In 2022, an estimated 4.4 million U.S. citizens lived abroad. If you are a U.S. citizen or everlasting resident, likelihood is you still want to file federal income tax returns in case your gross earnings exceeds a specific amount.
“There’s this idea that Americans can just pick up their little laptops and move their office, you know, to the coast of Spain without telling anyone and unfortunately, it doesn’t actually work like that,” Arielle Tucker, CPA and IRS Enrolled Agent and host of the podcast Passport to Wealth, tells CNBC Make It.
The U.S. and Eritrea are the solely two nations in the world the place taxes aren’t based mostly on residency, and most nations have their very own tax guidelines that, if you ignore, may find yourself costing you.
These are a few of the choices American expats have, together with deductions, credit, and exclusions.
The first step is discovering an skilled
All the consultants CNBC Make It spoke to counsel that one in all the first steps folks ought to take, apart from researching the tax treaty between the nation they need to journey to and the U.S., is to discover an accountant who has expertise submitting federal taxes in each locations.
“It’s not something that every tax preparer does. It’s an important step to take to find somebody with the expertise,” H. Jude Boudreaux, Senior Financial Planner at The Planning Center, says.
Tucker suggests and interviewing a handful of overseas accountants and ensuring they have different American purchasers as properly.
“Having someone who’s somewhat familiar with the U.S. system and what the U.S. documents look like, I think, is a really important hack for getting your stuff done in a timely manner,” she says.
Avoiding double taxation in your earnings
Experts suggest claiming the Foreign Earned Income Exclusion or the Foreign Income Tax Credit as the finest means to keep away from double taxation on overseas earnings.
The foreign earned income exclusion permits people to exclude a specific amount of earnings earned overseas for the tax yr. For 2025, the most exclusion is $130,000 per taxpayer and that quantity varies yearly relying on inflation.
To declare the advantage of the overseas earned earnings exclusion, you should be one in all the following, in accordance to the IRS:
- A U.S. citizen who’s a bona fide resident of a overseas nation or nations for an uninterrupted interval that features a complete tax yr
- A U.S. resident alien who’s a citizen or nationwide of a rustic the place the United States has an earnings tax treaty or
- A U.S. citizen or a U.S. resident who’s bodily current for at the least 330 full days throughout any interval of 12 consecutive months.
Tucker says the overseas earned earnings is a use-it-or-lose-it profit and might solely be used throughout the present tax yr.
“The important words to note there is earned income. That’s not passive income, that’s not investment income, it’s only earned income. That’s for people who can say ‘I’m self-employed’ or ‘I have a wage income,'” she says.
It’s additionally vital to notice that the overseas earned earnings exclusion is barely relevant if you’ve been in a rustic for at the least 330 days or a full calendar yr, so if you keep for much less time than that, you cannot reap the benefits of it.
Freelancers and self-employed Americans working overseas also needs to remember that the Foreign Earned Income Exclusion does not cowl self-employment taxes. That means even when you qualify to exclude your overseas earnings from federal earnings tax, you could still owe Social Security and Medicare taxes to the U.S. authorities.
This typically catches digital nomads and distant contractors off guard. If you’re contributing to a foreign social security system in a country that has a totalization agreement with the U.S., you could give you the chance to keep away from double taxation on these contributions. Otherwise, it is vital to plan forward and finances for these extra tax obligations.
Another choice for folks is the overseas tax credit score. It permits American expats to declare a credit score for overseas taxes which might be imposed by one other nation.
Tucker describes it as a means to scale back or remove double taxation between the U.S. and the overseas nation in which you’re dwelling.
“It’s a dollar-for-dollar credit that is a really powerful tool because you can build that credit up and it carries forward. If you are globally mobile, you can take your foreign tax credit with you,” she says.
The overseas tax credit score can be solely relevant if you’re shifting to a rustic that has a better tax price than the U.S. If a U.S. expat strikes to a low-tax or no-tax nation, then there is no such thing as a overseas tax credit score that may be utilized, Tucker provides.
Remember due dates
In the U.S., particular person earnings taxes are usually due April 15 until the date falls on a vacation or weekend. On the different hand, plenty of nations in Europe have a deadline in May.
Those submitting in the U.S. additionally have the choice of submitting for an extension till October 15. U.S. expats overseas get an computerized extension till June 15.
Guillaume Decalf, CEO and Founder of Oui Financial, suggests submitting for an extension in the U.S. after which submitting taxes in your nation of residence first.
“You’re going to deduct the taxes you pay in your country of residence from the taxes in the U.S. If you do the opposite, then you can’t take into consideration whatever you might be able to deduct, and then you have to redo it all over again,” he says.
In addition to remembering when to file, Tucker says it is vital to do not forget that it is an extension to file, not an extension to pay.
“A lot of expats mix this up because they think they’ve got an extension. If you live in a low-tax country and you make a lot of income, if you’re not paying attention to your tax deadline, you’re going to owe interest,” she says.
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