When you live in the US, “doing your taxes” is an activity you think about once a year. Whether you hand your info to an accountant or prepare your own return, tax for US residents is sort of like taking out the trash—a chore that just must get done.
However, when you become an expat, your relationship to US tax dramatically changes. Tax goes from a once-a-year activity to a whole body of knowledge that you must understand, work within, and develop a strategy to deal with.
Failing to embrace this change could cause you to miss out on some huge tax benefits or run into some huge tax penalties.
Let’s discuss this change a bit more and then discuss how exactly you can make sure you’re fully on board with the switch.
Tax for US residents is on auto-pilot
Tax when you live in the US is pretty easy, and much of it just sort of works in the background without you needing to really think about it.
For example, when you have a job, tax gets withheld from your paycheck, and then you get a W-2 each year. You enter the info from your W-2 into a tax-filing program (or just give it to your accountant) and you’re done until next year.
Or, if you sold some securities that year, you’ll get a 1099-B from your broker. You enter that info into your return, and the math all takes care of itself. Similarly, if you pay student loan interest or a mortgage, you get a different form and enter the numbers into your return.
New rules with huge consequences
But tax works differently for expats. You need to understand the rules and monitor things to make sure everything goes smoothly.
The biggest US tax benefit for expats is the “foreign earned income exclusion,” which allows you to make about $100,000 per year without paying US federal income tax. Click here for more detail.
To qualify using the “physical presence test,” you can’t spend more than 35 days per year in the US. Well, that’s an easy enough rule to state, but there are ins and outs here and on-going monitoring required.
For example, a day spent traveling to or from the US is spent as a day in the US. Also, for you sailors and astronauts out there, a day spent in international waters is also treated essentially as a day in the US (because the rule is that you must spend at least 330 days in a foreign country).
Layers and layers of complication
Additionally, even knowing how much income you have can be a complicated task if you work for a non-US employer. You won’t have a nice, neat W-2 that just lays it all out. You’ll need to know which sorts of benefits are included in your income (such as meals and housing provided by your employer).
Then, if you’re self-employed (i.e., you own a business in your own name or you work as a freelancer), things get almost impossibly difficult. There are special rules that make the foreign earned income exclusion work much differently than it does for employees. You’ll need to know exactly how the “30% rule” and “scaleback rule” can really rain on your parade (and what you can do about it).
Like this article? Click here to stay informed on the latest tax topics for global individuals who live or invest abroad.
New filing requirements
In addition to a new body of knowledge, as an expat you’ll also have new filing requirements. For example, if you have more than $10,000 across one or more non-US bank accounts, you’ll need to file the Foreign Bank Account Report (or “FBAR” for short). Click here for more details.
The FBAR is filed separately from your tax return. Its official name is actually “FinCEN Form 114”—it’s administered by the Financial Crimes Enforcement Network (how’s that for a scary name?), so it’s not technically a tax requirement.
In prior years, the filing deadline for the FBAR was June 30, but now the deadline matches the deadline for your return (which is generally June 15, but you can extend to October 15).
New retirement-saving strategies
In addition to new rules to monitor and new forms to file, expats also need to understand how their expat status affects saving for their retirement.
For example, saving in an IRA or solo 401(k) is more complicated for expats. If your income is below the foreign earned income exclusion cap of about $100,000, then generally you can’t contribute to a qualified retirement plan—you must have “taxable compensation” to be able to make a contribution.
However, there’s a little “trick” you can use to still contribute to a qualified retirement plan like an IRA, even when your income is below the foreign earned income exclusion cap. This trick is explained fully in Tax-Savvy Expat Essentials, which you can read more about by clicking here.
New legal structures
When you’re an expat entrepreneur, the legal structure that’s right for your business is likely very different than the legal structure that was best when you lived in the US.
For example, it’s most often best for an expat entrepreneur to operate through a non-US corporation. That way, the entrepreneur can best take advantage of the foreign earned income exclusion. Operating through a non-US corporation is the only way to pay zero US tax on the first about $100k of income from your business.
Start your Expat Tax Education
These new rules, new strategies, new filing requirements, and new business structures are why I created the Tax-Savvy Expat Essentials course. The course consists of me talking over carefully crafted slides that visually depict the rules and concepts here. Essentials is the best way to get real information from a US tax attorney about these topics so you’re not at the mercy of whatever information you run across on the internet.
Plus, Essentials is fully updated for the tax reform law that was enacted in late 2017. It’s always been dangerous to trust what you read on the internet, but after tax reform it’s even more dangerous–many old sources haven’t yet been updated.
Click here to read more about Tax-Savvy Expat Essentials.
Finally, if you’d like some expert advice on your specific situation, I’d be happy to do that as well. Click here for more details.
Want to know more? The Tax-Savvy Expat courses teach you everything you need to know about expat tax.