In today's digital age, the rise of the remote-first lifestyle has been nothing short of revolutionary. More and more individuals are seeking to live and work in foreign countries, drawn by the allure of diverse cultures and flexible working environments. However, the adventure of living abroad comes with some complexities — especially when it comes to taxes.
In this article, we’ll explore the eight things every expat entrepreneur should know before leaving the U.S. to work abroad so you can be prepared when tax season rolls around, regardless of where you’re working.
1. U.S. Citizens Must Always File Tax Returns
Even if you’ve relocated to a foreign country, the reality remains: If you're an American citizen holding a U.S. passport, you’re obligated to file tax returns annually. This might seem counterintuitive, but it's a crucial detail to remember so you can avoid audits and stay in the clear.
Elliott Locke, the Co-Founder and CEO of abroaden.co, a startup that provides financial services and solutions for people living abroad, says, “In the United States, we have a system called citizen-based taxation, which means that regardless of where you live in the world, if you're a U.S. citizen, or more precisely U.S. person — like if you're a green card holder — you are liable for your taxes both in the country you're living in as well as back to Uncle Sam.”
Convenient? Not really. Important to know when you work abroad? Absolutely.
2. Always Report Foreign Bank Accounts
If you have a foreign bank account, be aware that any American holding an account outside the U.S. is mandated to file a separate report if the balance surpasses $10,000 at any time during the year.
Roland Sabates, Managing Member at Expat Legal Services Group, mentions, “These are the accounts that an expat is opening to buy groceries and just do business or do whatever they have going on in that country. But these are the same accounts that a dentist in Baltimore, Maryland, is using to hide offshore profits in the Cayman Islands. So you have the same information reporting obligations that were not designed for you, but you still have the same penalty exposure that somebody who may be using these types of accounts for nefarious purposes would have.”
3. Understand the Foreign Earned Income Exclusion
For expats or those residing outside the U.S., there’s a silver lining. The foreign earned income exclusion was created to avoid double taxation for Americans living abroad and allows you to deduct $120,000 from your earnings before tax. This means you aren't taxed on that amount by the U.S. government.
You qualify for the foreign earned income exclusion if you have foreign earned income, your tax home is in a foreign country, and you are either:
- A U.S. citizen who is a resident of a foreign country for an uninterrupted period that includes an entire tax year
- A U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year
- A U.S. citizen or a U.S. resident alien who is physically present in a foreign country for at least 330 full days during any period of 12 consecutive months
4. You Get Credit for Foreign Taxes
Paid taxes in a foreign country? The U.S. offers a dollar-for-dollar credit for any foreign tax you've paid. This emphasizes the importance of understanding the tax rate of the country you’re residing in, as it directly influences your U.S. tax strategy.
Sabates reminds U.S. expats to think about two things:
- Are you paying tax in a foreign country?
- Is that rate of tax higher than you would be paying in the U.S.?
If you answer “yes” to both, you could qualify for some hefty U.S. tax breaks.
5. There Are Different Rules for Permanent Moves vs. Temporary Stays
Being a digital nomad isn’t the same thing as emigrating permanently — and each scenario has different tax implications.
“A digital nomad doesn't want to be a tax resident anywhere, so they keep moving around,” says Locke. But when someone sets up shop for the long haul in a new country, there’s a lot more to think about. Make sure you check out the tax laws in the country you’re immigrating to — and consider that foreign retirement and savings schemes might not align with U.S. tax benefits.
6. Plan Ahead for Tax Season
Think about optimizing your U.S. tax exposure while living abroad. Questions to ponder include:
- Are you paying foreign tax?
- Are you eligible for the foreign earned income exclusion?
It's advised to consider these factors before the year ends so you have plenty of time to consult with a tax professional or hammer out any details and avoid the typical rush before April 15.
7. Think About Where You Register Your U.S.-Based LLC
If you’re setting up a U.S.-based LLC while living abroad, consider the location of registration. Different states have varying income tax levels, so opting for a state with lower taxes will be beneficial in the long run.
8. Get the Right Visa
Residing in a foreign country means abiding by its rules, so it’s important to delve into your host country’s visa offerings before you set sail. If you intend to work while you’re abroad, you need to make sure you apply for the correct visa to avoid complications.
Don’t Let the Red Tape Keep You From Working Abroad
Embarking on a journey abroad is exhilarating, but it's crucial to remain compliant and informed. With these expert-backed tips, you're better equipped to navigate the tax landscape as a U.S. expat.