Do I Have to Pay US Income Tax if I Am Living Abroad?
I must admit, I’ve always thought I would live abroad as an adult. The first time I left the country was for a six-week student exchange in Spain. This was an eye-opening experience for a kid just coming off of the farm, and it led me to want to do even more exotic travel. I set my eyes on Japan and found a college with a solid Japanese language and student exchange program. In my junior year at college I traveled as a Hansard Scholar to London, and then flew to Japan for a semester abroad at Meiji Gakuin University. There I met my husband, who was a cryptologist in the navy at the time. Since then we’ve traveled to Austria together.
To say that my experiences changed my life and opened my eyes to wonderful possibilities is putting it lightly. While I haven’t lived abroad since college, I am only 30 and hope that it might still be in my future. A likely scenario would be that my husband finds a job abroad (he also loves this idea), or my freelance income becomes enough to sustain the two of us for an extended period of time in another country (a girl can dream, right?). One of the things that I will need to consider (and have often wondered about) when living abroad is what, if any, taxes I will owe to the United States Government for income earned abroad.
Do I Need to File a US Tax Return if I Am Living Abroad?
US income tax if living abroad. It turns out that yes, as long as you are a US citizen or resident alien, you will need to file a US tax return (and generally speaking, income reported and paid must be in US dollars). This is regardless of which country you choose to reside in, or which country your income sources come from. This is also true if your income is paid in foreign currency, and even if you are being taxed by the foreign country you live in (you may be eligible for a Foreign Tax Credit or an itemized deduction for those taxes paid if this is the case).
Self employed and living abroad. Particularly useful for me, I found out that you still need to pay taxes if you are self-employed abroad if you have $400 or more of net earnings (regardless of what country it is earned in). The minimum income for self employment income earned abroad is the same as the minimum income to file taxes in the US. Fortunately, there are ways to cut your tax bill to the IRS in this situation.
Possible Exclusions and Deductions
If you meet certain requirements while living abroad, then there are several exclusions that can apply to help with your tax bill.
Foreign Earned Income Exclusion. One of those is the Foreign Earned Income Exclusion, and if you qualify, you may exclude up to $95,100 of your foreign earnings from income (if your spouse also works abroad, together you can exclude up to $190,200 of income). To qualify, you must meet all of the following:
- Your tax home must be in a foreign country
- You have foreign earned income
- You are either a U.S. citizen who is a resident of a foreign country for an uninterrupted period that includes a tax year; or you are a U.S. resident alien who is a citizen/national of a country with which the U.S. has an income tax treaty in effect and you are a resident of a foreign country for an uninterrupted period that includes a tax year; or you are a U.S. citizen/U.S. resident alien who is physically present in a foreign country or countries for at least 330 full days during any consecutive 12 month period
Housing Exclusion/Deduction. If you qualify for the Foreign Earned Income Exclusion, then you qualify for the Housing Exclusion/Deduction. The housing exclusion applies only to amounts considered paid for with employer provided funds and the housing deduction applies only to amounts paid for with self-employment earnings. The amount you can exclude/deduct for housing is the total of your housing expenses for the year minus the base housing amount (16% of the Foreign Earned Income Exclusion amount).
Note that if you are not self-employed, all of your earnings are considered employer-provided amounts so your entire housing amount can be excluded (up to the limits).
Publications and Forms to Fill Out
Bear in mind that each of the phrases above are defined very specifically by the IRS. That’s why it is important to read through their tax guides, such as Publication 54: Tax Guide for U.S. Citizens and Resident Aliens Abroad. Other publications to read are Publication 514: Foreign Tax Credit for Individuals, and Publication 901: U.S. Tax Treaties (you may be able to reduce your foreign tax liability under certain Tax Treaties or Conventions between the United States and the country you are residing in).
To Claim the Foreign Income Exclusion or Housing Exclusion, you need to file a tax return and attach Form 2555: Foreign Earned Income, or Form 2555-EZ.