Do US Taxes Differ for Expats Living Abroad?

Are you a US expat living abroad? If so, do you have a handle on the tax implications of being an expatriate? In other words, do you have to pay taxes when living outside of the USA borders? Or, at best, do you need to submit an annual tax return to the IRS, indicating gross income earned for the tax year, irrespective of where in the world you live and work?

Doing taxes

It seems to be common knowledge, or perhaps an urban legend, that all US passport or Green Card holders have to pay taxes in the country of their residence and the United States? Is this correct?

By way of answering these questions, let’s look at the facts versus the urban legends or myths as supplied by the expat tax specialists from Phillip Stein.

1. All US citizens are subject to US tax laws

All American citizens are subject to US tax laws, irrespective of where they live or work in the world. They are taxed on the gross annual income, not just income earned in the United States for the tax year. Therefore, expats must combine their total yearly income, including investment and rental income, to file a tax return.

The inferred question at this point is, does the IRS know what your foreign income is? The succinct answer is that, if you receive a Form 1099 while living abroad, you must assume that the IRS has a record of your income earned while living and working outside of the USA.

Note: if you do not receive a Form 1099, you still have to comply with the US tax laws and file an annual return to the IRS. The consequences of dodging income tax filing and payment are not worth it.

The good news is that there is an expat tax benefit known as the Foreign Earned Income Tax Exclusion (FEIE). In summary, it is a monetary deduction that reduces the double-tax burden for expats.

The IRS website describes the FEIE requirements as follows:

“If you meet certain requirements, you may qualify for the foreign earned income exclusion, the foreign housing exclusion, and/or the foreign housing deduction.”

“To claim these benefits, you must have foreign earned income, your tax home must be in a foreign country, and you must be one of the following.”

  • A US citizen who is a resident of one or more foreign countries for an uninterrupted period of a tax year
  • A US resident, or Green Card holder, who is a resident or national of a country for an uninterrupted period of at least one tax year with which the US has an income treaty
  • A US resident or citizen who is lives and works in a foreign country for at least 330 days of a 12-month consecutive period or a single tax year

The maximum amount claimable under this benefit changes (increases) from year-to-year. For example, expats were allowed to claim up to $105 900 of foreign income. And the 2020 maximum claimable amount is $107 600.

2. Tax Amnesty Program

Not filing a tax return or not paying US taxes seems to be a common mistake that US citizens or residents living and working in other countries can make. While under normal circumstances, these actions, or lack thereof, would incur substantial penalties, there is a tax amnesty program directed explicitly towards non-tax-paying US expats.

Statistics show that the United States has the highest tax avoidance bill than the rest of the world. The total amount that is not paid every year is about $200 billion. This is a substantial sum of money. And it explains why the IRS finds new and innovative ways to track the income of American citizens or residents living abroad.

Some of these requirements include complying with the FATCA or Foreign Account Tax Compliance Act and filing a Report of Foreign Bank and Financial Accounts (FBAR) form.

The penalties for not filing an FBAR carries a $10 000 fine or civil penalty for every year that the form isn’t filed. This penalty assumes that the noncompliance with this requirement is non-willful. If the IRS determines that this noncompliance is willful, the penalty is $100 000 or 50% of the amount in each offshore bank account you hold.

It’s no wonder that expats do not comply with the US tax laws if they’ve accidentally missed a year or two.

Enter the Tax Amnesty Program.

The US federal government instituted this program in 2014. And its primary function is to help expats who are either behind on their taxes or have never paid tax catch up on their taxes without being penalized.

In other words, if you have fallen behind on your tax returns, or you’ve never filed a tax return as an expat, you can join this program and catch up on your income tax returns and other legal requirements without being penalized.

It’s a win-win situation.


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