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Imagine this: you’re living your dream life abroad, soaking up a new culture. But then tax season rolls around, and suddenly, you’re hit with a double whammy – filing taxes in your new country AND back in the US.
Overwhelming, right?
Well, we’ve been there — and that equipped us with enough experience to put together this guide to help you navigate the world of US expat taxes and explore tax-saving strategies to reduce your overall tax bill. Our goal? To make tax time a breeze (well, maybe not a breeze, but at least less of a hurricane!).
Move to a low-tax country
The country you move to also affects how much tax you pay globally. In general, expats never pay more than the higher of the two tax regimes, between the US and the country where they live.
Still, Americans who want to move abroad and are flexible about where they relocate to should research the tax rates and rules of their possible destinations before they move. For example, moving to the Netherlands may result in a high tax bill if you become a tax resident there. There are also many countries that don’t charge income tax, or they charge it at a very low rate, such as the UAE or Singapore.
Claim exclusions to reduce your tax bill
The IRS offers several exclusions and deductions for expats, one of which is the Foreign Earned Income Exclusion.
The FEIE lets Americans abroad who pass either the Physical Presence Test or Bona Fide Residence Test exclude a portion of their foreign-earned income from federal taxation. For the tax year 2023 (the taxes you file in 2024), you can exclude up to $120,000. For 2024, it increases to $126,500.
Bonus tip:
Expats who pay rent for their home abroad and claim the FEIE can also claim the Foreign Housing Exclusion. The FHE allows them to exclude income based on the portion of their housing costs that exceed what the IRS considers a base housing amount if they earn over the $100,000 FEIE threshold. For example — if you rent an apartment in Rome for $2,000 a month, with the FEIE and Foreign Housing Exclusion, you might be able to exclude, say, $4,800 per year based on your rent that exceeds the annual base ($19,200). Every bit counts!
Claim tax credits
Expats paying taxes abroad can claim the Foreign Tax Credit. This tax credit gives them a $1 US tax credit for every dollar that they’ve already paid in tax abroad.
While you can’t claim the FTC on the same income as the Foreign Earned Income Exclusion, expats who earn over $100,000 can claim both, claiming Foreign Tax Credits for taxes already paid abroad on their income above this Exclusion limit.
Alternatively, the Foreign Tax Credit can sometimes be a good option instead of claiming the Foreign Earned Income Exclusion for expats who pay more income tax than they would owe to the IRS, as they can claim more US tax credits than they need and save the excess credits for the future.
You can only use the FEIE for earned income, like salaries, self-employment income, and bonuses. However, the FTC comes in handy if you have any type of passive income, such as dividends, interest, capital gains, rental income, etc.
Note:
Expat parents may also claim the Child Tax Credit and/or the Child and Dependent Care Credit, too.
Move states before you leave
Some expat tax-saving strategies can come into play before expats have even left the US. The state you live in before you move abroad can greatly impact how much tax you pay after you’ve left.
For example, some states require former residents to keep paying taxes unless they can prove that they no longer have any ties to the state or that they’ll never return to live in the state again. As such, if you live in one of the more reluctant-to-let-go states, it may be worth moving to another US state before you expatriate.
Bonus tip:
Consider a strategic move to a more expat-friendly state with lower taxes or no state income tax at all, like Florida, Texas, or Nevada.
Choose the right filing status if married to a non-US citizen
Married to a foreign citizen? Your filing status can make a big difference. If your nonresident alien spouse earns more than you, filing separately will keep their worldwide income out of the US tax system.
If the spouse is earning less (or isn’t earning at all), on the other hand, it might be beneficial to file jointly and so take advantage of both Personal Exemptions and Foreign Earned Income Exclusions.
Finally, if you have US citizen dependents and are responsible for more than 50% of household costs, you may be able to disregard your nonresident alien spouse altogether for US tax purposes, and file as head of household.
Remember:
Consult a tax advisor to determine the best filing strategy for your situation.
Don’t forget to file the FBAR
Expats must also report their foreign bank and investment accounts. This includes any accounts they have control or signatory authority over, such as joint or company bank accounts.
This requirement applies if the total combined balance of all their foreign accounts is more than $10,000 at any time during the tax year. The annual FBAR requirement can be satisfied by filing FinCEN form 114, often called an FBAR or Foreign Bank Account Report online.
Tax professionals are your safest bet
So, when preparing your taxes, what can possibly help reduce the amount of taxes that you owe? You can take many paths to this goal, but not all of them may be right for your situation. US taxes for expats are often more complex than those of Americans living stateside as there are more requirements and provisions to consider. Like all tax filings stateside or abroad, the devil is in the details.
If you’re willing to spend time on research and preparation you may be able to file yourself and achieve an optimized outcome. Many expats will end up paying little or no US tax, assuming they enact the most beneficial tax-saving strategies for their circumstances.
Consulting with a tax advisor specializing in US expat taxes is crucial to ensure you’re following all the rules and taking advantage of every tax break you qualify for. With careful planning and the right strategies, you can navigate the world of expat taxes and keep more of your hard-earned income to fuel your international adventures!
