Do US citizens living abroad pay taxes?

Many of our clients ask us, do US citizens living abroad pay taxes? How do I know I’m meeting my obligations? The simple answer is: you're still required to pay taxes on your worldwide income.

This obligation stems from the United States citizenship-based taxation system, which differs from most other countries' territorial-based approach. Most nations, including the UK and Germany, only tax people who are a resident of their country, but the US requires its citizens to report global earnings regardless of where they live.

Understanding these requirements is necessary to avoid potentially severe penalties. With complex reporting obligations and significant consequences for non-compliance, staying informed about your tax responsibilities is more important than ever for US expats.

Do US expats pay taxes?

Yes, US citizens must report and potentially pay taxes on their global income, regardless of where they live or work.

Whether you're teaching English in Japan, running a business in Singapore, or working for a tech company in Germany, the Internal Revenue Service (IRS) requires annual tax returns from all qualifying US citizens living abroad. This applies even if you haven't set foot on American soil for years or have built a permanent life abroad.

While this might seem overwhelming – especially when you're already paying taxes in your country of residence – there are various provisions designed to prevent double taxation. Think of it as maintaining your connection to the US – just as your citizenship rights continue wherever you live, so do your tax obligations. Understanding these requirements is your first step toward proper tax compliance and peace of mind from one of the toughest things for an American living abroad: taxes.

State and local taxes

Even after moving abroad, you may still have to pay taxes to your last state of residence, depending on the ties you maintain there, such as property ownership, a driver's license, or voter registration. Some states, like California and Virginia, are particularly aggressive in claiming taxpayer status and may still consider you a resident for tax purposes.

If you haven't already done so, it's crucial to properly establish your non-resident status to avoid dual taxation. This includes reviewing any remaining connections like state IDs, voter registrations, or bank accounts that could trigger state tax obligations.

Pro tip: Document the date you established residency abroad, as this can be crucial for state tax disputes.

Reporting of foreign bank accounts and assets

Beyond income tax returns, another crucial reporting requirement for US citizens living abroad is the Foreign Bank Account Report (FBAR). If your foreign financial accounts exceed $10,000 combined at any point during the year, you must report them.

This would include simple things like that savings account you opened for daily expenses, your retirement fund, and even a joint account with your spouse. This requirement applies even if these accounts don't generate any income or you're just named on a joint account with your non-US spouse.

Penalties for non-compliance

The consequences of overlooking these obligations can be severe, and the IRS distinguishes between different types of non-compliance. Fortunately, the IRS treats honest mistakes differently from deliberate avoidance, but both can still be costly.

• Non-filing penalties can hit your wallet hard, reaching up to 25% of unpaid taxes. That's a quarter of what you owe added on top of your tax bill.
• Even something as minor as filing your FBAR late could mean you face penalties of up to $10,000 per violation for non-willful cases. That's $10,000 for each account you failed to report, even if you didn't owe any tax.
• The stakes get much higher for willful non-compliance – the IRS can pursue criminal charges and penalties up to $100,000 or 50% of your account balances, whichever is higher.

Who needs to file US taxes from overseas?

Filing requirements for US citizens living abroad depend on your income level and filing status, regardless of where that income is earned. Does an expat pay US taxes? The answer is yes. For 2024, you generally need to file if your gross income meets these thresholds:

• Single filers: $13,850
• Married filing jointly: $27,700
• Married filing separately: $5
• Head of household: $20,800
• Self-employed individuals: $400 or more in net earnings

These thresholds apply to your worldwide income, not just US-sourced earnings.

For example, if you're teaching English in South Korea making $30,000 annually, you'll need to file even though none of your income comes from the US. Similarly, if you're running a small online business from Thailand making just $500, you're required to file due to self-employment rules—even if you don’t have to pay taxes.

Pro tip: Even if you earn less than these thresholds, filing might be beneficial to claim refundable credits or document your foreign-earned income. This documentation can be particularly valuable if you plan to return to the US or need proof of income for other purposes, such as mortgage applications or visa requirements.

