Living abroad as an American can be an exciting experience, but it also comes with its fair share of challenges. One of the most challenging aspects of living abroad is figuring out how to navigate the tax system. As an American living abroad, you still have to pay taxes to the US government. In this article, we will explore the tax implications of living abroad as an American.
Who Has to Pay Taxes?
If you are a US citizen or green card holder, you are required to file a tax return with the IRS every year, regardless of where you live. The US has a worldwide tax system, which means that you are taxed on your worldwide income, no matter where you earned it.
Even if you are living and working abroad, you are still considered a US taxpayer. This means that you are subject to the same tax laws as someone living in the US. However, there are certain tax benefits and exemptions available to Americans living abroad.
Foreign Earned Income Exclusion
The Foreign Earned Income Exclusion (FEIE) is one of the most significant tax benefits available to Americans living abroad. The FEIE allows you to exclude up to $105,900 (in 2019) of your foreign earned income from US taxes.
To qualify for the FEIE, you must meet certain requirements. You must have a tax home in a foreign country and meet either the bona fide residence test or the physical presence test. The bona fide residence test requires you to be a resident of a foreign country for an entire tax year. The physical presence test requires you to be present in a foreign country for at least 330 days in a 12-month period.
Foreign Tax Credit
If you pay taxes to a foreign government on your foreign income, you may be able to claim a foreign tax credit on your US tax return. The foreign tax credit allows you to offset your US tax liability dollar-for-dollar with foreign taxes paid.
The foreign tax credit is subject to certain limitations and restrictions. You cannot claim a foreign tax credit for taxes paid on income that has been excluded under the FEIE. The foreign tax credit is also limited to the amount of US tax liability on the same income.
Reporting Foreign Bank Accounts
If you have a bank account or other financial account in a foreign country, you may be required to report it to the IRS. The Foreign Bank Account Report (FBAR) is required if you have more than $10,000 in foreign financial accounts at any time during the year.
In addition to the FBAR, you may also be required to report your foreign financial accounts on your tax return using Form 8938. The reporting requirements for foreign financial accounts can be complex, so it is important to consult with a tax professional if you have any questions.
Tax Treaty Benefits
The US has tax treaties with many countries, which can provide additional tax benefits to Americans living abroad. Tax treaties can help to reduce or eliminate double taxation (being taxed by both the US and the foreign country) and can provide other tax benefits.
To take advantage of tax treaty benefits, you must be eligible under the terms of the specific treaty. The eligibility requirements can vary, so it is important to review the specific treaty and consult with a tax professional.
Filing Deadlines
If you are living abroad, you may have different filing deadlines than someone living in the US. The filing deadline for US tax returns is April 15th, but if you are living abroad on April 15th, you automatically receive an extension until June 15th.
If you need more time to file your tax return, you can request an extension until October 15th. However, an extension to file does not mean an extension to pay. If you owe taxes, you must still pay by the original due date (April 15th) to avoid penalties and interest.
Penalties for Non-Compliance
It is important to comply with US tax laws when living abroad. Failure to comply with US tax laws can result in significant penalties and even criminal charges.
The penalties for non-compliance can include fines, interest, and even imprisonment. The IRS has stepped up its enforcement efforts in recent years, so it is important to take your tax obligations seriously.
Conclusion
Living abroad as an American can be an exciting adventure, but it also comes with responsibilities. As an American living abroad, you are still required to pay taxes to the US government. However, there are tax benefits and exemptions available to help reduce your tax burden. It is important to consult with a tax professional to ensure that you are meeting your tax obligations and taking advantage of all available tax benefits.