Posted By Gerardo (firstname.lastname@example.org) on 06/10/2012
This is a guest post from Greenback Expat Tax Services.
Sandy beaches, pristine ocean views, snow covered mountain tops, exciting new cultures, or even a career change…Whatever your reason is, sometimes you just have to pack up and go. Fortunately, living an expatriate lifestyle has so many rewards!
Another thing that comes along with the move, if you’re an American Expatriate, is expatriate taxes. While it might not be in the same category as sandy beaches, it certainly doesn’t have to be a nightmare!
US citizens and Greencard holders are in a unique situation. The US is one of the only countries (the only other one is Eritrea, in case you were curious) which continues to tax its residents after they have moved abroad, even if they are already paying tax elsewhere.
This article goes over the main points you should understand, from a US expat tax perspective, before moving abroad (or, if you have already moved, go over these points to make sure you’re on track).
Will you have to file a US Expatriate Tax Return while abroad?
In almost all cases, yes, you will be required to file an expatriate tax return. All US citizens and Greencard holders are required to report their worldwide income to the USA every year.
The only way you will not be required to report your income is if you fall below these income levels (current for 2011):
- Single - $9,350
- Married filing jointly - $18,700
- Married filing separately - $3,650
Don’t forget about that home state of yours!
Even after you move, some states will still require you to pay tax on your worldwide income! Some of the worst states for US expat taxes are California, South Carolina, Virginia, or New Mexico-If you were a resident of one of these states before your move, you are going to have to work very hard to prove your non-resident status in order to avoid tax there as well.
Some states, such as Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming, have no state income tax. As such, you will not be required to pay any state tax at all as an expat.
If planned well enough in advance, you can work to change your residency to one of these more favorable states. It will be a bit of a chore now, but when your tax bill is thousands less later on, you will be glad you put in the effort!!
There is a light at the end of the tunnel!
The US government wants to encourage its citizens to live abroad and learn new things, which can help improve the US when they return. As such, they have provided a number of exclusions and credits to help offset dual taxation and allow expats to earn money tax free. You can use these to limit (or even eliminate) your US tax liability. The main credits one can use as an expat are the Foreign Earned Income Exclusion (FEIE), the Foreign Housing Allowance, and the Foreign Tax Credit.
With the FEIE you can exclude $92,900 (2011 rate) of your foreign earned income from being taxed in the US. If you make less than this, you will not owe the US anything in taxes (even if you won’t owe anything, you are still required to file).
The Foreign Housing Allowance allows you to deduct expenses like rent from your taxable income. For 2011, you can deduct up to 30% of the FEIE, or $27,870 (even more if you live in a high cost cities Honk Kong, London or Paris)!
The last big credit is the Foreign Tax Credit. This provides you with a Dollar for Dollar credit for any taxes paid to a foreign country, thus helping you eliminate any dual taxation.
Save even more money….
In addition to these exclusions and credits, the USA also has a number of tax treaties in place to help clarify issues for US citizens. A bit of country specific research to see if there is a tax treaty between your host country and the USA and how it works can save you a significant amount of money.
Another way to save some money is by checking the foreign exchange rates regularly. Sometimes, the difference between calculating exchange rates daily versus once yearly, can make a huge difference on your total tax bill.
Do you have to report your foreign bank accounts?
One of the last things we are required to do as citizens and residents of the US is to report our foreign bank accounts. If you have more than $10,000 USD in foreign accounts (this is cumulative, so, if you have $2,000 in six accounts for a total of $12,000, you would be required to report all 6 accounts), you have to file a FBAR (form TD F 90.22.1).
This form must be received by the Department of the Treasury by June 30th each year, there are no extensions.
Even with all this information, filing an expatriate tax return can be a confusing and troublesome task! If, at any point along the way, you need some assistance, reach out and ask for help from an expat tax professional.
About the author
Greenback Expat Tax Services specializes in the preparation of U.S. Expat Taxes for Americans living abroad. Greenback offers flat fee pricing; a simple, hassle-free process; and, most importantly, CPAs who are experts in the ins-and-outs of U.S. expat taxes.