Available tax exemptions and credits

Here’s some good news: The US tax system offers several tax exemptions for US citizens living abroad, to help prevent you from paying taxes twice on the same income. Let's break down these money-saving opportunities:

1. Foreign Earned Income Exclusion (FEIE)
The biggest tax break for most expats. You can exclude up to $120,000 (2024) of your foreign-earned income from US taxation.

To qualify, you need to meet one of two tests:

• Physical Presence Test: You're outside the US for 330 days in a 12-month period.
• Bona Fide Residence Test: You're a genuine resident of a foreign country for an entire tax year.

2. Foreign Housing Exclusion

• Living abroad can be expensive. This provision helps by allowing you to exclude qualified housing expenses like rent, utilities, and insurance.
• The amount you can exclude varies by location – expensive cities like London or Tokyo have higher limits.
• available in addition to the FEIE

3.Foreign Tax Credit
Already paying taxes in your new country? This credit helps prevent double taxation by letting you claim those foreign taxes against your US tax bill.

Please note: You can't use this for income you've already excluded under the FEIE.

What tax forms do expats need to use?

Expat tax filing typically requires a lot of paperwork. Each of the forms serves a specific purpose in reporting your worldwide income and foreign financial accounts. Here's what you need to know:

Core Tax Return Forms

• Form 1040: this is your standard US Individual Income Tax Return, the foundation of your tax filing
• Form 2555: used to claim the Foreign Earned Income Exclusion, potentially excluding up to $120,000 (2024) of your foreign earnings
• Form 1116: essential for claiming Foreign Tax Credits on income taxes paid to your country of residence

Foreign Account Reporting Forms

• FinCEN Form 114 (FBAR): required if your foreign accounts collectively exceed $10,000 at any point during the year
• Form 8938: needed when your foreign financial assets exceed certain thresholds – $200,000 for single filers living abroad

Pay careful attention to filing deadlines:

• US Individual Tax Return (Form 1040) – due June 15 for overseas filers
• FBAR – due April 15, with an automatic extension to October 15
• additional extension available until October 15 for Form 1040 if requested
• Form 8938 follows the same deadline as your tax return

We highly recommend creating a calendar reminder for these deadlines and start gathering your documentation early to ensure timely filing.

Overseas retirement taxes

US citizens living abroad must report worldwide retirement income, including foreign pensions and social security benefits from their country of residence. While this might seem daunting, tax treaties between the US and many countries often provide relief from double taxation on retirement income.

For example, provisions in these treaties may allow you to exclude or reduce taxes on certain pension distributions, foreign social security benefits, or retirement account earnings. Understanding how these treaties affect your specific situation is crucial for effective retirement planning.

Visit our guide on expat retirement planning for comprehensive information about managing your retirement accounts and optimizing your tax position while living abroad.

How do I file a US tax return from overseas?

Filing from abroad doesn't have to be complicated. Our team are experts on tax filing US taxes from overseas, we can help you navigate the entire process with confidence. We'll assist you with:

1. Gathering necessary documentation, including foreign income statements and bank account records.
2. Identifying applicable exclusions and credits to minimize your tax burden.
3. Completing and submitting all required forms accurately and on time.
4. Ensuring full compliance with both standard tax requirements and special reporting obligations for expats.

Conclusion

While US citizens living abroad must file their US taxes, navigating the system doesn't have to be overwhelming. Understanding available exemptions like the Foreign Earned Income Exclusion and the Foreign Housing Exclusion can significantly reduce your tax burden. Additionally, making the most of the Foreign Tax Credit can help prevent double taxation of American citizens living abroad on worldwide income.

Remember, compliance involves more than just annual tax returns – it also includes reporting foreign bank accounts through FBARs and staying current with various filing deadlines throughout the year. While the requirements may seem complex, especially with different forms and deadlines, taking a proactive approach to your tax obligations is essential.

Staying informed about your requirements and seeking professional advice when needed are your best strategies for maintaining compliance while maximizing available tax benefits. This approach not only helps you avoid penalties but also ensures peace of mind in your life abroad.