U.S. Taxes are not known for being easy, and they can become even harder when you live and work in another country. American citizens living overseas often contend with U.S. taxes and tax obligations in their new country of residence.
United States citizens and green card holders living abroad are taxed in a very similar way as U.S. citizens and green card holders living in America. Americans are taxed on their worldwide income, meaning you must pay taxes on the income you earn while living abroad or from foreign sources. Often, American expats must figure out their U.S. tax obligations while also figuring out how to pay taxes abroad. If you are unsure of what you are doing, or worse yet, your preparer is, you might pay taxes on the same income to two countries, making for a very expensive tax scenario. To ease your financial burden, talk to our team about potential tax breaks, credits, exclusions, and other benefits that might help minimize your tax obligations.
Contact our Dual Licensed Tax Attorneys and CPAs by calling the Tax Law Offices of David W. Klasing at (800) 681-1295 or clicking here to schedule a reduced rate initial consultation and get help with your tax situation.
How United States Citizens Are Taxed While Living Abroad
Tax Nexus is a tricky legal concept, especially when figuring out whether you need to pay taxes in a particular country. Each country sets its own laws regarding how to tax citizens and residents. The United States taxes citizens based on their worldwide or global income. This means that if you earn money from foreign sources, you may be taxed on that income.
United States citizens may be required to pay taxes on their worldwide income even if they are not residing in the U.S. For example, American expats living and working in foreign countries while retaining their citizenship are still obligated to pay American taxes. Being outside the U.S. does not relieve you of this burden.
Generally, an American citizen or green card holder living abroad must pay their taxes in the same way as American citizens and green card holders living on U.S. soil. You may file your taxes online or by mailing physical tax forms to the IRS. Either way, our Dual Licensed Tax Attorneys and CPAs can review your situation to help you avoid making mistakes on your U.S. and foreign taxes.
Note: A green card holder continues to be subject to U.S. taxation even after their green card has been killed by operation of law until they surrender their green card at a U.S. consulate office offshore. This decision should not be contemplated without counsel from an immigration attorney. (we are not immigration attorneys).
Determining Whether You Have to Pay U.S. Taxes
In the United States, a person is considered a legal citizen if born on U.S. soil. Even if your parents are not U.S. citizens, but you were born somewhere in the United States, you may claim citizenship. Many people are born in the United States to foreign parents who return to their home country to raise their family. It is not unusual for people to realize they are U.S. citizens years later when they are tax-paying adults.
You might also be considered a citizen if you were born in another country to at least one U.S. parent. Alternatively, a foreign-born person might have to pay U.S. taxes if they pass the Green Card Test. According to this test, you must pay U.S. taxes if you are a lawful permanent resident who has been issued a Permanent Resident Card, also called a green card.
You may also have to pay U.S. taxes if you pass the Substantial Presence Test. This test states that if you are physically present in the U.S. for at least 31 days during the current calendar year and 183 days during the 3-year period, including the current year and the 2 years before. You may only count all the days you were present in the current year, one-third of the days you were present in the year before the current year, and one-sixth of the days you were present 2 years before the current year.
Living in another country will not erase your tax obligations if you are a citizen or lawful resident who must pay U.S. taxes. Even if you renounced your U.S. citizenship, you might still owe taxes from the last year you were a U.S. citizen. Thankfully, expats living abroad have an automatic 2-month extension on their U.S. taxes, so there is more time to figure things out.
Figuring Out Tax Obligations Overseas as a U.S. Citizen
U.S. citizens living and working abroad often worry about more than their tax obligations in the United States. Many expats are considered tax residents of other countries and must pay taxes to foreign governments. Being a tax resident is not the same as being a legal citizen. You do not have to be considered a citizen of a different country to be considered a tax resident.
Whether you are a tax resident of a different country depends on its laws. You may be considered a tax resident if you have legally resided in a certain country for a specific period. Alternatively, you might be a tax resident if you own property, have a job, or otherwise center your life in a foreign country.
