As an American citizen, you’re required to file a US tax return even if you’re living abroad. And if you already owe income tax to a foreign government, you could end up paying twice on the same income. Here’s what you need to know about US double taxation—and how to avoid it.
What Is Double Taxation?
Double taxation means being taxed twice on the same income. Most commonly, corporate shareholders often face double taxation. Americans living abroad can also be subject to double taxation if they owe taxes to both the US and their country of residence.
Is Double Taxation Legal?
You might be wondering whether double taxation is even legal. After all, how can it be fair to pay taxes twice for the same income? Well, fair or not, double taxation is allowed under US law. This is true for corporate shareholders, American expats, and more.
Some activist groups, such as Americans Against Double Taxation, oppose this and hope to remove double taxation from US tax law. For now, however, double taxation remains a reality for many Americans.
Fortunately, in the case of expats, there are often tax treaties, credits, or exclusions in place to help US citizens living or working abroad avoid double taxation. (More on that below.)
Who Is Subject to Double Taxation?
As we’ve already stated, corporate shareholders are the most common targets of double taxation. Specifically, we mean shareholders in a C-corporation.
As a C-corporation generates profits, it must pay income taxes at the corporate level. Then, once the profits are distributed to individual shareholders in the form of dividends, those shareholders must report and pay taxes at the personal level for their piece of the pie.
This means that the shareholders only get to keep what’s left after the income has already been taxed twice, once at the corporate level and again at the personal. As a result, some C-corporations convert to an S-corporation or partnership to avoid double taxation.
But for expats, double taxation typically refers to having their income taxed by the US as well as the country they’ve made their home in.
The US is one of only two countries in the world with citizenship-based taxation. (The other is Eritrea.) Citizenship-based taxation means that all citizens are required to report their worldwide income regardless of where they live or work. And if a US citizen lives in a country that requires them to report their income as well, they could end up facing double taxation.
This applies to “Accidental Americans” as well. For example, if you were born to at least one US citizen parent living abroad—thus becoming an automatic US citizen yourself—you would still be required to file a Federal Tax Return with the IRS even if you’ve never once set foot in the United States.
And once again, this could cause you to be subject to double taxation.
Still with us? Double taxation can be a confusing concept, so just to make sure we’re on the same page, here are some helpful examples.
Double Taxation Examples
Double Taxation Example 1
Mark, a US citizen, moves to the Netherlands to serve as an accountant for the Dutch branch of the international corporation he works for. His salary is $70,000, and he will have to report this amount to the Dutch government. However, because the United States imposes citizenship-based taxation, he will have to report that same $70,000 to the IRS.
Theoretically, this could result in having to shell out two tax payments for a single year’s salary, reducing his take-home income significantly.
Double Taxation Example 2
Lisa moves to Thailand, where she sets up shop as a freelance web developer. She makes $85,000 per year, which she reports to the Thai government. But once again, as a US citizen, she will have to report the same amount on a US Federal Income Tax Return.
Because of this, Lisa could find herself losing an extra cut of her profits through US double taxation.
Double Taxation Example 3
Julio leaves his home in Kansas and moves to Beijing, China to become an English teacher. He earns the equivalent of $30,000 for a year of teaching. And being a US citizen, he must report that same $30,000 to both the Chinese government and Uncle Sam.
However, in all three of these examples, the people involved would almost certainly not be required to actually pay twice. This is because US tax law provides ample opportunities for Americans living abroad to avoid double taxation.
Here’s how.
How to Avoid US Double Taxation as an Expat
1. Tax Treaties
The US has a number of tax treaties in place with foreign countries to prevent US double taxation. The two main types of treaties are:
Income Tax Treaties
Totalization Agreements
…both of which serve to remove the added burden of double taxation for Americans living abroad. These treaties determine which country will tax which sources of income for US citizens overseas.
