As experienced experts in tax preparation for US expats, we spend a lot of time making sure we answer the questions that our clients send us. As you prepare to file your 2018 tax return, here’s a list of requirements to make sure you fulfill if you are already living abroad. Remember, US expats must still file a tax return.
So, if you are in this situation, here are some things to review and add to your to-do list:
- File a tax return. You must still file a tax return declaring your income, even if you are paying tax in your country of residence. There are some extra forms that need to be filed, including applying for the Foreign Earned Income Exclusion (see below) and an informational return on the amount of money in your bank account. The latter, called FBAR, must be filed if you have more than $10,000 in foreign bank accounts, and is separate from your normal return.
- Establish a “tax home” in another country. This will allow you to exclude up to $103,900 of earned income (note that you will still be taxed on interest, dividends, pensions, and rental income). The easiest way to do this is to cut financial ties with the U.S. Sell your car, sell your home or break the lease, cancel office leases, etc.
- Meet the residence requirements. This can be done either through the Bona Fide Residence Test or the Physical Presence Test. For the former, you need to pick a country and either buy or rent a home there and pay local taxes. Other things that can help other than having relatives there are to get a library card or gym membership, get a local driver’s license, and make sure to open an account with a local bank. For the latter, you just need to be present in another country for 330 days in 12 months, which do not have to be consecutive.
- Find out the tax requirements for the country you are moving to. Digital nomads can often avoid tax requirements in other countries, but if you are actually planning on living in, say, Germany full time, then you will likely have to file taxes there. If you can literally pick anywhere, consider a country with no income tax such as Bermuda or the United Arab Emirates. If you are moving because of a job, your employer will be a good source of information on what you need to do.
- If you make more than the excluded amount, you will have to pay taxes. You may be able to reduce your burden further by applying for foreign tax credits (this allows you to lower your amount by what you paid to the other government) or the Foreign Housing Exclusion, which gives a tax break based on the extra costs of living overseas. In some cases, such as if you are in a high tax country like Sweden, you may be better off applying for Foreign Tax Credits rather than the exclusion.
- If you are self-employed or an independent contractor, you will still need to pay the full amount of social security taxes on income over $400. In some countries you may be able to avoid this by paying into the local system.
- Check to see if your state requires you to file a return. New Mexico, Virginia, South Carolina and Colorado are particularly bad for requiring this. Massachusetts wants evidence that you don’t plan on going back to Massachusetts, ever. If you live in a state such as Alaska or Florida, that does not collect state income tax, then you are golden. Most states will release you from residency if you have been gone for more than six months, although you will need proof. The same kinds of things that establish a tax home are useful here. Some people move to a favorable state, such as Florida, for a year before moving overseas.
- You will still have to pay taxes on the following: Any income earned on US soil, such as if you come back to the US to sell at a trade show; rental income both foreign and domestic, Social Security benefits if they are otherwise taxable. So, while the majority of expats do not owe U.S. taxes, some do.
Being an expat can be amazing, especially if you have the chance to travel and see the world, but U.S. tax requirements can feel overwhelming if you don’t dedicate time and attention to it. Consider sitting down with a tax professional to discuss your unique situation, whether you are already living abroad or planning to make the move.
About Lisa Palazzo
Lisa Palazzo is the Owner and CEO of Palazzo & Company, an tax and accounting firm based in Gulfport, Mississippi. Lisa Palazzo gained her knowledge as an EXPAT first-hand living overseas in Hungary. She has built upon this foundation by attaining over ten years experience in EXPAT tax service. With clients in more than 20 countries, Palazzo has grown since 2001 to become a worldwide service provider specializing in small business accounting, bookkeeping and payroll services, business income tax preparation, and local/individual income tax preparation.