US Taxation of Expats

Unlike most countries, the United States taxes its citizens on worldwide income, whether or not they are resident in the United States.  Therefore whatever liability to taxation they are liable to in the new country you remain liable to taxation at home in the U.S.  Double Tax treaties will generally allow them to offset tax paid in their new residence against their liability to tax in the U.S.

U.S. expatriates will usually discover that their tax matters become extremely complex. Taxable income may increase substantially due to assignment related expenses paid or reimbursed by their employer and tax returns are required in the U.S. and the foreign country. They may also encounter tax issues relating to the sale or rental of their home, moving expenses, state residency issues, foreign earned income and housing exclusions, foreign tax credit, foreign tax planning, and much more.

U.S. citizens and residents must report 100% of their worldwide income on their U.S. individual income tax return, regardless of where they live and regardless of where the income is paid. As such, U.S. expatriates must continue to file U.S. tax returns and in many cases owe U.S. tax during their foreign assignments. There are two special tax provisions used by U.S. expatriates to reduce their federal income tax liability while on foreign assignment. These provisions are:

  • Foreign Tax Credit - can reduce U.S. federal and, in some cases, state individual income tax. The foreign tax credit is designed to help minimize double taxation of income.
  • Exclusions from Income - a U.S. citizen or resident who establishes a tax home in a foreign country and who meets either the bona fide residence test or the physical presence test may elect to exclude two items from gross income:
    • Foreign earned income of up to the annual limit and
    • Foreign housing costs limited to 30% of the maximum foreign earned exclusion (with possible adjustment based upon geographic location), reduced by a base amount.

The exclusions are elective and an individual may elect either or both exclusions. These elections are available to each individual taxpayer, so, if eligible, each spouse may claim the exclusions even if a couple files a joint tax return.

U.S. citizens and businesses overseas must prepare and file the Report of Foreign Bank and Financial Accounts (FBAR) by June 30 of each year (no extension possible) where they have an interest in, or signature authority over, a foreign financial account with a value over $10,000 at any time during the year.

It makes no difference if the average amount in the account during year is less than $10,000 or if all the money is withdrawn by the end of year. If the account held more than $10,000 any time during the year, the FBAR must be filed.  Additionally, if the foreign account that has non-monetary assets of more than $10,000, for example, the cash surrender value of a life insurance policy, an FBAR must be filed.  There is a maximum $10,000 penalty for inadvertent failure to file, but wilfully not filing an FBAR has a minimum fine of $100,000 or half the value of the account, whichever is greater.

In addition to the special tax provisions that apply to U.S. expatriates, an expatriate is still subject to the normal U.S. tax laws with respect to all other items of income, expenses, and credits. Other common federal tax issues that arise due to a foreign assignment include:

  • Treatment of employer-provided allowances and reimbursements
  • Moving expenses
  • Rental of principal residence
  • Sale of principal residence
  • Exchange gains and losses
  • Short-term versus long-term assignments
  • Social security taxes

To deter tax avoidance by abandonment of citizenship, the United States imposes an Expatriation Tax on those who abandon U.S. citizenship. The tax also applies to green-card holders who abandon U.S. permanent residence, if they have been resident for 8 of the last 15 years, whether or not they are emigrating to avoid tax.