Those who leave the United States and take up residence in another part of the world may believe that they are no longer required to pay taxes in the United States. This belief is generally untrue. Similarly, the children of parents that are citizens may also be subject to taxes within the United States, even when the children are born in other countries. Basically, anyone with United States citizenship likely owes taxes in the United States.
As explored in a recent publication by Aylett Grant Tax, an accounting firm out of Canada that specializes in international tax matters; there are two legal options that those attempting to navigate their tax obligations in these situations should consider.
Option #1: Foreign Tax Credit
This option essentially allows the tax payer to claim taxes paid to a foreign country as either a deduction or a credit. This option is available for income taxes. Other expenses, like “foreign mineral income, oil and gas tax, property tax, etc.” do not qualify for this option.
Option #2: Foreign Earned Income Exclusion
The Foreign Earned Income Exclusion (FEIE) allows tax payers the option of excluding income from salary or wages. It is important to note that paperwork is likely required to document these options with the IRS even if the income made in a foreign country is minimal. A failure to do so could be viewed as an attempt to avoid tax obligations and could result in allegations that the tax payer has committed tax crimes.
Which option is best?
The answer to this question depends on the details of your financial situation. However, it is important to note that this is generally a one or the other decision. Taxpayers, generally, are not allowed to use both options on the same source of income.
It is wise for those who have foreign income and are unsure on how to properly report it to seek legal counsel. An experienced tax lawyer can review the details of your situation and provide guidance on the best way to ensure compliance.
