If you were born on U.S. soil or have a parent who is a U.S. citizen, you may be an “accidental American” even if you do not live in the country. This makes you a citizen and subjects you to taxation despite spending none of your life in America.
Understanding your tax obligations is an important aspect of financial responsibility, regardless of where you reside.
Citizenship-based taxation
The United States employs a citizenship-based taxation system, meaning that individuals holding U.S. citizenship are subject to taxation on their worldwide income, regardless of their place of residence. This includes citizens who have at no time lived in the country.
Filing requirements
Even if you have not ever set foot on U.S. soil, you may still need to file U.S. federal tax returns. Factors such as income level, filing status and specific types of income earned abroad determine your need to file. In some cases, you may be exempt from filing, but it is necessary to be aware of the criteria that govern these exemptions.
Foreign Earned Income Exclusion
One key consideration for U.S. citizens living abroad is the Foreign Earned Income Exclusion. This provision allows qualifying individuals to exclude a certain amount of their foreign-earned income from U.S. taxation. To claim this exclusion, you must meet specific criteria, such as establishing a tax home in a foreign country and meeting either the bona fide residence test or the physical presence test.
Reporting foreign assets
Beyond income, U.S. citizens abroad may also have reporting obligations related to foreign financial accounts and assets. The Foreign Bank Account Report requires the disclosure of foreign accounts exceeding a certain threshold. Additionally, the Foreign Account Tax Compliance Act mandates reporting specified foreign assets that surpass specific thresholds.
Navigating the process
To manage these tax obligations effectively, seeking professional advice or utilizing available resources is wise. The IRS provides information and forms necessary for compliance. Understanding the requirements and taking proactive steps can help U.S. citizens abroad fulfill their tax obligations and avoid potential penalties for non-compliance.
Navigating the intricacies of U.S. tax laws is necessary for ensuring financial compliance while living overseas.