Answering Your Most Asked Questions About US Taxes As A US Citizen Living Abroad

Taxes are scary. And confusing.
We get that.

As US tax experts for US expats, we’re answering your most-asked questions below. These answers are linked to longer articles where we’ve shared more information.

Hope this helps. Our team is always here to help you file your taxes correctly (and also save money).

Does the US have a tax treaty with New Zealand?

Yes, there is an income tax treaty in effect between the governments of the United States and New Zealand which overrides the income tax law of each country. The inter-governmental agreement (IGA) for the implementation of the Foreign Account Tax Compliance Act (FATCA) rules was implemented on 3 July 2014. The main objective of the treaty is to provide relief to the citizens from double taxation.

Do US citizens have to pay taxes if they live abroad? / Do I have to pay American taxes while living abroad?

Wherever you are at this time, if you are an American living overseas as a US citizen, you must file US taxes on your overseas income. According to current US tax law, the only way to avoid filing a US tax return and paying US taxes abroad is to renounce your citizenship. US citizens who reside abroad but fail to file US taxes may be subject to fines, interest charges, or even legal repercussions.

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Do American expats have to pay double taxes? / Do Americans living abroad have to pay taxes twice?

If a citizen of the United States is eligible for the Foreign-Earned Income Exemption, they are not subject to double taxation when they earn income abroad. Expats should be aware that US taxes are determined by citizenship, not the taxpayer’s location. Therefore, taxpayers need to pay taxes on income earned outside the United States.

While it can be a little challenging to comprehend taxes on income made abroad, there are certain benefits to doing so. Tax rates that are more lenient than those in the US are available in a lot of other nations. Many expats might meet the criteria for exemptions, exclusions, credits, and deductions; the most beneficial of which is the Foreign-Earned Income Exemption (FEIE).

How can I avoid U.S. taxes while living abroad?

If you are a US citizen or holder of a green card, you must file an annual tax return and pay the related taxes even if you are living overseas. However, there are unique tax credits, deductions, and exclusions available to Americans residing overseas that can help you avoid double taxation and lower your US tax burden.

The Foreign-Earned Income Exemption (FEIE) allows U.S. taxpayers to exclude about $112,000 from their taxable income if that income was earned from an overseas source.

The Foreign Tax Credit is another clause that helps in avoiding double taxation. As a result, Americans receive a tax credit equal to the amount of taxes they have already paid or still owe to foreign governments. This rule is complicated though, because it only applies to specific kinds of income and because each overseas country has its own special considerations.

How long do I have to live outside the US to not pay taxes?

The US government taxes its citizens based on their citizenship, not where you live and work. Therefore, you are still obligated to file a US federal tax return even after moving to another country.

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What is the tax exemption for US citizens living abroad?

The only method for an American citizen to avoid filing a tax return and paying the associated taxes under the existing U.S. tax regulations is to renounce their citizenship. If you think this process will be simple, be aware that it is usually time-consuming and expensive. The requirements for renouncing citizenship are as follows:

  1. Schedule a visit with an American embassy, which can take some time given that the process for handling these requests is constantly overburdened.
  2. You must quit your citizenship in front of an embassy ambassador or consular official.
  3. You must fill out and submit a statement of voluntary renunciation of U.S. nationality to the Department of State.
  4. You must wait for confirmation that the process of revoking your citizenship was successful, which could take weeks or months.
  5. Any applicable expatriation taxes must be paid to the IRS.

How much tax do US expats pay?

In accordance with the US tax code, income earned abroad is subject to the same marginal tax rate as domestic income.

This implies that if your total income exceeds any of the following minimum thresholds—regardless of where the income was obtained (and in what currency)—you must file a US federal tax return this year as an American living abroad.

Individuals filing as citizens:
$12,550 for those under 65 and $14,250 for those over 65

For individuals filing jointly as married couple:
if neither spouse is older than 65, $25,100
If both spouses are over 65, the combined amount is $26,450.
if both spouses are 65 years of age or older, $27,800

For citizens filing as married but separately: $5 (No, there was no typo here! It truly costs $5.)