By looking into the details of any tax treaties your country of residence has entered into with the US, you can see which types of income you should report to your host or to the IRS. For example, you may be required to report dividends to the host country, but pension payments or Social Security benefits to the US.
Typically, to claim a tax treaty benefit, you will need to fill out 8833: Treaty-Based Return Position Disclosure and attach it to your standard tax return. This will let you inform the IRS what treaty article you’re using to modify your tax obligations and avoid US double taxation.
2. Foreign Earned Income Exclusion
For some types of income, you won’t have to bother scanning tedious tax treaties to prevent US double taxation. Expats who pass the Bona Fide Residence Test or Physical Presence Test can use the Foreign Earned Income Exclusion (FEIE) to exclude up to roughly $100,000 of foreign earned income from their US tax obligations—regardless of what country they live in.
Foreign income means income that comes from any non-US source, and earned income refers to income that was received as compensation for a service, such as:
Salary
Wages
Commissions
Bonuses
Tips
Self-employment income
The FEIE cannot be used to exclude unearned income, such as:
Interest
Dividends
Capital gains
Pension payments
Rental income
Unemployment benefits
Distributions from trusts or retirement accounts
3. Foreign Tax Credit
Of all the possible ways to avoid US double taxation, the most reliable is generally the Foreign Tax Credit. In fact, this credit was instituted for the sole purpose of warding off double taxation for Americans living abroad.
So how does it work? Well, if you qualify for the Foreign Tax Credit, the IRS will give you a tax credit equal to at least part of the taxes you paid to a foreign government. In many cases, they will credit you the entire amount you paid in foreign income taxes, removing any possibility of US double taxation.
And in the event that your credit exceeds the amount you paid in foreign taxes, you can carry the excess over to reduce your tax liability for other years.
Regardless, between existing tax treaties, the Foreign Earned Income Exclusion, and Foreign Tax Credit, it’s very rare that an American citizen living abroad will ever be subject to US double taxation.
Get the Help You Need to Optimize Your Expat Tax Strategy
Hopefully, this article has given you a better understanding of what US double taxation is and how you can avoid it as an expat. Still, US tax law is nothing if not complicated—especially for citizens living abroad. It’s easy to make a mistake and either fail to meet your obligations or pay more than you need to.
If you still have questions, we can help. At Greenback Expat Tax Services, we’ve spent years helping expats file their taxes correctly and on time. Just contact us, and we’ll be happy to give you all the answers you need.
We can also assist you with your expat taxes, ensuring you save every dollar you’re entitled to.
Click here to get started on your expat taxes today.
Well, if you qualify for the Foreign Tax Credit, the IRS will give you a tax credit equal to at least part of the taxes you paid to a foreign government. In many cases, they will credit you the entire amount you paid in foreign income taxes, removing any possibility of US double taxation.
While yes, U.S. citizens file a yearly tax return even if they live abroad, U.S. expats don't usually end up owing anything. While there is no overarching tax exemption for U.S. citizens living abroad, there are a variety of mechanisms in place to prevent Americans from being double taxed on foreign-earned income.
You Can Reduce or Eliminate US Taxes for Expats with the Foreign Earned Income Exclusion. For the 2022 tax year, you may be able to exclude up to $112,000 of foreign-earned income from US taxation with the Foreign Earned Income Exclusion! This is the most common way expats reduce or eliminate their US tax liability.
U.S. taxes are based on citizenship, not country of residence. That means it doesn't matter where you call home, if you're considered a U.S. citizen, you have a tax obligation. Your expat tax filing requirement doesn't change even if you're paid by a foreign employer overseas.
The US tax laws for citizens living abroad are essentially the same for those living in America. Expats file the same Form 1040 and are subject to the same US federal income tax rates. While expats can use form 1040, it's always a good idea to read up on the other important tax forms for expats.
Do I still need to file a U.S. tax return? Yes, if you are a U.S. citizen or a resident alien living outside the United States, your worldwide income is subject to U.S. income tax, regardless of where you live. However, you may qualify for certain foreign earned income exclusions and/or foreign income tax credits.
