If you’ve moved out of the United States and no longer make money in the United States, you may think that you don’t need to pay U.S. taxes. Unfortunately, this isn’t the case. In this post, we’ll explain why U.S. citizens still need to pay taxes once they leave the USA for good. We’ll talk about the tax laws that require this and talk about the possible exemptions to these laws.
How Countries Around the World Tax Income
Every country has its own rules about how citizens are taxed, including rules about income taxes. Some countries, such as Monaco and the Bahamas, actually have no income tax. But most countries do require citizens to pay income tax.
If a country requires citizens to pay income tax, they usually use one of two systems. They will either use a territorial-based tax system or a residence-based tax system. A territorial-based tax system taxes citizens based only on income earned within that territory. A residence-based tax system taxes citizens on worldwide income, but only if the citizen lives in the country.
Unfortunately for US citizens living abroad, the United States takes a unique approach to income tax. Rather than using a territorial-based or residence-based tax system like most of the world, the United States uses what’s called a citizenship-based tax system. In a citizenship-based tax system, all citizens of the country are taxed on their income no matter where it’s earned.
There are only a few other countries in the world that use a citizenship-based tax system: Eritrea, Hungary, and Myanmar. But these countries have more lenient tax rules for their citizens who are both living and earning money abroad than the US does. In Hungary, citizens living and earning money abroad do not get taxed on their foreign income if the the citizen’s new country of residence has a tax treaty with Hungary. Then, both Eritrea and Myanmar tax all citizens living in other countries on their income in those countries but offer reduced tax rates. In Eritrea, it’s a flat rate of 2% while in Myanmar, it’s a flat rate of 10%. On the other hand, US citizens living abroad and earning money abroad are taxed exactly the same way as residents, no matter where their income comes from.
Exemptions and the Issue of Double Taxation
So, all US citizens are taxed at the same rates, even if they live abroad and only earn income abroad. If you’re a US citizen, you must file a federal tax return each year regardless of where you live or earn money. The same is true for US non-citizens that hold a Green Card.
There are some exceptions to this rule. If you’re a US citizen or Green Card holder living abroad, you do not have to file a federal tax return if you don’t meet certain tax thresholds. For single filers this threshold is $10,000. For those filing as married filing jointly, the threshold is $20,600. For those filing as married filing separately, the threshold is $4,000. And, finally, for those filing as self-employed, the threshold is rather low at $400.
Alongside these income thresholds, there are other exceptions designed to help US citizens avoid double taxation. Double taxation is when a person is taxed on the same income twice. So, for example, a US citizen might be subject to tax on the same income from both the US and their new country of residence. There are two US tax code previsions designed to help lessen the burden of double taxation for US citizens living abroad: the foreign income exclusion (FEIE) and the Foreign Tax Credit. The FEIE allows expat citizens to exclude a certain amount of income earned abroad from their total tax liability. As of 2019, this amount is $103,900. The Foreign Tax Credit allows expat US citizens to go beyond this amount if they’ve paid tax to a foreign government. This tax credit can be a bit complicated, as there are numerous rules about the types of income this applies to. Additionally, there are rules related to this credit that changed depending on which country income was earned in.
If you’re a US citizen living abroad and you need help filing your more complex tax return, contact Tax Defense Partners today. Our team of expert tax attorneys and licensed CPAs is experienced at preparing all types of US tax returns. A member of our team can help you prepare your return and ensure you do not miss out any any valuable exceptions or credits at tax time.