$400 for those filing as self-employed.

Citizens filing as the head of household must pay $18,800 if they are under 65 and $20,500 if they are over 65.

For citizens filing as a qualified widow or widower with a dependent child, the following amounts apply: $25,100 if under 65; $26,450 if 65 or older.

The IRS still requires you to submit a tax return even if you did not live in the US at any point during the year and received all of your income from a foreign country.

Note: You might also need to file a state tax return, depending on where you lived before moving abroad. This could make your yearly tax duties even more difficult. Consult an expat tax expert if you’re unsure whether you need to file a state tax return.

What happens if US citizens don’t file taxes while living abroad?

No matter where in the world they may reside, the US taxes all of its residents on their worldwide income.

If US citizens fail to file US taxes while living abroad, they may incur fines, interest charges, or perhaps legal consequences. The IRS imposes penalties for both late filing and late payments. More severe legal ramifications may be relevant if your failure to file was deliberate i.e. if you intentionally avoided your US tax obligations while living abroad.

Failure to File Penalty: 5% of the unpaid taxes for every month the tax return is late, up to 25%
Failure to Pay Penalty: 0.5% of the unpaid taxes for each month that the tax payment is past due, up to a maximum penalty of 25%
More than 60 Days Late: The maximum for this penalty is 25% of your unpaid taxes

Fortunately, the IRS does provide a means for Americans residing abroad who were unaware that they had to file US taxes to close the gap without incurring penalties. The Streamlined Filing Compliance Procedures make this easier and less expensive to become compliant because you need to file the most recent three years’ worth of federal tax returns and six years’ worth of FBARs, irrespective of how many years you’ve missed.

Does a U.S. citizen living abroad have to file a tax return?

If you are a citizen of the US, you must follow the same protocols for filing and paying taxes whether you live in the country or abroad. You are still required to disclose your worldwide income, regardless of whether you are a permanent resident or a citizen of another nation.

All US citizens and holders of green cards who made more than $12,550 (globally, in any currency) in 2021, $400 from self-employment, or $5 from any source if they were married to a foreigner but filed separately are required to file a US federal tax return outlining their worldwide income.

If you fail to submit your US or state taxes while living abroad, just like any other US resident, you may be subject to a penalty even if you do not owe taxes. A failure to submit penalties might cost you thousands of dollars, prevent you from getting benefits that would reduce your tax liability, or both.

Without requesting an extension, you are given an automatic 2-month extension to file your return. The automatic extension of two months for calendar year returns extends to June 15th. To avoid incurring interest, you must pay any unpaid taxes by April 15th.

What should I do if I’ve never filed taxes?

Do not be alarmed if you haven’t submitted a US tax return because you were unaware that it was necessary. The IRS provides an amnesty program to help foreigners in complying with the law without fear of consequences. It’s called the Streamlined Filing Compliance Procedures. In order to use this program, you must:

  • Self-certify that you did not file out of purposeful unwillingness, but rather because of ignorance.
  • You must submit your last three unfiled income tax returns and pay any taxes due (with interest)
  • File FBARs for the previous six years.

By doing this, you will be in conformity with the IRS and could be eligible to receive any overdue refunds. To reduce or completely eliminate your tax liability, you could even be eligible to use the Foreign Tax Credit or Foreign Earned Income Exclusion.

Pro tip: Do not delay filing and keeping your expat taxes updated if you are behind. Generally speaking, the IRS amnesty legislation is only a choice if you request it. If the IRS notices that you’ve been negligent in your tax filing and reaches out to you first, you will likely lose any chance of amnesty and will have to pay the penalties for failing to file.

Keep Tax Obligations From Complicating Your Life Abroad

An American who lives and works abroad, whether they are hired by a corporation or on their own, undoubtedly has a lot on their mind already without having to worry about the American tax system. You can reduce your concerns and avoid the kinds of fines and penalties that can befall anyone whose returns contain errors or are missing information by speaking to US Tax Pros. We’re here to make your life easier!

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