The penalty for not filing your tax return is 5% of the amount of tax shown on the return for each month you have not filed, up to 25% of your tax owing. If you fail to pay, the IRS imposes a ½ percent penalty for each month that the amount remains unpaid, up to 25% of your total tax owing.
The United States is one of the few countries that taxes its citizens on their worldwide income. This means that Americans who retire overseas still have tax obligations.
Do US Expats Pay State Taxes? The answer is yes— If you're living abroad, you might not realize that you're still considered a resident of your home state and are subject to paying state taxes. This includes income tax, property tax, and sales tax.
Key Takeaways. Most expats are able to receive US Social Security payments while living abroad (if otherwise eligible). Social Security payments are considered taxable income and must be reported on a US income tax return. Totalization Agreements can help expats avoid double taxation and reduce their US tax burden.
Further, expatriated individuals will be subject to U.S. tax on their worldwide income for any of the 10 years following expatriation in which they are present in the U.S. for more than 30 days, or 60 days in the case of individuals working in the U.S. for an unrelated employer.
If you're an expat and you qualify for a Foreign Earned Income Exclusion from your U.S. taxes, you can exclude up to $108,700 or even more if you incurred housing costs in 2021. (Exclusion is adjusted annually for inflation). For your 2022 tax filing, the maximum exclusion is $112,000 of foreign earned income.
In general, yes — Americans must pay U.S. taxes on foreign income. The U.S. is one of only two countries in the world where taxes are based on citizenship, not place of residency. If you're considered a U.S. citizen or U.S. permanent resident, you pay income tax regardless where the income was earned.
Expatriation is the process of relinquishing U.S. status. It includes both U.S.Citizens and Green Card Holders (aka Legal Permanent Residents) who meet the definition of a Long-Term Resident (LTR). The baseline perspective is that formal expatriation rules apply to US Citizens and Lawful Permanent Residents.
The most convenient way to maintain a functional U.S. address while living abroad is to use a virtual mailbox service that you can activate online. This service scans, holds, and offers mail forwarding services for a few dollars per month.
Eritrea is notable as the only country in the world, besides the United States, to tax its citizens on the basis of their citizenship. Yep, Eritrea and the United States are the only nations on planet earth to have citizenship-based taxation. If you're a US citizen living abroad, you're still on the hook to Uncle Sam.
You meet the physical presence test if you are physically present in a foreign country or countries 330 full days during any period of 12 consecutive months including some part of the year at issue. The 330 qualifying days do not have to be consecutive.
Filing the 1040 is generally due each year on April 15th (April 18th in 2023) with an automatic extension to June 15th for Americans residing abroad, but if any taxes are due, interest is calculated starting April 15th up to payment date. You can request an additional extension by filing Form 4868.
Some American expats who work abroad may also need to pay US social security and Medicare taxes on their earned income, especially if they are self-employed or work for a US-based employer. For the 2022 tax year, the rate for expat employees is 7.65%. For self-employed expats, however, the total is double, at 15.3%.
Key Takeaways. Expats are more likely to face an IRS tax audit than Americans living in the US. By avoiding common IRS red flags, you can reduce your chances of being audited. Knowing what to expect from an audit will help you remain calm and respond appropriately.
If a foreign employer employs you, you will generally NOT be required to pay into US Social Security. If you are self-employed, you will generally be required to pay a self-employment tax, which covers the Social Security and Medicare taxes you would generally split with a US employer.
TurboTax. TurboTax is designed specifically for US taxpayers living and working in America. This means that their support for US Expats is limited because they are “Tax Prep USA Support.” So questions like “how to pay us taxes from abroad” may be tricky for TurboTax to answer.
If you leave the U.S., we will stop your benefits the month after the sixth calendar month in a row that you are outside the country. You can make visits to the United States for specific periods of time, depending on how long you've been outside, to continue receiving your benefits.
