Just moved outside the US? Welcome to the club! Here’s a a US tax to-do list to start you off on the right foot.
1. Change your address with the IRS
File IRS Form 8822 to officially change your address with the IRS. That way, the IRS can easily send you information if there’s ever a problem. The worst way to interact with the IRS is after they’ve been unsuccessfully trying to reach you. Eliminate that possibility by letting them know the new place where you receive mail.
2. Stay out of the US for at least 330 days in the first 12 months
You’ll be able to eliminate US income tax on about $100,000 of income you make from working abroad as long as you qualify for the foreign earned income exclusion. The key to qualifying right from the start is to meet the “physical presence test,” which requires that you spend no more than 35 days in the US during the first 12 months after your move.
You don’t need to remain in one country the whole time, you just need to stay outside the US (and, of course, there are some detailed rules here about how to count travel days, etc.). If you settle down somewhere and meet the “bona fide residence test” (which generally requires that you make a new country your home for an entire calendar year), you can spend more time in the US without losing the ability to take the foreign earned income exclusion.
3. If you have a US employer, tell them to reduce your tax withholding
If you work remotely for a US company, you can provide your employer with a completed IRS Form 673 to reduce the amount of US federal income tax your employer withholds. This form alerts the company that you will soon qualify for the foreign earned income exclusion, so they can withhold an amount with that exclusion worked into the figures. If you make less than about $100,000, all of your income will be excluded, so you can just file an IRS Form W-4 claiming exempt.
4. If you own a business, form a non-US corporation
If you own and operate your own business, it’s most often better to hold your business through a non-US corporation. By operating through a non-US corporation, you can
- avoid all US tax on the first about $100,000 of salary per year (as long as you qualify for the foreign earned income exclusion) and
- keep the earnings over your salary in the corporation (allowing you to re-invest in a tax-deferred manner).
You’ll pay tax on the amount you keep in the company only once your company distributes it to you.
Owning a non-US corporation requires some extra US tax reporting (you must file an IRS Form 5471 and perhaps also an IRS Form 8938), but the US tax advantages of this structure are more than worth it.
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5. Keep your stock market investments in the US
Investing in non-US mutual funds can be a tax reporting nightmare and result in higher tax in some circumstances. It’s much easier to simply keep investing in US mutual funds through a US brokerage account.
If you own stock of a non-US mutual fund, you’ll be required to file IRS Form 8621, which is complicated in the best of circumstances and impossible to comply with in the worst. Also, the non-US mutual fund will be subject to a complicated regime called the “passive foreign investment company” rules, which often result in worse US tax treatment as compared to owning US mutual funds. Finally, investing in non-US mutual funds can have non-tax detrimental effects as well, such as generally higher fees and more risk (very few countries have equivalents of the FDIC and SIPC).
6. Research the US tax treatment of local tax-advantaged accounts
If you’re planning to stay in your new country long-term, it’s tempting to dive right into saving through the local array of tax-advantaged accounts. However, some research into the US tax treatment of each particular offering will go a long way in avoiding headaches on your US tax return.
Certain types of plans require more reporting than others. For example, if the plan has a trust structure (so that by holding the account you’re really the beneficiary of a trust), you may find that your US tax reporting burden will be lessened if you don’t make contributions yourself to the trust (or only make contributions to certain portions of the trust). This can get complicated and is fact specific, so it requires careful research and planning with each particular type of savings vehicle in mind.
7. Avoid financial scams and hucksters
The expat and offshore investor communities are rife with people selling absolute garbage, such as complicated and expensive asset protection structures that don’t offer any more asset protection than a simple trust or non-US company. To make it worse, some of these gurus are also self-anointed US tax advisors who spread the gospel of salvation through secrecy and complicated structures. Don’t believe the hype.
8. Keep filing US tax returns
You’re required to file a US tax return for any year in which you make over the applicable threshold, even if you don’t actually owe any tax liability (e.g., because all of our income is foreign earned income and is below about $100,000). Many people think that the penalty for not filing a return is just a percentage of the tax owed, so there’s no harm in not filing.
That’s not the case at all. The foreign earned income exclusion can only be claimed on a return that’s filed before the IRS notifies you of a failure to file on time. So, the penalty for not filing a return could be as high as the US tax on your foreign earned income.
9. You may need to file an FBAR as well
If you own or have signature authority over one or more non-US bank accounts with a balance of more than $10,000 in any year, then you’re required to file an FBAR (which stands for “Foreign Bank Account Report”). The FBAR only asks for basic information about the bank, the account number, and the maximum amount in the account each year. Filing the FBAR has no effect whatsoever on your tax liability—it’s just a disclosure form (that comes with a $10,000 penalty for each failure to file).
Enjoy your new adventure abroad!
Want to know more? The Tax-Savvy Expat courses teach you everything you need to know about expat tax.