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American citizens residing and working abroad may be subject to foreign tax withholding. Many American citizens living and working overseas are required to pay taxes on their income to the government of the country in which they reside. However, their tax liability may not end at the border of their new home country.
How Living Abroad Affects US Tax Liabilities
While American citizens living abroad are required to file US income tax returns, taxes paid on their income to foreign governments affects the amount, if any, of tax due to the United States government. When a United States citizen lives and works in a foreign country, then that country is considered to be the taxpayers “tax home”.
Therefore, most American citizens can claim any legitimate income taxes paid to the foreign government as tax credits on their US income tax return. These are generally referred to as Foreign Earned Income Exclusions, and are made available to all US citizens that live and work abroad - provided they meet certain requirements.
Requirements for Foreign Earned Income Exclusions
In order to be eligible for US tax credits associated with Foreign Earned Income Exclusions, a US citizen must qualify under the bona fide residence or physical presence test. In order to qualify under the status of a bona fide resident, a US citizen must have resided in the foreign country for the entire calendar year, have not submitted a statement of non-residence to that foreign country and be subject to income taxation in that country.
Under the physical presence test, a taxpayer must have been present in the foreign country for a minimum of 330 full days, during a 12 month period. Furthermore, people that meet the physical presence test must also be the same qualifications for statements of non-residence and also be subject to income taxation in the country.
Limitations of Foreign Earned Income Exclusions
For US citizens living abroad that claim tax credits associated with Foreign Earned Income Exclusions, the United States allows the citizen to exclude personal income up to $85,700. Income amounts over $85,700 are subject to United States income tax – regardless of where the income was earned. For US citizens that do earn more than $85,700, only the amount of income that exceeds the maximum exclusion amount is taxed by the United States.
Living in Low Tax Rate Countries
While the United States allows US citizens working and living abroad to claim credit in the form of Foreign Earned Income Exclusions, US citizens could be liable for US taxes if they live in a country that has particularly low income tax rates. While many countries in the world have higher income tax rates than the United States, there are a few countries that offer their citizens very low rates of taxation on their income. U.S citizens residing in these countries might be liable to the U.S Government for the difference in the income tax rates of the two countries – if there is a large difference.
Determining income tax rates and obligations for United States citizens living abroad can often be confusing and not easy to understand. Therefore, if you are presently living abroad, or simply considered moving abroad, you should visit the IRS website and make sure that you are familiar with all laws, rules and regulations that pertain to income earned abroad.
How Living Abroad Affects US Tax Liabilities
While American citizens living abroad are required to file US income tax returns, taxes paid on their income to foreign governments affects the amount, if any, of tax due to the United States government. When a United States citizen lives and works in a foreign country, then that country is considered to be the taxpayers “tax home”.
Therefore, most American citizens can claim any legitimate income taxes paid to the foreign government as tax credits on their US income tax return. These are generally referred to as Foreign Earned Income Exclusions, and are made available to all US citizens that live and work abroad - provided they meet certain requirements.
Requirements for Foreign Earned Income Exclusions
In order to be eligible for US tax credits associated with Foreign Earned Income Exclusions, a US citizen must qualify under the bona fide residence or physical presence test. In order to qualify under the status of a bona fide resident, a US citizen must have resided in the foreign country for the entire calendar year, have not submitted a statement of non-residence to that foreign country and be subject to income taxation in that country.
Under the physical presence test, a taxpayer must have been present in the foreign country for a minimum of 330 full days, during a 12 month period. Furthermore, people that meet the physical presence test must also be the same qualifications for statements of non-residence and also be subject to income taxation in the country.
Limitations of Foreign Earned Income Exclusions
For US citizens living abroad that claim tax credits associated with Foreign Earned Income Exclusions, the United States allows the citizen to exclude personal income up to $85,700. Income amounts over $85,700 are subject to United States income tax – regardless of where the income was earned. For US citizens that do earn more than $85,700, only the amount of income that exceeds the maximum exclusion amount is taxed by the United States.
Living in Low Tax Rate Countries
While the United States allows US citizens working and living abroad to claim credit in the form of Foreign Earned Income Exclusions, US citizens could be liable for US taxes if they live in a country that has particularly low income tax rates. While many countries in the world have higher income tax rates than the United States, there are a few countries that offer their citizens very low rates of taxation on their income. U.S citizens residing in these countries might be liable to the U.S Government for the difference in the income tax rates of the two countries – if there is a large difference.
Determining income tax rates and obligations for United States citizens living abroad can often be confusing and not easy to understand. Therefore, if you are presently living abroad, or simply considered moving abroad, you should visit the IRS website and make sure that you are familiar with all laws, rules and regulations that pertain to income earned abroad.
