Thinking About Moving Abroad? Here’s What to Expect for Your Taxes
Whether it’s a change in political winds or the dream of immersing yourself in a new culture after an amazing vacation, the idea of moving abroad is tempting for many. I’ve had several clients consider making the leap, curious about what life might look like in another country but wondering, “What would my taxes look like?” Here’s what you need to know if you’re seriously considering life abroad.
#1: U.S. Taxes Go Where You Go
Even if you’re living abroad, the IRS doesn’t lose track of you. The U.S. is one of the few countries that taxes its citizens on worldwide income, regardless of where they live. This means that, unlike many other countries, you’ll still need to file a U.S. tax return every year and report your global income.
#2: The Foreign Earned Income Exclusion (FEIE)
To help offset the tax burden, the IRS offers the Foreign Earned Income Exclusion (FEIE), allowing eligible U.S. taxpayers to exclude up to a certain amount of foreign-earned income from their U.S. taxes. For 2024, this exclusion is $120,000, but you must meet either the Bona Fide Residence Test (establishing residency in another country) or the Physical Presence Test (spending at least 330 full days outside the U.S. in a 12-month period) to qualify.
#3: Foreign Tax Credits
If you’re paying taxes abroad, you may be eligible for the Foreign Tax Credit (FTC), which helps avoid double taxation. The credit applies to income taxes paid to a foreign government and can offset your U.S. tax liability on foreign income. In some cases, this may be more beneficial than the FEIE, especially if you’re working in a country with higher tax rates.
#4: Reporting Foreign Assets
Living abroad often means dealing with foreign banks, investments, and other financial accounts. U.S. taxpayers are required to report foreign financial assets if they meet certain thresholds through the Foreign Bank Account Report (FBAR) and Form 8938. Failing to report these assets can lead to severe penalties.
#5: Self-Employment Abroad
If you’re self-employed abroad, you’re still subject to U.S. self-employment taxes (15.3%), which cover Social Security and Medicare, unless there’s a Totalization Agreement between the U.S. and your host country. These agreements prevent double social security taxation and allow you to pay into only one country’s system, either the U.S. or the foreign country’s, depending on your situation.
#6: Estate and Gift Taxes
The U.S. also has estate and gift tax rules that apply to U.S. citizens and residents living abroad. The tax laws here can be complex, especially if you acquire assets overseas or have foreign heirs. This is an area where careful planning is crucial to avoid unintended tax consequences for your estate.
#7: State Taxes When Moving Abroad
Moving abroad doesn’t always mean you’re free from state taxes. Some states, like California, New York, and Virginia, are known for being aggressive in claiming former residents as tax subjects. Before you leave, it’s essential to understand the residency rules in your state and take steps to establish a clear departure.
#8: Foreign Taxation
Foreign taxes vary widely from country to country, impacting everything from income tax rates to deductions and social security contributions. Some nations, like the UAE, have no income tax, while others, such as Scandinavian countries, have high tax rates that fund extensive social benefits. Tax treaties often help avoid double taxation, but residency rules differ, with some countries taxing residents on worldwide income if they stay for more than 183 days. This complexity makes it essential to understand both local tax laws and how they interact with U.S. taxes when considering a move abroad.
#9: The Exit Tax if You Plan to Renounce
Some expats decide they want to renounce their U.S. citizenship or residency status to simplify their lives and tax obligations. If you’re considering this step, be aware of the Exit Tax, which applies to individuals with a high net worth or who have had significant U.S. tax liabilities. This tax is essentially a capital gains tax on your worldwide assets, as if you had sold them on the day you renounce. Also, tax should not be the sole consideration when making this move.
In Closing
Moving abroad can be a life-changing experience, and with the right planning, you can avoid many of the potential tax pitfalls. It’s always wise to consult with a tax professional before making the leap. Every country has its unique tax landscape, and making sure you’re informed about how it meshes (or clashes) with U.S. rules will help you feel prepared, wherever your journey takes you.
If you’re dreaming of an escape, let’s talk! You might find that a well-planned move is less of a tax headache than you think and perhaps just the adventure you need.
