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Income Tax Requirements When Living Out of the Country

Updated: Feb 5

Living in a foreign country holds a lot of appeal. It gives an exotic impression and seems like a never-ending vacation. But it doesn’t matter where you go, because the US government still expects you to file a tax return and pay taxes. This is true even if you become a citizen of another country and live there full time. The United States might be the only country in the world that does this.

If you were a citizen of Italy but living and working in Argentina, Italy wouldn’t expect you to pay any taxes! You would have to pay them in Argentina, though. The US would expect you to pay both.

For your peace of mind and to keep you out of jail, become familiar with the income tax rules that apply to you as a citizen of the United States living outside the country.

Income tax rules for US citizens living abroad:

  1. No matter where you live, you must file a tax return. It’s entirely possible that you won’t owe any taxes, but you must file an income tax return each year.

  2. You’re still subjected to all US tax laws. This includes income tax rates and the same credits and deductions.

  3. There are 2 primary ways to reduce your taxes owed in the United States. The United States has a reputation for double taxation, but in practice that only applies above certain income limits.

  • Foreign tax credit: This credit is intended to protect American citizens from paying taxes twice on the same income. In essence, you can deduct any income taxes you’ve paid in the foreign country from your taxes owed in the US. There is a limit, however, if you paid $12,000 in foreign taxes, you could reduce your US tax bill by $12,000. Simple enough.

  • Income exclusions: This is the other option. You can’t claim both. The income exclusion allows you to reduce your gross income by up to $126,500. You can also subtract housing costs up to a maximum amount.

The United States also has tax treaties with most countries that help prevent double taxation for its citizens. These treaties specify which country has the right to tax certain types of income and determine the amount of income that can be taxed by each country.

4. Any gross income above and beyond these deductions will likely be taxed in both countries. Those with significant incomes can expect to have a portion of their income double taxed.

The laws surrounding the reporting of foreign investments and bank accounts are very arduous. The banks themselves have to report your accounts. You also have to individually report each account holding $10,000 or more.

It’s important to file your US tax returns. The penalty for failing to file while living abroad starts at 5% of the amount of tax shown on the return for each month you have not filed,  and can go as high as 25% of your total tax owing. 

When it comes to filing US taxes while living abroad, it’s important to know everything you are required to report in your filingOne thing is for sure: file your US tax return, no matter where you reside!

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