US citizens who move to a foreign country to reduce their living expenses often find that their expat taxes are lower than when they lived in the States, at least the taxes they must pay to the United States government.
That’s because the IRS allows hefty income exclusions for US citizens living overseas that can result in significant tax savings. The agency has specific rules governing income exclusions, however, and these rules are not always easy to understand. Due to their length and complexity, it takes hours just to read the IRS regulations for expat taxes.
What those regulations spell out is a generally favorable tax system for expats, but one that requires careful study and a thorough understanding.
The responsibility of a US citizen living abroad to file timely US tax returns never ends as long as that person retains their citizenship. The amount of expat taxes due depends to a great extent on the taxpayer’s ability to qualify for what is called the foreign income exclusion. The expat taxpayer must establish foreign residence by meeting the requirements of either the bona fide residence test or the physical presence test in order to qualify for the “tax free” income exclusion, which is currently the first $91,000 of income for expats.
Determining whether an American living in a foreign country can earn up to $91,000 “tax free” often requires professional expertise. A CPA firm that specializes in expat taxes is the safest bet for a US citizen living abroad who wants to minimize his or her tax liability while complying with all US tax laws.
Sometimes American expats wonder, “Why should I pay any taxes to the US at all if I’m not even living there?” It’s important to remember that as long as a person holds US citizenship, he or she still enjoys all the protections that go along with that citizenship, regardless of where they choose to live. With careful and informed calculation of one’s expat taxes, that can prove to be a pretty good bargain .