In summary, US citizens living abroad are expected to pay taxes due to the citizenship-based taxation system, with provisions in place to mitigate potential double taxation through exclusions and tax treaties.
The US is one of the few countries that taxes its citizens on their worldwide income, regardless of where they live or earn their income. This means that American expats are potentially subject to double taxation – once by the country where they earn their income, and again by the United States. NOTE!
Most American expats do not end up owing U.S. taxes
In most situations, U.S. expats can offset foreign-earned income with: The Foreign Tax Credit (FTC) The Foreign Earned Income Exclusion (FEIE) The Foreign Housing Exclusion.
The first U.S. income tax to include U.S. citizens living overseas dates to 1862, but the first law to authorize taxation of former citizens was passed over a century later, in 1966.
Why Do You Have to Pay Taxes If You Live Abroad? US taxes are based on citizenship rather than residence. This means that citizens are taxed by the IRS even if they live in another country. The only way to avoid this requirement is to renounce your citizenship, which can be a costly choice and is rarely wise.
Renouncing citizenship is the only way to avoid the exit tax: This is not true. With proper planning, it is often possible to mitigate or even eliminate exit tax liability by taking steps to reduce net worth, manage unrealized gains, and ensure compliance with US tax obligations.
Importantly, U.S. citizens are always considered U.S. tax residents, even if they live in a foreign country or claim residency elsewhere. They are subject to citizenship-based taxation, meaning they must report and pay taxes on their worldwide income until they formally renounce their citizenship.
Key Takeaways. Dual citizens are often required to file tax returns in both countries. However, tax treaties and other benefits can be used to avoid double taxation. Using these benefits, most US dual citizens who live abroad can erase their US tax liability.
Limit on excludable amount
The maximum foreign earned income exclusion amount is adjusted annually for inflation. For tax year 2023, the maximum foreign earned income exclusion is the lesser of the foreign income earned or $120,000 per qualifying person. For tax year 2024, the maximum exclusion is $126,500 per person.
Absences of more than 365 consecutive days
You must apply for a re-entry permit (Form I-131) before you leave the United States, or your permanent residence status will be considered abandoned. A re-entry permit enables you to be abroad for up to two years.
Double taxation refers to income tax being paid twice on the same source of income. This can occur when income is taxed at both the corporate and personal level, as in the case of stock dividends. Double taxation also refers to the same income being taxed by two countries.
Americans who retire overseas still have tax obligations. Typically, you will have to file a tax return with both the US government and your new host country. You may even have to file a tax return with the US state you used to live in.
For the most part, the only tax that the UAE imposes is a value-added tax. However, Americans living abroad in the UAE still have US filing obligations. All US citizens are required to file a US tax return regardless of where they live in the world. You may also have to file certain other tax forms.
One of the main catalysts for the IRS to learn about foreign income which was not reported is through FATCA, which is the Foreign Account Tax Compliance Act. In accordance with FATCA, more than 300,000 FFIs (Foreign Financial Institutions) in over 110 countries actively report account holder information to the IRS.
There are various ways to mitigate corporate double taxation, such as legislation, structuring an organization into a sole proprietorship, parentship, or LLC, avoiding the payment of dividends, and shareholders becoming employees of the businesses they own.
1. I'm a U.S. citizen living and working outside of the United States for many years. Do I still need to file a U.S. tax return? Yes, if you are a U.S. citizen or a resident alien living outside the United States, your worldwide income is subject to U.S. income tax, regardless of where you live.
Drawbacks include the potential for double taxation and the lengthy, costly process of obtaining dual citizenship. The simplest way to acquire dual citizenship is by birth, although many migrants may naturalize or marry into another country's citizenship.
Dual residency in states outside of California is not exempt from multi-state taxation. This scenario also has its share of complicated tax rules. If you live in California for only part of the year, the percentage of tax you pay will be based on how many months during the year you reside there.
One of the many benefits of becoming a U.S. citizen is that it is a stable immigration status. Unlike the situation for lawful permanent residents (green card holders), someone who has attained naturalized U.S. citizenship can't lose that status solely by living outside of the United States for a long time.
To satisfy the 183-day requirement, count: All of the days you were present in the current year, One-third of the days you were present in the first year before the current year, and. One-sixth of the days you were present in the second year before the current year.
Expats can use the FEIE to exclude foreign income from US taxation. For the entire tax year 2024, the maximum exclusion amount under the FEIE is $126,500. To qualify for the FEIE, you must meet the standards of the physical presence test or the bona fide residence test.
Green Card holders who have lived lawfully in the US for eight years in the last fifteen years may be subject to the exit tax regardless of their income, net worth, or filing compliance.
But, despite various myths you could find on the different expat boards — just moving outside of the United States and taking up residence in a foreign country does not qualify as formally abandoning their US status or renouncing their US citizenship.
Here's what you should know when turning in your green card. Who is considered a long-term resident (LTR)? A long-term resident who has held a green card for at least 8 of the last 15 years, including any part of a year. Even a single day of legal residency in a year counts towards this 8-year requirement.