If you decide to pack your bags and move to another country one day, you must first understand that pursuing life abroad is not easy. Whether your decision to be an expat is motivated by personal or business reasons, there are obligations that you just can’t sweep under the rug. As a citizen and resident, you have tax responsibilities in the U.S., and the Internal Revenue Service (IRS) can still audit you.
So, before you make your big move, here’s what you need to know and do.
1. You still need to file your tax returns
Even when you’ve chosen the life of a digital nomad, working and discovering the true meaning of work-life balance, you still need to file your U.S. tax return during tax season. That’s true even if you don’t necessarily owe taxes. The reason for this is the IRS needs to know the ins and outs of your finances.
Tax season typically begins at the end of January, while the deadline is April 15. If the deadline falls on a weekend, it is moved to the next business day. If you are living abroad on April 15, the deadline is extended to June 15, but taxes are still due on April 15
2. Have a copy of the necessary forms
With the previous insight in mind, know which forms you’ll need for your comprehensive tax return filing and take note of the purpose of each form, too. You can visit the IRS website for the following documents:
- Foreign Earned Income Exclusion and Foreign Housing Exclusion or Deduction (Form 2555)
- FBAR or Financial Bank Account Report (FinCEN Form 114)
- Foreign Tax Credit (Form 1116)
- Statement of Specified Foreign Financial Assets (Form 8938)
3. Eliminate tax burden with FEIE and FTC
You may qualify to take advantage of two possible tax exclusion options to reduce your U.S. taxes. First is the Foreign Earned Income Exclusion (FEIE), which can earn you a tax exclusion of your foreign earnings up to an amount that is adjusted annually for inflation (this amount is $108,700 for tax year 2021). Eligibility is determined based on passing one of two possible tests: (1) The Physical Presence Test, or (2) The Bona Fide Resident Test.
Another tax exclusion you could maximize is the Foreign Tax Credit (FTC). This affords you a dollar-for-dollar tax credit for paid foreign taxes against foreign income.
4. Report foreign bank accounts and assets
Keep in mind that the IRS can trace foreign bank accounts and assets, so do not attempt to hide those from the U.S. government. To report these, furnish the IRS with FinCEN Form 114 and Form 8938. The latter is required for foreign assets and accounts exceeding a certain threshold.
5. Take note of the important tax filing dates (in the U.S.)
If you can’t meet the April 15 deadline because you’re filing overseas, you’re automatically eligible for a two-month extension. That moves the tax return filing deadline to June 15. If that’s still not enough to gather all pertinent documents, you may request another extension. The IRS can wait until October 15 for your tax return.
However, these extensions don’t apply to tax payments. Taxes must always be paid by April 15. Interest and penalties will accrue if you pay your taxes late.
6. Familiarize yourself with tax filing dates in the country you are moving to
Know the tax season in the country you’re moving to. For instance, in Germany, it starts at the end of July. It might take some adjustment, but you can always contact the U.S. Embassy of the country you are moving to.
7. You still have tax obligations to the state you came from
There are so-called sticky states that require residents to pay state taxes even if they’ve relocated overseas. The most notorious of these are Virginia, New Mexico, and California. You can circumvent state tax obligations by establishing residency in a no-income-tax state. Be sure to include that in your list of things to do before moving abroad.
8. If you have no plans of returning, make sure to cut ties with your state and establish a domicile
This will exempt you from state taxes. Some of the things you may need to do before moving abroad are to give up any IDs, licenses, registrations issued by or within the state and sell or rent out residential properties under your name. The goal is to provide proof that you don’t intend to return because you already have a home overseas.
9. Work with a tax expert
To ensure that you’re on the right side of the law, work with a tax professional. They can give you advice on how to go about expat taxes and help you gather the documents you need to furnish the IRS.
10. Learn the ins and out of state taxes
Leaving your home state doesn’t necessarily equate to freeing yourself from state tax obligations. Other states will already relinquish your residency after six months, especially if you have established residency in another country.
It differs per state, so be aware of the tax rules in your home state. The following states do not have state income taxes:
- South Dakota
As for states that collect income tax, residency is generally determined by the following (however, the specific details can vary state by state):
- You resided in the state at any point in the tax year.
- You have immediate family in the state.
- You come home to the state every time you fly to the U.S.
- You maintain a permanent residence in the state.
- You maintain voting rights, an ID card, or a driver’s license in the state.
Fulfill Your Tax Obligations
Being chased by the IRS as you move to another country and start a new life is the last thing you want. Just make sure that you do not forget about your tax obligations back home while far away. Should that happen, find a tax resolution company to work with. Tax Samaritan has the expertise to help you out.