What is an Expatriate Tax?
For many people, living or retiring abroad is the fulfillment of a lifelong dream. However, anyone living outside the country must understand the tax rules that apply to them. The United States has a tax system that is based on citizenship, not residence. Therefore, there is an expatriate tax that you could be obligated to pay. The experts at US Tax Help take a closer look at the expatriate tax and how it affects you below.
Requirements for Expats Filing U.S. Federal Tax Returns
As stated above, the United States tax system is based on citizenship and not residency. Therefore, if you are a United States citizen or Green Card holder, you must file a U.S. federal tax return. More specifically, you are required to report your worldwide income no matter where you live.
If you are an expat who has earned over $10,000 of income, you must file a federal return in the U.S. If you are self-employed, then the amount is only $400. However, in most cases, U.S. citizens do not end up owing any federal taxes. There are several exemptions that the IRS. has made available to citizens living abroad. At US Tax Help, we can help you understand and utilize these exemptions.
If you own a foreign-registered business, you are required to report it under your federal tax returns, in the same manner, you would if the company was registered in the United States. The rules and regulations regarding reporting the income of a foreign business are complicated. The type of business and ownership will affect what income must be reported. If you have a foreign registered business or corporation, you should have the help of tax professionals experienced in foreign enterprises.
In addition to United States tax obligations, an expat should review the tax residency requirements of the country where they are living. Many countries require that you file or pay taxes if you have spent a specific amount of time or have a permanent home in the country. Our tax specialists at US Tax Help will assist you in understanding how foreign and U.S. tax liabilities intersect.
Exemptions for United States Expats Who Pay Foreign Taxes
U.S. citizens living abroad who pay foreign taxes could benefit from the Foreign Tax Credit. Under this exemption, an expat is permitted to claim a $1 United States tax credit for every foreign tax dollar paid on foreign-sourced income. Therefore, if you pay more in foreign taxes than you would owe in federal taxes, you can eliminate your U.S. tax obligation. Additionally, the Foreign Tax Credit carries forward, allowing you to use leftover credits for future U.S. tax liabilities.
If you have paid less in foreign taxes than you would owe or if your foreign income is taxed at a lower rate, you might be better off claiming the Foreign Earned Income Exclusion. Under the tax exclusion, an expat is permitted to exclude approximately $100,000 of their foreign earned income from their federal tax obligation. The exact figure is adjusted yearly for inflation and, as of 2020, is $105,900.
To qualify for the Foreign Earned Income Exclusion, you must prove that you live abroad by passing the Bona Fide Residence Test or the Physical Presence Test. Our US Tax Help experts can assist you in establishing that you are a permanent resident of another country or demonstrate that you have lived at least 330 days outside of the United States within a 365-day taxable year.
If you have claimed the Foreign Tax Credit and have a dependent child, you are also entitled to claim a Child Tax Credit. This tax credit provides an additional exemption of $2,000 per child.
Social Security Contributions and United States Expats
If you are an expat who works for a United States company or who is self-employed, you are required to contribute to U.S. Social Security taxes. If you live in one of the 26 signatory countries of the United States Totalization Agreement treaty, then you are not required to pay Social Security taxes twice. The treaty states to which country a U.S. expat should pay Social Security taxes. Depending on the length of time you have or will reside in the country, the Social Security tax will be apportioned out between both systems. Contact our tax experts at US Tax Help to determine which countries the Totalization Agreement applies to and how your specific taxes will be impacted.
Expats and State Taxes
Whether or not you will be required to pay state taxes depends on which state you call home. For example, some states such as Washington, Florida, and Texas do not have personal income taxes. However, every state has their requirements for dealing with your U.S. expatriate taxes. California will consider whether you have retained rights of ownership of assets, such as real estate or financial accounts, to determine your intent to return and might require you to file a state tax return. Other states will base the need to file a return on whether you still have a valid driver’s license. At US Tax Help, we will evaluate the requirements of your state to determine if you are required to file a return and have a state tax liability.
Contact Our Expatriate Tax Specialist to Understand Your Tax Liability
Many Americans decide to live, work, or start a business overseas. This dream is often complicated by the need to comply with the federal tax code and regulations governing expatriates. Our expatriate tax specialists can assist you in navigating the complex rules, exemptions, and requirements. To learn more about what is necessary for foreign account tax compliance with United States, contact the experts at US Tax Help online or call us at (541) 362-9127 to schedule your first consultation.