It’s fun to be an expat, but it is not a permanent vacation. People are increasingly choosing to move abroad and reap the many benefits of American citizenship in countries with lower living costs and favorable tax systems.
This logic is fine. However, potential expats need to be aware that just because they moved away from their home country doesn’t mean they are exempted from paying federal and state taxes.
Here are some points of interest. Please continue reading!
Who is liable to pay state taxes?
Americans who live abroad must file US federal taxes returns and pay US income tax, regardless of where they earned it. As long as they are US citizens. This applies to all Americans who are residents and have income within the state.
They were in the state during the tax year for any length of time
They are allowed to live in the state as a permanent resident
While they are abroad, their immediate family is there to support them.
They can keep their voter rights, driver’s licence, and ID card in the state.
They can earn income regardless of where they live.
They receive pensions, retirement income, or any other state benefit
Only two countries impose citizenship-based taxes. This is not to say that all states in the USA are equally beneficial.
The U.S. states do not apply state income taxes for expats from Alaska, Florida and Nevada. New Hampshire and Tennessee have income taxes on dividends and interest only.
California, South Carolina and New Mexico apply state income taxes for American expats.
You can own a property in the state
Have a bank account or an investment account in the state
You must have an ID card, driving license or voter registration.
If their family has one, they should have a postal address in the state.
Dependents of the state
What happens if an American expat fails to file taxes while living abroad?
American expats living abroad who fail to pay U.S. tax may be subject to penalties and interest. Criminal charges may also be possible in the worst case.
If an American expat intentionally avoids tax obligations, penalties may be imposed by IRS for late filing or payment.
Failure to pay a penalty will result, for illustration purposes, in a 0.5% monthly fine being applied to unpaid taxes. The maximum amount is 25% of unpaid taxes. Failure to pay a penalty can result in a 0.5% monthly fee being applied to unpaid taxes. The maximum amount is 25% of unpaid taxes. Overdue payments of 60+ days can result in a fine up to 25% of unpaid taxes.
However, unless your intention is to renounce U.S. citizenship you should be familiar with the tax deadlines for American expats.
The U.S. tax years equal the calendar year (January 1 through December 31).
Avoiding double taxation
There are many ways that American expats can avoid double taxation. Each expat should be eligible for the programs listed below. You should only choose one program. If you are eligible for more than one, select the one that best suits your needs.
The programs available to expat Americans include tax treaties, The Foreign Earned income Exclusion (FEIE), and The Foreign Tax Credit [FTC].
Let’s briefly look at each option.
The United States has tax treaties in place with 70 countries. This program is available to anyone who establishes a business in a country with a tax treaty. Check out the list of countries with which the U.S. has tax agreements.
Foreign Earned Income Exclusion
You are eligible for the FEIE if you pass the Bona Fide Residency or Physical Presence Test. This program allows you to exclude up to $107620 of foreign-earned income from your tax year.
Foreign Tax Credit (FTC).
American expats can claim a dollar for dollar credit on foreign income taxes through the FTC. They must have a foreign tax liability in order to qualify.
There is also a housing exclusion, and a foreign credit for tax.
American Expats Have an Alternative: Streamlined Tax Filing
American expats seeking an alternative to the IRS can use the Streamlined Filing Procedures. They help expats to keep up with missed taxes and provide many tax returns.
An expat must:
Demonstrate the fact that you didn’t file taxes in the past because you didn’t know what you were required to.
At least 330 days of full-time residence outside the U.S. during the most recent tax year
You have not had a residence in the U.S. during one or more recent tax years
Sign a statement (Form 14653) attesting to all the above
There are many solutions available for expats from America and abroad. Tax filing can be time-consuming and expensive. There are many options. Take a look at all the benefits and choose the program that best suits your needs.