Earning a promotion is exciting – and accepting a new position overseas can be even more thrilling.
Living in a new country grants you the opportunity to explore new places, soak in new cultures, and maybe even learn another language. But before you accept that job offer abroad, it’s important to weigh all of your financial considerations, including the tax implications.
Here’s everything you need to know about your US tax implications when you’re living in another country.
You May Owe Taxes in More Than One Country
As a US expat, your taxes are a little more complicated than when you were just a US citizen living within the country. Depending on where your work stations you, you could end up owing taxes to your new home country, as well as to the US.
Most foreign countries tax you based on residency, and not on citizenship. Usually to become a resident, you need to live in a country for a certain amount of time – typically several months, although it varies from country to country. Once you meet this criteria, you’re considered a resident and owe federal income taxes.
The catch is, the US charges tax based on citizenship, not on residency. So, even if you’ve lived outside of the US for an entire tax year, you still have to file US taxes as long as you’re a legal citizen (or Green Card holder).
If you’re wondering if this could lead to double taxation, don’t worry. We’ll explain how to avoid that.
How to Prevent Double Taxation as a US Expat
It’s possible to earn an income abroad and then owe taxes on this income to the foreign country you’re living in, as well as to the US. The good news is that the Internal Revenue Service (IRS) offers two main tax breaks designed to help US expats avoid paying double taxes on the same income.
The tax breaks include the Foreign Earned Income Exclusion and the Foreign Tax Credit.
How the Foreign Earned Income Exclusion Works
The FEIE lets US expats exclude a portion (and in some cases, all) of their foreign income from their US tax returns. They can only exclude income earned through wages, salaries, bonuses, and commissions – they can’t exclude passive income. This lowers their US tax bill and in some cases, may wipe it out entirely.
For your 2021 taxes, you can exclude up to $108,700 in foreign earned income from your US tax bill using this tax break. For 2022, the threshold is $112,000.
So, if your company moves you abroad to Japan and you make $96,000 in foreign income, you could exclude this entire amount from your US tax return using the FEIE, and eliminate your tax bill altogether.
To claim the FEIE, you have to pass one of the tests below:
- – You must prove you are a bona fide resident of a foreign country. If you meet a foreign country’s residency requirements for the entire tax year, you’re eligible for the FEIE. For instance, if you lived in Barcelona from January 1st through December 31st in 2021 and became a resident of Spain, you’d fulfill this requirement of the Bona Fide Residence Test for 2021.
- – You lived outside of the US for more than 330 days. If you were in one or more foreign countries for over 330 days during a 12-month period that fell within the tax year, you’re eligible for the FEIE. For instance, if you travelled across Asia in 2021 and were only in the US for 21 days, you’d likely pass this Physical Presence Test.
If you don’t pass at least one of these tests, you can’t claim the FEIE. But you may be able to claim the next credit.
How the Foreign Tax Credit Works
The FTC works by reducing your tax bill by one dollar for every dollar you’ve paid in foreign taxes that year. This is a good option if you are already paying foreign taxes, especially if the country you’re living in charges a higher tax rate than the US.
For instance, say you earn $75,000 in Germany and pay $20,000 in income taxes there. Using the FTC, you can reduce your US tax bill by $20,000. So, if your US tax bill were $18,000, your $20,000 deduction would more than cover your tax liability.
You can only claim the FTC if:
- – The foreign taxes you paid were imposed by the foreign country
- – You have already paid this tax bill or it has accrued (and will be paid in the future)
- – You did not profit from paying the foreign tax
- – The US does not have sanctions against the country where you paid the tax
The Foreign Housing Exclusion May Save You Even More on Your Tax Bill
When you live abroad, it’s also possible to deduct housing costs from your US tax bill. If you pay for your housing with money you have earned from your employer (such as your wages or salary), you can claim this tax break on Form 2555 as a housing exclusion. If you pay for your housing with income earned from self-employment, then you must claim this tax break as a deduction instead, this time on Form 1040. (The amount you exclude depends on where you live. Deduction limitations by location can be found on the instructions for Form 2555.)
Using this tax break, you can deduct rent, repairs, non-telephone utilities, furniture rental, parking costs, and property insurance.
If your employer reimburses you for your housing costs and expenses, this raises your taxable income and thus could raise your tax bill.
What are tax equalization packages?
When your employer offers you a job outside the country, they may also offer a tax equalization package. This program ensures the taxes you pay outside of the country do not exceed what you would pay living in the US. If your taxes do happen to exceed this amount, then your employer would reimburse you for the difference.
Read more: Employee Expatriate Tax Services
Other Tax Considerations When Accepting a Job Offer Abroad
If your US employer reimburses you for any personal expenses, such as relocation expenses, educational costs, spousal allowances, home leave, or car allowances, these reimbursements increase your taxable US income – potentially sticking you with a larger tax bill.
Get Ahead of Tax Requirements Before Moving
If you’re considering a job offer abroad with your company, the best way to mitigate your tax liability is to talk with a tax professional before your move. Bright!Tax has helped thousands of US expats with their taxes, and we can help you understand your new tax requirements in advance.
Bright!Tax will work with you to minimize your tax liability by helping you understand what expenses and reimbursements affect your tax bill. And when the time comes, we’ll help you apply for any eligible credits to make sure you are filing in the most tax-efficient manner possible.
Connect with a Bright!Tax CPA today to get answers to all of your tax-related questions about moving abroad.