Living Internationally: File Your Taxes Correctly

Andrea Miller
Expert Contributor
Last Updated:
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  • Americans who live abroad are required to pay taxes but have an extension to file them until mid-June. Most expatriates can claim a foreign tax credit, which offsets U.S. tax liability.
  • The foreign earned income exclusion prevents you from being taxed on your income by both the U.S. and your country of residency.
  • It’s important to consider the tax implications of retiring abroad.

If you’re an American living in another country, tax time can be challenging. Whether you’re new to living abroad or have been an expatriate for several years, here’s what you need to know about staying in good graces with the IRS when you don’t reside in the U.S.

Paying Income Tax as an Expat

As a U.S. citizen, you must pay income tax no matter where you live. This means if you earn money in another country, you have to file an income tax return and pay the outstanding balance just as you would otherwise. Your tax return must be filed with calculations in dollars even if you are paid in foreign currency.

However, you do receive a two-month extension on the filing deadline. This means your income taxes are due in mid-June rather than in mid-April. Although you can e-file, you must also mail a copy of your tax return to Department of the Treasury, Internal Revenue Service Center, Austin, TX 73301-0215.

You will need to file a tax return in your country of residence as well as in the U.S. Depending on your new location, you may be taxed on your income twice. Some countries have a reciprocal agreement with the U.S. that prevents this situation, however.

Living Internationally: File Your Taxes Correctly

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It’s best to consult with an expert when filing taxes overseas. American Citizens Abroad maintains a database of tax return preparers who specialize in working with expatriates.

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Foreign Tax Credit

You can deduct income earned in another country on your U.S. tax return after the amount is converted to U.S. dollars. This deduction is allowed for individual taxpayers who have earned foreign income during the current tax year. Although you will not receive a refund if the foreign tax credit exceeds your tax liability, the surplus can be applied to either any future tax year for 10 years or the prior year’s taxes.

Exceptions to this credit include income earned from Cuba, Iraq, North Korea, or other countries that the Department of State has designated as terrorism supporters. You must file Form 1116 with your tax return to claim the Foreign Tax Credit (FTC).

The Foreign Earned Income Exclusion (FEIE)

You can avoid double taxation on your income in both the U.S. and your foreign location by claiming the Foreign Earned Income Exclusion (FEIE). Up to $102,100 in foreign income can be excluded from your taxable income if you have foreign earned income, ongoing employment for at least 12 months, and can pass one of two residency tests.

  • The physical presence test requires that you have resided in the country for at least 330 of the last 365 days. You cannot pass this test if you have retained a U.S. address. You must plan your travel time carefully to meet this requirement. Missing the cutoff by just a day or two can be costly when it comes to your taxes.
  • The bona fide residency test  requires you to live in the foreign country for the entire tax year and have the intention to remain there indefinitely.

Tax Implications for Retiring Abroad

If you’re planning to move to another country when you retire, you should simplify your finances as soon as possible before taking the leap. Make sure to set up online access to all your banking and investment accounts. Although the cost of living in your new locale might be much lower than in the U.S., you should still have several thousand dollars set aside for getting set up overseas. You may need it for a rental deposit, moving expenses, and other one-time costs.

If your only income in retirement comes from investment accounts and pensions, you are not eligible for the FEIE or the FTC. You may be able to claim them if you work part-time, however.

You may also be charged an extra fee to open an overseas bank account because the bank must comply with the Foreign Account Tax Compliance Act (FATCA). This law requires the bank to report the existence of your account to the U.S. government. You must report your holdings in foreign accounts if they exceed a certain threshold.

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When opening a new bank account, you will need to provide proof of the source of the money. For example, if you try to deposit the proceeds of selling your home in a foreign bank account, come prepared with a copy of the closing documents from the sale.

Financial experts recommend keeping your retirement accounts in the United States to avoid reporting requirements under FATCA. Doing so also increases your investment choices and protects you from changes in world currency.

Although you can receive Social Security payments when you live abroad, you will not be able to receive Medicare.

When You Can’t Afford To Pay Taxes

Even if you are not living in the United States, past-due taxes will still accrue taxes and penalties. If you haven’t filed, you should do so immediately. The monthly penalty for not filing your taxes is 10 times greater than the monthly penalty for not paying your taxes. If you haven’t filed taxes in a few years, you can take advantage of Streamlined Offshore Filing Procedures. This provision allows you to file the past three years of tax returns without penalty.

Some individuals renounce U.S. citizenship to avoid paying taxes. If you go this route, you will have to prove that you have filed and paid all outstanding taxes for the past five years.

If you owe taxes you can’t pay, consult a CPA who is experienced working with expats so you can amend your returns to claim the credits above if you haven’t already. You can also contact Solvable to be matched with well-reviewed companies that provide solutions for those facing tax, student loan, and credit card debt.

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Andrea Miller
Expert Contributor
Last Updated: