Packing your things and starting a new life in a different country doesn’t necessarily mean you’ll be able to avoid Uncle Sam’s tax bill. In fact, doing so is against the law. Taxes can be a complicated matter, and for Americans living abroad, it’s important to know what the tax authorities expect of you so that you don’t run into any issues on Tax Day.
The expat and tax treatment
It’s safe to assume that if you’re a resident of the U.S., any kind of income you generate throughout the world is subject to U.S. taxation. Uncle Sam won’t excuse you from your patriotic duties just for living in another country. And you’ll still need a Social Security number or an individual taxpayer identification number to file your taxes.
If you’re a U.S. taxpayer living or traveling abroad, regardless of the length of time, we’ll call you an expat for the sake of simplicity. But technically, to be considered an expat for tax purposes, you are either a 1) U.S. citizen, 2) resident alien, 3) green card holder, or 4) member of the U.S. military on active duty. For tax purposes, resident aliens are those who satisfy either the green-card test or the substantial-presence test.
Expats are automatically given a two-month extension from the normal April 15 deadline for filing taxes. However, they still have to pay any taxes owed by April 15, lest they rack up interest charges on the amount they owe the IRS. For couples living abroad, the general joint-filing rules apply. However, the IRS grants some leeway to couples who have individually separate alien statuses. For instance, let’s say you’re a resident alien and your spouse is a nonresident alien. You would have the option of filing jointly as a married couple and treating your spouse as a resident alien.
The figures you report on your tax return must be expressed in U.S. dollars, so if you receive your income in a foreign currency, you must use the local exchange rate. Those rates can sometimes be tricky, especially in smaller countries, where the rates can fluctuate rapidly, but for income received throughout the year, the IRS deems it acceptable to use an annual average exchange rate for these reporting purposes.
The IRS requires you to make all tax determinations in your “functional currency,” which is the currency you conduct most of your financial activities in. For example, if you lived and worked in Chile and receive your paycheck in Chilean pesos, then you would want to 1) calculate all of your reportable figures in Chilean pesos, 2) translate that amount into U.S. dollars using the USD/CLP annual average exchange rate, and 3) use that U.S. dollar figure to report on your tax return.
Foreign accounts and double taxation
Under certain conditions, bank accounts held overseas must be accounted for in your tax filing. The Bank Secrecy Act requires you to file a form called the Report of Foreign Bank and Financial Accounts (FBAR) if you control any type of financial account overseas that contained more than $10,000 at any point during the year. Although the form is due by April 15, it’s not a tax return, so it should be submitted separately from your 1040.
Note that the FBAR can only be filed through the BSA E-File System.
Finally, the U.S. holds tax treaties with various nations that affect how you’re taxed by both governments. Depending on the country and its treaty with the U.S., you may be able to reduce your income taxes through foreign tax credits, which are designed to avoid double taxation.
Be sure to do your due diligence by learning the tax implications of living in a particular country. Your research should include tax laws at the federal level, those of your state, and those of the country you’re traveling to or residing in. If you’re ever unclear about your taxpayer category, visit the International Taxpayers section of IRS.gov and use the interactive tools to clarify your situation.
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