Expats do not live in the U.S.—but they still may need to file a tax return.
When living abroad, the U.S. and its regulatory requirements can seem a long way away. Besides—if you are living and earning in a different country—your taxes are due in that country, not the U.S., right? Wrong. Many an expat is surprised to learn that the U.S. tax requirements follow citizenship, not residency. Essentially, if you have U.S. citizenship or a green card, you may owe taxes to the U.S. wherever in the world you reside. This also applies to individuals who have U.S. citizenship but have never stepped foot in the country.
Currently, the threshold amount that requires a U.S. person to file taxes is $12,950 USD. This might take the form of wages, qualified retirement distributions, or rental income, among other sources. It is likely you have a foreign bank account. If the combined proceeds of your foreign account(s) is greater than $10,000 USD at any time during the year, you will need to file a report of Foreign Bank and Financial Accounts (FBAR) as well.
If your income is above the threshold level, you are responsible for paying taxes in the U.S. and your country of residence. The good news is exclusions and special circumstances may significantly reduce or eliminate your U.S. tax liability. Consider these options:
- Under certain circumstances you may take advantage of a foreign housing deduction or the foreign housing exclusion. The programs allow you to deduct the cost of housing from your gross U.S. income. You can qualify through the physical presence test or the bona fide residence test.
- The U.S. has tax treaties with a number of foreign countries. These treaties provide a reduced tax rate or exemption to those living in foreign countries. If no treaty exists, the tax rate remains the same as if you are filing in the U.S.
- The U.S. allows expats to take a dollar-for-dollar tax credit for qualified foreign taxes paid during the tax year. The filer may choose instead to take the dollar figure as an itemized deduction, depending on their tax profile. Taxpayers can change their method of foreign tax credit each year.
Each year, some U.S. persons choose to renounce their citizenship rather than continue to pay taxes to the U.S. If you have questions about paying U.S. taxes while living abroad, or if you are considering terminating your U.S. citizenship over taxation, speak first with an experienced tax attorney who can walk through your options with you.
Concerned about offshore tax compliance? Speak with our tax legal group today
Serving local and international clients from offices in Chicago and Cleveland, the legal team at Robert J. Fedor, Esq., LLC delivers strategic representation and guidance with compliance questions, tax litigation, or criminal tax defense. Call 800-579-0997 or contact us online today.