definitely be an overwhelming experience. After you’ve secured a new job (or a promotion with your current company) or decided to retire abroad,  there are many things to consider: Finding a new home, packing your belongings, tying up loose ends, managing transportation to send items to your new home, saying goodbye to friends and family members and more.

The last thing on your mind is probably taxes.

That is, until the annual deadline rolls around on the calendar and you realize the time is now to deal with the issue at hand. If you’re filing your taxes as an expat for the first time, you probably have many questions. Here are a few of the frequently asked questions Americans living abroad usually have about taxes:

Q: Do I have to file U.S. taxes from abroad?
A: The short answer is yes. According to the Internal Revenue Service (IRS), your worldwide income is subject to U.S. income tax, regardless of where you reside. The United States is actually one of only a handful of countries in the world that requires its citizens living abroad to file a tax return.

Q: How is it fair that I have to file U.S. taxes? Isn’t that double taxation?
A: Filing your U.S. taxes doesn’t mean you will pay taxes twice on the same income. The tax code makes allowances to ensure that this doesn’t happen by offering tax benefits to expats like the Foreign Tax Credit and Foreign Earned Income Exclusion. Both of these are designed to help expats reduce their overall tax liability to the United States.

The Foreign Earned Income Exclusion, for example, allows those living overseas to exclude their foreign earnings from income up to an amount that is adjusted annually for inflation. For 2021, that is $108,700 per person. If you earn less than that amount, your tax liability to America is drastically reduced because you’ve already paid taxes on that money to your new home country.

Similarly, the Foreign Tax Credit recognizes that you have already had legally required taxes taken from your paycheck and paid other taxes simply by working and purchasing goods and services in your new neighborhood, so it gives you credit for doing so.

The difference between the two is that the Foreign Earned Income Exclusion can only be used for earned income where the Foreign Tax Credit can be applied for both earned and unearned income. Earned income is generated by wages and work performed, including freelance and self-employed earnings while unearned income comes from investments and regular payments like pension and alimony.

It is up to you to determine which works best for your situation because you can’t claim both.

Q: Do I have to report my foreign bank account?
A:
If you have over $10,000 in total in foreign bank and investment accounts at any time in a year, then yes. The U.S. government is constantly monitoring foreign bank accounts, looking for activity as it relates to offshore tax evasion or income acquired illegally.

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