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What you Need to Know about Taxes as a U.S. Expat

Moving abroad is a wonderful experience as it allows you to broaden your views and gain a different appreciation of life and its adventures. Plus, nowadays it’s rather easy to pack things up in the U.S. and move across the globe wherever your heart or profession takes you.

True, COVID-19 does make things a bit more complicated, but once you get started on this path there’s no point to look back. You will have to do some extra tests and maybe fill in some forms, but, in the end, your move will happen and you will be able to start your new life.

But what happens with your life in the U.S.? Do you just start your new life and keep living in America as a fond memory? Does the government forget you ever existed? As it turns out, things are not that simple.

Even as an expat, you still have to stay in touch with the U.S. authorities, and with the IRS in particular. Even if you earn foreign income, you still have some obligations towards your old home country, and failing to comply with the regulations can land you in some real hot water.

So before you even consider living abroad, here are some of the things you should know with regards to U.S. taxes:

You Must Fill Out Taxes Each Year

Unless you decide to fully renounce your U.S. citizenship, you will still be an American citizen living abroad. So, if you earn over a certain amount of foreign income and still have your citizenship, you will have to file a yearly U.S. tax return.

This happens because the U.S. is one of the few countries that tax based on citizenship and not residency (like the rest of the world does). If you want to forever separate your affairs, learn how you can renounce your U.S. citizenship to make sure everything is in order.

Keep in mind that you don’t have to be a standard employee in order to have the IRS knocking on your expat door. The U.S. is equally interested in the income you get from dividends, rental properties, or interest (among others).

You May Not Owe the U.S. Anything

Why do I still have to pay taxes in the U.S. if my life is in a different country? Well, as we mentioned above, you have to file for a tax return, but that doesn’t mean you actually owe the American IRS anything.

The IRS has several mechanisms in place to prevent double taxation, which happens when you pay taxes towards two different governments. These mechanisms include deductions, exclusions, and credits such as the Foreign Tax Credit (FTC), the Foreign Earned Income Exclusion (FEIE), or the Foreign Housing Exclusion.

Each can help you get out of paying the IRS anything so it’s best to get yourself familiar with their regulations.

How About State Taxes?

Most U.S. citizens don’t owe taxes just to the IRS; they also have to pay state taxes, which are different from state to state. So if you keep your citizenship, it may also mean you will have to continue paying some state taxes.

The best way to make sure you don’t pile up tax debt is to consult with a tax professional that has experience working with expats.

Wrap Up

Whether you are leaving the U.S. on your own, in search of a more adventurous life, or you are sent abroad by your company, you have to take care of your affairs in the country before you leave. Otherwise, you risk getting fined, losing your passport, or even getting in trouble with the government of your current residency.