Tax opportunities when living abroad
Minimize taxes while working and living abroad
Did you know that as a US Citizen, you have to pay taxes on your worldwide income for as long as you live? Did you know that this is still true if you relocate to a foreign country? This comes as a shock to many American’s, and during my career I have helped many people living abroad minimize that tax in a number of ways. With that, below are my top five tax tips for those that are current US Citizens or Residents, but choose to live and work elsewhere.
If you qualify under the “bona-fida residence test” or the “physically present test”, you may be able to exclude up to $108,700 in foreign earned income from US taxation.
In addition to the foreign earned income exclusion, you may also qualify to exclude a portion of your foreign home costs if paid for with employer provided funds. This benefit can be quite valuable if you are paying for your own living costs, especially when living in an expensive foreign city.
The foreign tax credit is available for income earned and taxed in a foreign country that is not claimed as part of the foreign earned income exclusion. For example, if you earned $200,000 and excluded $108,700 under the foreign earned income exclusion, you may be able to claim a credit on a pro-rated basis on the remaining $91,300.
Many countries have tax treaties with the US. These are designed to ensure that income is not taxed twice; in both the US and the foreign country. These are complex tax tools and a qualified CPA should be retained to ensure that you are not only in full compliance with the treaty, but if there are multiple options, the most tax efficient option is used.
The last tip is one that does not apply to many people, but has become more prevalent in recent years so I thought was worth mentioning. This is related to the “Exit Tax”. This is a complex tax calculation that is performed when a US Citizen or qualifying resident gives up their Citizenship and has a net worth of over $2 million (per person). This treats all assets as sold for their fair market value on the date of revocation and assesses a final tax on any gains. These gains are taxed at the same rates as they would be under normal tax filing circumstances. This tax has very strict rules to follow, but a qualified professional can help minimize or completely eliminate this tax with sound tax planning.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.