The US is the only developed nation that taxes based on citizenship rather than residence. As a result, US citizens, wherever in the world they live, always have to file a tax return and pay tax to the IRS on their worldwide income.
If you live abroad though, you'll most likely have to pay taxes in your country of residence as well, presenting the risk of being taxed on the same income twice. Thankfully, there are several mechanisms that allow you to avoid paying tax twice.
But how do the top US expat destination countries local tax regimes compare to ours? Below is a summary. Countries are listed in order of the estimated number of US expats who live there.
1) Mexico (1,000,000)
A land of beaches, ancient ruins, and colorful markets. Mexican taxes are fairly straightforward, although lower earners may pay a higher rate than in the US. High earners may pay a little less on the other hand, as the highest rate is just 35%. One difference compared to the US is that Mexico has no capital gains tax, so if you sell a property any profit is considered income.
2) Canada (687,000)
With tax rates ranging from 15% to 33% but no personal exemption, north of the border lower earners will pay a little more than in the US, and higher earners a little less.
3) The UK (United Kingdom - 224,000)
In the land of fish and chips very low earners pay very little tax, but mid-range earners pay a relatively high rate of 40% starting at around $60,000. They also have an unusual tax year, in that it runs from April 6th to April 5th, based on a historical English legal year that was used from the twelfth century until 1751, in case you were wondering (!)
Personal income taxes have risen in 21 out of 34 Organization for Economic Cooperation and Development (OECD) countries in recent years.
- Kelly Phillips Erb, Forbes.
Germany is home to an estimated 211,000 Americans. German taxes are low for lower earners (15% up to around $60,000) then suddenly jump to 42%. There is also a 'solidarity tax' of a further 5.5% of the income tax owed, introduced after West and East Germany re-unified to modernize the formerly communist East.
5) Israel (184,000)
Like most of the European countries, lower earners in Israel typically pay less tax compared to in the US, while high earners pay a lot more, with the top rate an eye-watering 50%.
6) Italy (169,000)
It's easy to understand the draw of living in Italy, with its fascinating history, culture, climate and cuisine. Italian income taxes are pretty high though, starting at 23% and heading swiftly up to 43%. There are also regional and local taxes, so life in Italy certainly comes with a price.
7) China (including Hong Kong – 140,000)
The tax system in mainland China is complicated in a way only an old world communist could have designed. As an expat, there are different tax rates not only depending how much you earn, but also what sort of income it is (e.g. employment, self-employment, rental), and how long you've been resident in China for. Hong Kong on the other hand is considered a Special Administrative Region and has a simple and very low tax regime.
8) The Philippines (105,000)
Filipino tax rates start at 5% but quickly rise to 30%. Low earners will pay more tax than they would in the US, however with the highest rate 32%, higher earners will pay less than in many countries.