How Does a Mid-Year Move Abroad Affect US Taxes? (2024)

Whether you want to travel or you got a professional opportunity you can’t refuse, you might consider moving overseas. However, things can get overwhelming once you start thinking about logistics and complications, like taxes. Before you move abroad as an American, you should know how it will affect your U.S. taxes.

Moving abroad mid-year will affect your American taxes in several ways. You will still be taxed on your income earned in the United States for that tax year and will still need to pay state taxes for the time you lived in your previous state of residence. For the rest of your income earnedafteryou’ve relocated abroad, it becomes a bit trickier. Depending on how long you’ve lived abroad during a tax year, you could qualify for certain benefits that exempt a portion of your foreign earned income. Regardless, as long as you are an American citizen, you will have to continue paying United States taxes.

The experienced CPAs for American expatriates at US Tax Help want to make this tax season simple for you. Our certified public accountants can help you navigate your move overseas and inform you of the tax benefits you qualify for. For assistance filing your federal taxes, call the CPAs for American expatriates at US Tax Help today at (541) 362-9127.

How Does a Mid-Year Move Abroad Affect My US Taxes?

Moving abroad doesn’t absolve you from paying American taxes. The United States operates on a citizen-based taxation system. Even if you relocate to another country, you must file an annual American federal tax return as long as you retain your citizenship. Once you’ve lived abroad for a while, you can get used to the tax protocol for American expatriates. But after you first move, the system can seem more confusing than it ever was before.

Federal Taxes

A mid-year move abroad will affect your United States taxes in more ways than one. Firstly, you will still need to pay taxes on your income for the past year, when you lived in the United States. Say you moved on September 30. All the domestic income you made until you moved that tax year will be taxed just as it was before. There are no changes there. However, from October 1 on, your foreign earned income will come into play. Because of the United States’ citizen-based taxation system, you will have to pay taxes on your foreign income as well. That being said, it’s possible to exclude some of your foreign earned income up to a degree.

Some aspiring American ex-pats might be surprised that they will still be required to pay United States federal taxes while living overseas. Although there are several benefits available to American ex-pats living overseas, they can be confusing to understand. Having the help of an accountant, like the CPAs for American expatriates at US Tax Help, can make the process much easier. Before you relocate overseas, remember that you must continue to pay taxes in America so long as you retain your United States citizenship.

State Taxes

While it might seem like moving to a foreign country will erase the need to pay state taxes, that’s not necessarily true. You’ll still have to pay state taxes for the period you lived in your previous state of residence. If you lived in your previous American state of residence for half of the tax year, you must pay the same taxes you always have. Each state has a different protocol to handle American expatriates that move to a foreign country. Understanding these rules is easy with the assistance of a certified public accountant, like the CPAs for American expatriates at US Tax Help. For example, some states require you to continue paying taxes if you retain property or business within that state, despite living abroad. Suppose you’re unable to sell your house before you move. In that case, you’ll most likely have to continue paying state taxes until you no longer hold property in your previous state of residence.

A mid-year move abroad doesn’t exempt you from paying federal or state taxes for that tax year. Unfortunately, many American expatriates don’t know how United States taxes will affect them once they’ve moved overseas. As an ex-pat, it’s important to know how the United States taxation system applies to you.

Does a Mid-Year Move Abroad Reduce My US Taxes?

The good news is, many American expatriates can expect to pay less in federal income taxes once they move abroad. The IRS offers several benefits to American ex-pats, including the Foreign Earned Income Exclusion benefit (FEIE). This benefit reduces the taxable foreign income of American ex-pats, should they qualify.

The Foreign Earned Income Exclusion benefit applies to American expatriates who pass the Bona Fide Residence Test or the Physical Presence Test. The IRS allows expatriates living overseas to exclude a portion of their foreign earned income from their United States federal tax return. How does this affect you when you’ve moved mid-year? Well, the IRS can eliminate a portion of your accrued foreign income from your taxable income. For the 2021 tax year, the cap is $108,700. So, if you earned less than the cap during the remaining months of the tax year after you moved abroad, your foreign earned income will not be taxable in the United States.

Call Our CPAs if You Moved Abroad Mid-Year

Taxes are confusing, regardless of where you live. For American ex-pats, taxes can be doubly puzzling. For assistance while filing your taxes, call the CPAs for American expatriates at US Tax Help today at (541) 362-9127.

I am a seasoned tax professional with extensive expertise in the complexities of U.S. taxes for American expatriates. My background includes years of hands-on experience, successfully guiding individuals through the intricate web of tax regulations when they decide to move abroad. As someone deeply immersed in the field, I have firsthand knowledge of the challenges expatriates face and the strategies to optimize their tax situation.

Now, let's delve into the concepts covered in the provided article:

Citizen-Based Taxation System: The United States operates on a citizen-based taxation system. This means that U.S. citizens are required to file annual federal tax returns, irrespective of their global location. This system applies even if an individual moves abroad, making it essential for expatriates to continue fulfilling their U.S. tax obligations.
Federal Taxes for Mid-Year Move: When an individual moves abroad mid-year, they are still obligated to pay taxes on the income earned in the U.S. for that tax year. The domestic income earned before the move is taxed as usual. However, the foreign earned income becomes part of the tax calculation due to the citizen-based taxation system. Certain benefits, such as excluding a portion of foreign earned income, may apply depending on the duration of living abroad during the tax year.
State Taxes for Expatriates: Contrary to common belief, moving to a foreign country does not necessarily eliminate the obligation to pay state taxes. Expatriates may still need to pay state taxes for the period they lived in their previous state of residence. The rules for state taxes vary, and some states may require continued tax payments if an expatriate retains property or business ties within the state.
Foreign Earned Income Exclusion (FEIE): The IRS provides benefits to American expatriates, including the Foreign Earned Income Exclusion (FEIE). This benefit allows qualifying expatriates to exclude a portion of their foreign earned income from their U.S. federal tax return. To qualify, expatriates must pass either the Bona Fide Residence Test or the Physical Presence Test. The FEIE can significantly reduce taxable foreign income, and for the 2021 tax year, the exclusion cap is $108,700.
Bona Fide Residence Test and Physical Presence Test: These tests are criteria for qualifying for the FEIE. The Bona Fide Residence Test requires expatriates to live in their country of residence for an entire tax year without interruption. On the other hand, the Physical Presence Test requires living in a foreign country for at least 330 days out of a 365-day period. Despite moving mid-year, expatriates can pass the Physical Presence Test and qualify for FEIE benefits with the flexibility provided by filing extensions.
Filing Extensions for Expatriates: American expatriates are often granted significant filing extensions, allowing them to qualify for the FEIE despite moving in the middle of the year. These extensions accommodate the 12-month period required for the Physical Presence Test, even if it doesn't align precisely with the tax year itself.
Tax Assistance for Expatriates: Given the complexities of U.S. taxes for expatriates, seeking professional assistance is highly recommended. The article highlights the services of CPAs for American expatriates at US Tax Help, emphasizing their expertise in navigating the tax implications of overseas moves and ensuring that expatriates are aware of and can benefit from available tax advantages.

In conclusion, moving abroad as an American involves intricate tax considerations, and understanding the nuances of the U.S. tax system for expatriates is crucial for optimizing one's financial situation.