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Most countries in the world operate on a location-based tax regime, meaning that the country where you are physically located determines which country you pay taxes in. Unfortunately, the U.S. is one of two exceptions in the world. The U.S. uses a citizenship-based tax system. This means that, if you are a U.S. citizen living abroad, you will have to file a tax return every year, regardless of if and where you earned income.
If you have a foreign bank account or assets overseas, your tax reporting requirements in the U.S. could change. In its simplest form, if you’re a U.S. citizen with a foreign bank account above $10,000, you’re likely to be required to file an FBAR (Foreign Bank and Financial Accounts Report) to the Financial Crimes Enforcement Network. If you have foreign assets totaling over $50,000 in any given year, you likely will need to file a FATCA (Foreign Account Tax Compliance Act) form along with your taxes. Penalties for not filing can be severe — up to $100,000 or 50% of the balance in the account at the time of the violation, whichever is greater.
If you are a resident in another country, you will also likely need to file and pay taxes on your worldwide income in your country of residence. To avoid double taxation, you could potentially claim the Foreign Earned Income Exclusion (FEIE), which allows expats to exclude $108,700 of income earned overseas from their U.S. tax obligation in 2021. There are two ways to claim the FEIE, the most common of which is the Foreign Presence Test, which requires you to demonstrate you have spent 330 full days abroad during a 12-month period, including some part of the year in question.
You may also qualify for the Foreign Tax Credit, which would allow you to reduce your U.S. tax obligations beyond the FEIE, if you have paid tax to a foreign government. The Foreign Tax Credit allows you to offset taxes in the U.S. dollar for dollar based on what you have already paid in tax to another country. What type of income does and does not qualify is quite complex, and changes country by country. The IRS has a good overview for how to qualify for the FEIE and how to qualify for the Foreign Tax Credit.
To make sure your needs are covered, we recommend one of the three following options:
Check with your tax specialist to be sure he/she understands these requirements and is able to file on your behalf
Engage an expat tax specialist directly
Work with a concierge platform to connect with vetted experts across multiple specialties to get all of your relocation needs met
If you decide to work with an expat tax specialist, StartAbroad can confidently recommend Bright!Tax.
Click THIS link to schedule a free call with a Bright!Tax expat tax specialist to get started.
Your tax filing requirements will change when you move internationally. Although engaging an expat tax specialist or a concierge platform like StartAbroad could seem to be an expensive route, it could ultimately prove to be a small expense compared to the significant penalties or increased taxes you could end up paying by not doing it right. Regardless of whether you decide to engage an expat tax specialist every year after your move, it is prudent to do so your first year abroad at least. Work with him/her to develop a plan to reduce your global tax burden over time, and go from there.
StartAbroad is here to help
Get a free consultation with international move experts at StartAbroad to discuss your situation and learn what’s right for you. StartAbroad provides a comprehensive suite of services to make your move abroad as easy and painless as possible. StartAbroad’s international moving experts have over 20+ years of experience living abroad and helping others get settled. Get a free consultation at www.startabroad.com to discuss your situation and learn what’s right for you. Ask us about our holistic concierge package, and our medical, visa, and tax solutions!