The U.S. tax system is full of peculiarities. Many exceptions address various circumstances, and navigating it well requires knowledge of the considerations applicable to every kind of situation.
Familiarizing yourself with the U.S. tax system will help you avoid unexpected mishaps that may derail your goals. You can even yield considerable tax savings and avoid paying what can sometimes amount to thousands of dollars in fines. Start on the right track and know the answers to the most common questions about U.S. expat tax concerns.
10 Frequently Asked Questions About U.S. Expat Taxes
- Why do I still have to file U.S. tax returns when I’m not living in the U.S. anymore?
- If I renounce my U.S. citizenship, does it mean I don’t have to file tax returns anymore?
- I am self-employed. Does that affect my U.S. tax obligations?
- How do I qualify for the Foreign Earned Income Exclusion?
- How do taxes differ based on your chosen U.S. location?
- If I am married, is filing a joint return with a nonresident spouse possible?
- What factors affect my tax obligations if I run my own business abroad?
- What kind of income is reportable on my tax return?
- How do I report my foreign bank accounts?
- How long should IRS records be kept?
Q: Why do I still have to file U.S. tax returns when I’m not living in the U.S. anymore?
A: All U.S. citizens who reach a certain income threshold have to file tax returns, including expats living abroad. If this makes you worry that you may have to pay your taxes twice — first in your country of residence and then to the U.S. government — don’t fret. Tax benefits like the Foreign Earned Income Exclusion and Foreign Tax Credit prevents expats from having to pay their taxes twice.
Q: If I renounce my U.S. citizenship, does it mean I don’t have to file tax returns anymore?
A: Renouncing your U.S. citizenship frees you from having to pay U.S. taxes. However, this may not be the best course of action if you’re looking to avoid paying altogether, as the U.S. government charges the world’s highest fee for renouncing one’s citizenship at $2,350.
Exit taxes may also be needed to be paid if you are a covered expatriate.
Q: I am self-employed. Does that affect my U.S. tax obligations?
A: U.S. self-employment taxes typically will have to be paid if you are self-employed and living overseas. Special exceptions may apply. To learn more about the totalization agreement that may apply in the country in which you are self-employed, check out our Expat Tax Country Guides.
Q: How do I qualify for the Foreign Earned Income Exclusion?
A: To qualify as an American expat for the Foreign Earned Income Exclusion, you must have foreign earned income, your tax home must be in a foreign country, and you must pass one of the following tests:
- The Bona Fide Residence Test.
- The Physical Presence Test.
Q: How do taxes differ based on your chosen U.S. location?
A: There are two main types of taxes in the U.S. First is the federal tax, which is the same amount wherever you are in the country. The other is the state and local tax, which will be different depending on your specific location within the U.S. or where you have previously resided (and may still be required to file taxes).
Q: If I am married, is filing a joint return with a nonresident spouse possible?
A: Yes. But doing so will subject your nonresident spouse’s worldwide income to U.S. income tax not just for the year a joint return is filed but for future years as well. Before doing so, Tax Samaritan recommends speaking with your tax professional.
Q: What factors affect my tax obligations if I run my own business abroad?
A: Three main factors can directly impact your filing requirements if you own a business overseas:
- The structure of your company
- Where the business entity was established
- Your company shareholders
Consider these before your move so that you can manage your resources in the best possible way.
Q: What kind of income is reportable on my tax return?
A: U.S. citizens and resident aliens are taxed by the Internal Revenue Service (IRS) on their worldwide income. Savings and investments outside the country are also taxed. Any tax you paid on these savings and investments locally may be credited to your U.S. taxes.
Q: How do I report my foreign bank accounts?
A: All foreign bank accounts must be filed electronically on the Foreign Bank Account Reporting (FBAR). An FBAR is required if you have more than $10,000 in financial accounts with ownership or signing authority at any given time during the year.
Q: How long should IRS records be kept?
A: All supporting documents and tax returns must be kept on file for at least seven years. The IRS can audit your tax return for up to six years from your filing date, but this applies only to good-faith errors.
Organize your expat tax affairs now
Understanding how to navigate the complex U.S. tax system can go a long way towards helping shield you from any unnecessary steps and fines. Arm yourself with more knowledge by reading about U.S. expat tax issues like foreign housing exclusions or deductions, individual taxpayer identification concerns, and more. Check out Tax Samaritan for expat tax professional services.