When moving abroad, very few Americans can imagine the span of implications their
move will have on their taxes. Hopefully most expats learn sooner rather than later that
they are obligated to continue filing US taxes when living abroad but what else do American expats want to know? Here are some of the common questions we get from our clients:
Do I need to pay tax in the U.S. if I’m already paying taxes in a foreign country?
Many expats think that because they need to file a US tax return they would also have to pay tax in the US. Luckily, even though the income Americans earn abroad is in fact taxable in the US, there are several different ways expats can reduce or eliminate their US taxes. Eligible taxpayers can exclude up to $100,800 of foreign earned income from being taxed in the US by claiming the Foreign Earned Income Exclusion. Another effective way to lower US tax liability is to claim a credit for the taxes paid in the foreign country. The credit is beneficial as it offsets the US tax dollar for dollar. If an expat lives in a country that has similar tax rates to the US, the foreign taxes would likely be sufficient to wipe out their US liability.
Who can claim the foreign earned income exclusion?
To qualify for the Foreign Earned Income and Housing exclusions an American expat generally must have his tax home in a foreign country and must be able to meet one of two tests. The first one named the Physical Presence Test, is a mechanical test which is based on the number of days spent overseas. The test is satisfied when an expat spends at least 330 out of any 365 consecutive days abroad. The second one is the Bona Fide Residence test. This test is more subjective and applies to Americans who have been bona fide residents of a foreign country for at least one calendar year. To meet the test, an individual has to be able to demonstrate that he or she has established a residency in the foreign country considering factors such as the purpose of their trip, intention to stay, length and nature of their work assignment.
I’ve lived overseas for several years and haven't filed US tax returns. Is there a way I can catch up on my taxes?
Unfortunately, there are many expats who are genuinely unknowing of their US tax obligation and the truth is, they are not alone. The IRS is aware of this problem and has
implemented programs to help bring expats current on their taxes. The Streamlined Filing Compliance Procedure allows qualifying taxpayers to become compliant with the
IRS by filing three years of delinquent tax returns and six years of delinquent FBARs. The procedure is especially beneficial as it involves minimal or no penalties. Taxpayers under audit are not eligible to participate in the program. So in this regard, it's better for expats who want to take advantage of the opportunity to get to the IRS before the IRS gets to them.
Will I still have US income taxes withheld from my paycheck after I start working abroad?
US employers are required to withhold income taxes from the wages paid to American citizen and green card holder employees even when their work is performed abroad. However, if the expat employee expects to have part or all of their income excluded under the foreign earned income exclusion they can provide their employer with Form 673, authorizing him to stop federal income tax withholding on the exempt part of the employee’s income. Additionally, expats can further reduce their withholding by providing their employer with a declaration that they are expecting to claim the foreign tax credit.
Do I need to continue paying Social Security and Medicare taxes?
The subjectivity to Social Security and Medicare taxes for expats is generally dependent on the type of company the individual is employed with. Taxpayers who work for
American employers overseas generally continue to be subject to Social Security and Medicare while employees of foreign companies are not. A risk of double taxation arises for expats who are employed with a US company abroad if the foreign country also imposes social security taxes. The presence of a “totalization agreement” between the foreign country and the US can relieve this risk by ensuring the expat only pays social security taxes to one country.
Can I file a joint return with a nonresident spouse?
If you live overseas and are married to a spouse who is not a US citizen or green card holder, you can elect to file a joint return with your spouse. However, doing so would subject your alien spouse’s worldwide income to US income tax. Therefore, it’s important to make the choice carefully as it often may be more tax advantageous to file “married filing separately” if your spouse has significant income.