You must have worked and paid Social Security taxes in five of the last 10 years. • If you also get a pension from a job where you didn't pay Social Security taxes (e.g., a civil service or teacher's pension), your Social Security benefit might be reduced.
They remain on your record in the country where they were earned. Therefore, it is possible for a person to qualify for a separate benefit payment from each country. You may also contact us by email at International.policy@ssa.gov.
Yes, eventually the IRS will find your foreign bank account. When they do, hopefully your foreign bank accounts with balances over $10,000 have been reported annually to the IRS on a FBAR “foreign bank account report” (Form 114).
If you are a U.S. citizen or resident alien living or traveling outside the United States, you generally are required to file income tax returns, estate tax returns, and gift tax returns and pay estimated tax in the same way as those residing in the United States.
Foreign Earned Income Exclusion is increasing to $120,000
Every year, the IRS adjusts the FEIE to account for inflation. American expats will be happy to know that for the calendar year 2023, for returns you'll file in 2024, the IRS has increased the FEIE from $112,000 to $120,000.
To acquire the full amount, you need to maximize your working life and begin collecting your check until age 70. Another way to maximize your check is by asking for a raise every two or three years. Moving companies throughout your career is another way to prove your worth, and generate more money.
The top three countries for American expats are Mexico, Canada, and the United Kingdom, which are all popular for their proximity to the States and lower cost of living.
Do I Need to Notify Social Security If I Move to Another State? Regardless of whether you receive SSDI or SSI benefits, it's essential to inform the Social Security Administration (SSA) if you move to another state.
Do US expats living in the UK also have to file US taxes? Yes, due to the US's citizenship-based taxation system, all US citizens and permanent residents must report their worldwide income.
Depending on where you move to or travel to, you may not enjoy the standard of service that you've grown accustomed to from the U.S. postal service. You may need a U.S. mailing address to keep some other U.S. services. If you want to keep your U.S. bank account, you'll still need to maintain a U.S. address.
You must apply for a re-entry permit (Form I-131) before you leave the United States, or your permanent residence status will be considered abandoned. A re-entry permit enables you to be abroad for up to two years. Apply for a re-entry permit.
When it comes to U.S. taxes, being an expat or expatriate has a clear-cut meaning — specifically a taxpayer who has given up their U.S. citizenship or abandoned their green card. We'll get to more about what it means to be an expatriate according to this definition in a moment.
If you are a resident of both the United States and another country under each country's tax laws, you are a dual resident taxpayer. If you are a dual resident taxpayer, you can still claim the benefits under an income tax treaty.
The capital gains tax applies to profits made from the sale of investments, including properties, and is applicable to Americans residing abroad as per US tax laws. The IRS provides tax credits and exclusions that many expats can use to avoid paying a capital gains tax.
Eritrea is notable as the only country in the world, besides the United States, to tax its citizens on the basis of their citizenship. Yep, Eritrea and the United States are the only nations on planet earth to have citizenship-based taxation. If you're a US citizen living abroad, you're still on the hook to Uncle Sam.
If you're an expat and you qualify for a Foreign Earned Income Exclusion from your U.S. taxes, you can exclude up to $108,700 or even more if you incurred housing costs in 2021. (Exclusion is adjusted annually for inflation). For your 2022 tax filing, the maximum exclusion is $112,000 of foreign earned income.
Especially when the taxpayer resides in a foreign country with a lower cost of living and has amassed a significant amount of non-recognized gains – this is one strategy some taxpayers may qualify to use to pay zero income tax.
Those include Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, and Wyoming. It's no coincidence that these eight are also no personal income tax states. (Although, Tennesee has a limited tax on certain dividends and capital gains, and New Hampshire taxes interest and dividends income.)
Introduction: My name is Kerri Lueilwitz, I am a courageous, gentle, quaint, thankful, outstanding, brave, vast person who loves writing and wants to share my knowledge and understanding with you.
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