The exact test used to determine tax residency status depends on which country you live in. If you reside long-term in another country or have financial interests in another country (e.g., income, stocks, accounts), you should consider speaking to a tax professional.
How to Minimize Your Tax Obligations as a U.S. Citizen Living Abroad
If you are considered a tax resident of another country, you may be obligated to pay foreign taxes. If you have retained your U.S. citizenship, you are also obligated to pay taxes in the U.S. Being taxed twice on the same income is not ideal, and there are ways to hopefully minimize your tax obligations, at least in the United States.
Foreign-Earned Income Exclusion
You might be eligible for a foreign-earned income exclusion if your income is derived from foreign sources. Generally, you must be a U.S. citizen or U.S. resident alien with a foreign source of income. Second, you must live in another country for at least an entire tax year or be physically present in another country for no less than 330 days during any 12-month period.
If you are a U.S. citizen working abroad, you should consider excluding your foreign-earned income from your U.S. taxes. This may help reduce your taxable income and minimize your tax obligations in the U.S. In 2024, a person claiming this exclusion could exclude up to $126,500 in foreign earnings from their U.S. taxes.
Foreign Tax Credit
If you know you are a tax resident of a foreign country, you may be able to claim a foreign tax credit based on the taxes you pay to a foreign government. For example, if you paid $5,000 in taxes in another country, you may potentially take that as a dollar-for-dollar credit against your U.S. taxes. This can be a great way to reduce your taxable income and minimize the amount you must pay. Your foreign tax credit will be limited if you also use the foreign-earned income exclusion.
Foreign Information Reporting
Also keep in mind that if you have a foreign trust, foreign business, have foreign financial accounts and in many additional circumstances you will also have to comply with foreign information reporting requirements which carry draconian penalties if not complied with.
Coming Back into Compliance Without Facing Criminal Tax Prosecution and Minimizing the Penalties That Might Otherwise Apply.
If you have failed to file a tax return for one or more years or have taken a position on a tax return that could not be supported upon an IRS or state tax authority audit, eggshell audit, reverse eggshell audit, or criminal tax investigation, it is in your best interest to contact an experienced tax defense attorney to determine your best route back into federal or state tax compliance without facing criminal prosecution.
Note: As long as a taxpayer that has willfully committed tax crimes (potentially including non-filed foreign information returns coupled with affirmative evasion of U.S. income tax on offshore income) self-reports the tax fraud (including a pattern of non-filed returns) through a domestic or offshore voluntary disclosure before the IRS has started an audit or criminal tax investigation / prosecution, the taxpayer can ordinarily be successfully brought back into tax compliance and receive a nearly guaranteed pass on criminal tax prosecution and simultaneously often receive a break on the civil penalties that would otherwise apply.
It is imperative that you hire an experienced and reputable criminal tax defense attorney to take you through the voluntary disclosure process. Only an Attorney has the Attorney Client Privilege and Work Product Privileges that will prevent the very professional that you hire from being potentially being forced to become a witness against you, especially where they prepared the returns that need to be amended, in a subsequent criminal tax audit, investigation or prosecution.
Moreover, only an Attorney can enter you into a voluntary disclosure without engaging in the unauthorized practice of law (a crime in itself). Only an Attorney trained in Criminal Tax Defense fully understands the risks and rewards involved in voluntary disclosures and how to protect you if you do not qualify for a voluntary disclosure.
As uniquely qualified and extensively experienced Criminal Tax Defense Tax Attorneys, Kovel CPAs and EAs, our firm provides a one stop shop to efficiently achieve the optimal and predictable results that simultaneously protect your liberty and your net worth. See our Testimonials to see what our clients have to say about us!
See this page to fully understand all your options to come back into compliance without facing criminal tax prosecution.
Contact Our Dual Licensed Tax Attorneys and CPAs For Help with Your International Taxes
Contact our Dual Licensed Tax Attorneys and CPAs by calling the Tax Law Offices of David W. Klasing at (800) 681-1295 or clicking here to schedule a reduced rate initial consultation and get help with your tax situation.
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