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What to Know About Paying U.S. Taxes When You Live Abroad

Many Americans choose to retire in warmer, more affordable countries. However, even if you haven’t set foot in the U.S. for years, you’ll still need to file an annual tax return with the IRS. Expatriates—commonly referred to as “expats”—usually have complicated taxes. To avoid dealing with the stress of the IRS, it can be very beneficial to work with a tax resolution lawyer. If you are an American that is living in or has retired to a different country, here is what you need to know about paying U.S. taxes while living abroad.

All American Citizens Must File Annual Tax Returns

Unfortunately, the IRS doesn’t care where you live. All U.S. citizens—regardless of where they may reside—are still subject to the jurisdiction of the IRS. Even if you haven’t lived in the U.S. for years, you still need to file a tax return and report all of your income to the IRS, including any money made in a different country.

While there are some tax exceptions for expats, most of the tax rules that apply to taxpayers living in the U.S. also apply to U.S. citizens living abroad. For example, expats are still expected to pay the same income tax rates as Americans residing within the U.S. As a result, you might have to pay a U.S. income tax rate on any money that you earned in another country.

How Expats Can Reduce Their U.S. Income Taxes

Although expats are required to pay U.S. income taxes, there are some exclusions they can claim to reduce their income taxes or, in some cases, eliminate them entirely. The foreign tax credit and “exclusions from income” credit are the two credits expats can claim on their tax returns. However, you cannot claim both and will have to choose which one you want to claim.

The Foreign Tax Credit

The foreign tax credit was created to minimize double taxation. Without it, U.S. citizens living in another country would end up paying income tax in the country they live along with U.S. income taxes. The foreign tax credit works by providing a tax credit for all income tax and excess profit tax you paid in another country.

Your foreign tax credit applies solely to the portion of your U.S. income tax that is attributed to your foreign income. To calculate this, the IRS will consider the amount of money you paid in foreign income tax and use a “limitation” factor in their tax formula.

In lieu of taking a foreign tax credit, you can choose to claim the money you paid in foreign income taxes as an itemized deduction on your Schedule A. However, it is usually advantageous for taxpayers to take the foreign tax credit instead.

The Exclusions From Income Credit

U.S. expats have the option to choose the “exclusions from income” credit over the foreign tax credit. This allows eligible expats to exclude certain things from their gross income, including:

  • Any foreign income that totals $105,900 or less

  • Foreign housing costs that are more than 16 percent—with a cap at 30 percent—of an expat’s foreign income. Self-employed expats are not eligible for the foreign housing exclusion.

Expats can choose to use either or both of these exclusions. The exclusions are available to every ex-pat—meaning if you are living in another country with a spouse, you are both eligible to claim the exclusions. In order to receive the exclusions from income credit, expats must qualify. To qualify, an expat must meet certain conditions:

  • They must be a U.S. citizen who has been a resident in a foreign country for a period longer than a tax year.

  • They must be a U.S. resident who is a citizen of a foreign country with whom the U.S. has an income tax treaty.

  • The must be a U.S. citizen who has been in a foreign country for 330 days or more during a one-year period.

Consult a Skilled Tax Resolution Lawyer

Choosing to retire in a different country should be an exciting choice. However, many expats are plagued by complex tax returns. As an expat, it can be hard to determine which of the two tax credits to choose for your individual situation. At Morgan Sebastian Law, our firm is eager to confront all the complexities of your tax issues. When you work with Attorney Becky Sebastian, you will experience compassionate attention that provides a sense of relief and peace of mind regarding your financial state.

To schedule a consultation with an experienced tax resolution lawyer, call 877-938-1350 or fill out our online contact form.