How to Change Tax Residency When Moving Overseas
Moving overseas is exciting but also presents challenges – tax-related challenges. To make tax season easier as a U.S. expat, it’s important that you change your tax residency status. But how can you do that?
In order to change your tax residency status, there are a few things you must do. The first is to move out of your previous home. Next, establish a home in a foreign country. And finally, cut all financial and legal ties to your previous state of residence. Then, simply stay in your new country of residence. If you take these tests, you can meet either the physical presence or bona fide residence tests, making you eligible for certain tax advantages available to American expatriates. Changing your tax residency status can be a complicated process, so it benefits prospective expats to check in with a tax accountant for helpful tips.
Our tax CPAs are here to help expats navigate taxes while living overseas. To learn more about the tax accountants for American expatriates at US Tax Help, call us today at (541) 362-9127.
How Can I Change My Tax Residency When Moving Overseas?
Changing your tax residency status is important if you plan to move overseas. That way, you can take advantage of the tax perks available to American expats. That said, changing your tax residency status can be complicated, requiring intentional effort on your behalf. Generally, those looking to change their tax residency status need to do three things: move out, move in, and cut ties. In addition to taking these steps, you’ll also have to file IRS Form 8822.
The first step in changing your tax residency status when moving overseas is to move out of your previous home. This is known as abandoning your domicile. So, you’re going to need to leave your previous home behind. The best way to do this is to sell your house or put it on the market. If you live in an apartment, don’t renew the lease. Because determining tax residency status can be complicated, you may have to take a few extra steps to show the IRS that you’ve abandoned your previous domicile. For more detailed instructions, you can reach out to an experienced tax accountant for American expatriates.
In order to establish residency in a foreign country, you’re going to have to move in. To do this, you don’t need to purchase property right away. Having an apartment or rented house in a foreign country may be enough to prove your residency. It takes time for the IRS to accept that you’ve moved abroad. Generally, expats must live in a foreign country for a year before changing their tax residency status. So, finding a place to live and establishing residency as soon as possible when you move abroad is important. Try not to leave your new country of residence too often, as that can impact your ability to change your tax residency status quickly. You’ll also need to file Form 8822 to inform the IRS of your new foreign address.
If you plan to move abroad and take advantage of the tax benefits available to expatriates, you must cut ties with your previous state of residence. That means selling your house and any other property you may hold in the United States. Some states require expats to pay state income taxes even when living abroad if they continue to have connections to their previous state of residence. So, close your bank accounts and change your car registration. Your tax accountant for American expatriates can help you cut all ties with your previous state of residence so that you can successfully change your tax residency status when moving abroad.
Tax Residency Tests for American Expatriates Moving Overseas
Before you can utilize the tax benefits available to American expatriates, you must meet certain tests. To qualify, expatriates can meet either the bona fide residence test or the physical presence test.
Bona Fide Residence Test
To meet the bona fide residence test, American expats must reside in a foreign country for an entire tax year. That doesn’t mean you can visit friends and family in the United States from time to time. Just make sure those visits aren’t too long. If you meet the bona fide residence test, you’ll be able to change your tax residency status.
Physical Presence Test
In order to meet the physical presence test, American expatriates must be physically present in their new country of residence for 330 days out of a tax year. The days physically present in a foreign country do not have to be consecutive, but they do have to be complete.
Why is it Important to Change Your Tax Residency When Moving Overseas?
The United States operates within a citizenship-based taxation system. That means all American citizens, regardless of where they live, have a tax liability to the IRS. Of course, if you live and work abroad, you may have to pay taxes to two countries. Because of this, the IRS grants exceptions and perks to expatriates. Changing your tax residency status can help you take advantage of these benefits, lowering your tax liability to the IRS.
If you live in a foreign country and meet either the bona fide residence test or the physical presence test, you can qualify for the foreign earned income exclusion credit. This allows American expatriates to exclude a portion of their foreign income from their annual tax returns. In 2022, expatriates can exclude up to $112,000. Establishing residency in a foreign country, and changing your tax residency status, can also allow you to avoid state taxes that you may otherwise have to pay, even if you live abroad.
Changing your tax residency status is crucial, so you don’t have to pay taxes twice on your earned income. If you’re having difficulty changing your status or are still unsure how U.S. taxes will affect you while living abroad, reach out to a tax accountant for American expatriates for guidance.
Our Tax CPAs Can Help You Change Your Tax Residency Status
If you’ve recently moved abroad, it’s important that you officially change your tax residency status. To learn more about the tax accountants for American expatriates at US Tax Help, call us today at (541) 362-9127.