US Expat Tax Myths and the Truth | Tom LR Griffiths
Tom LR Griffiths is a tax advisor and consultant, specialising in US expatriate tax matters
Tom LR Griffiths
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US Expat Tax Myths and the Truth | Tom LR Griffiths

US Expat Tax Myths and the Truth

The online space is not always a good place to acquire information on expat tax, especially when that tends to be misinformation if not coming from a position of tax expertise. A thread in an expatriate group on Facebook isn’t the best place to discover the factual information you need to make the best decisions where taxes are concerned.

Tom Griffiths dives deep into many of the US tax misconceptions and shares his expert expat tax advice to help ensure the correct information is available to all those who need it.

Worldwide income isn’t taxable.

This is a common query, especially for new expats living in locations other than the US. Worldwide income is indeed taxed by the IRS, even for US residents that reside in another country. The worldwide income takes into account income that is earned inside the US and outside the US. The amounts earned must be submitted in US dollars, the exchange rate on the date the income was earned must be accurate, and the submission should follow the US tax rules.

I don’t need to worry about the IRS when living abroad

Unfortunately, the way the US system works, you do need to consider the IRS and your duty to pay the relevant taxes. With this current system, US citizens are legally required to pay tax on their income which is based on their citizenship and not on their residence.

I earn less than the foreign earned income exclusion, so I am exempt from filing a tax return

There is, of course, a possibility that you could be eligible to claim the Foreign Earned Income Exclusion. However, it is not a forgone conclusion that you will meet the requirements. A 2555 form must be filled out to claim the exclusion and display to the IRS that the eligibility expectations have been met in a timely manner. The exclusion is limited to income tax, so social security taxes could still be payable.

The FEIE allows expat green card holders and US citizens to exclude a limited amount of foreign compensation from their income tax, including some housing expenses. Currently, the amount eligible for exclusion is $108,700.

All foreign expat taxes can be credited against US tax

No one likes paying taxes, and certainly not if you have to pay twice! US expats can avoid double taxation through the foreign tax credit form (1116). This can apply if the US tax owed on foreign income was first taxed by a foreign country. As with all circumstances involving tax, not everyone is eligible, and the foreign tax must apply to income tax or the equivalent.

My foreign bank account has less than a $10,000 balance, so I don’t need to report it

If your bank balance is high enough, the US government does require you to report your foreign financial accounts to them. The FBAR (form 114) must be submitted if your balanced exceeds $10,000 within the year. The interesting fact about this one is that if you have several accounts, regardless of their amounts, when one reaches that threshold, you must report them all, even if the balance is $1.

My US passport or green card has expired; therefore, I do not need to file

Allowing your passport or green card to expire won’t suddenly make all the expat tax challenges magically vanish. In fact, there is every likelihood that those challenges could increase! There are plenty of Americans living abroad who want to renounce their citizenship, but that is quite an extreme step when many other options are available. To ensure you’re not shirking on your expat tax responsibilities, rather than allowing your official documents to expire, you will need to follow the US citizenship exit system properly. Failure to do so could result in penalties, continued liabilities, and punitive exit taxes in some circumstances.

As a US citizen who has chosen to reside in another country for whatever reason that might be, it can be challenging to deal with the US tax system and expat tax because there are so many elements to it. This is why many expats living abroad choose to work with US specialist tax advisors to help them navigate this system, especially if they wish to retain their US citizenship.

The truth is, once you understand more about the complexities of the tax systems as an expatriate and perhaps seek advice from a tax specialist, it can all be straightforward and less daunting. Enabling you to simply focus all of your efforts on making your experience of living in another country an incredibly positive and enjoyable one.