Do Us Citizens Pay Taxes Working Abroad – Imagine you’ve left the US. Now you are relaxing on a beach in Mauritius or working in Germany. Living in a new house in Malaysia or traveling to a new country every month.
In today’s world, it is possible to be a global citizen and take advantage of everything the world has to offer.
Do Us Citizens Pay Taxes Working Abroad
It’s a bump in the dream, but this is reality. No matter where you are traveling to, if you are a US citizen, you are still expected to pay US taxes.
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This may not seem fair or reasonable. How can they do this? Is there a way to escape the US tax system?
The United States is currently the only country in the world that imposes a citizenship-based tax. This means that you must pay taxes as long as you are a US citizen, even if you no longer live in the country.
Citizenship-based taxes have been around for a long time in the US, dating back to the Civil War. And it probably isn’t going away anytime soon.
Other countries have considered citizenship-based taxation, and a few even tried it for a while, but the US is currently the only country that will make you pay taxes as a citizen, no matter where you are.
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All US persons (including citizens, residents and green card holders) must pay US taxes.
This means that if you are a US citizen living abroad, you must still pay and file US taxes. No and no, if, or but. You must file your tax form wherever you live. In fact, living abroad means you have to fill out additional tax forms.
Along with the taxes you have to pay, there are many forms that need to be filled out. Expats are already eligible for an automatic filing extension, which means taxes are due annually by June 15. However, if that extension still doesn’t give you enough time to clear the foreign filing hurdles, you can file Form 4868 and extend it. period until October 15.
FBAR is a report you must file for every foreign bank account with $10,000 or more, no matter where you are in the world. There are penalties if you don’t report your accounts (about $25,000), so make sure you’re filing all applicable FBARs each year.
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You must also report your foreign company and file Form 5471, which is for any US person who owns a foreign company. If you own at least 10% of the company, it counts and must be reported. This form isn’t technically a tax form, just informational, but the IRS won’t be happy if you don’t fill it out.
There are only two assets you don’t need to report if you own them offshore: real estate and precious metals. If you are storing gold in a private vault offshore, this does not need to be reported. And as long as you haven’t made any profit from your foreign real estate, it’s considered a non-reportable asset.
Failure to pay your taxes or complete and submit the correct forms can have serious consequences. This can lead to heavy fines or even jail time.
If you don’t fill out your tax forms correctly, or if you don’t fill them out at all, the IRS will come after you.
Living Abroad Taxes For Us Citizen
If you realize you’ve made a mistake on your taxes or previously failed to pay taxes that you didn’t know you should while living abroad, it’s often possible to fix it.
It helps to hire a tax attorney who can help you figure out exactly what you owe. Even better is that you can find a tax preparer who is familiar with expat tax situations.
Hiring a lawyer and fixing your tax mistakes will cost you, so it’s best to get it right first. Know that a tax mistake is not the end of the world, you may be able to fix it. The key is to get it resolved before the IRS contacts you. If they catch your mistake first, you will likely be fined.
Overpaying is not as bad as underpaying or not paying at all. If you pay too much, the IRS sometimes sends you a refund check, although it may take some time because the IRS is not very efficient or fast.
Guide To Taxes For U.s. Citizens Living Abroad
Although you have to pay taxes if you live abroad, there are some ways that living abroad can reduce your tax burden.
If you qualify for the foreign income exclusion, the first $107,600 of actively earned foreign income may be exempt from federal income tax beginning in 2020.
There are some qualifying factors, but most likely if you spend most of your time living and working outside the United States, are a permanent traveler, or have established a tax home in another foreign country.
One way or another, you will need to pass the Physical Presence Test or the Bona Fide Residence Test.
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Most states and cities follow FEIE, which means you can also get a break on state or city taxes, but not all do. If you want to make sure you won’t be charged state tax, you’ll want to move to a zero tax state before moving abroad.
While the FEIE gives you some relief from federal income tax and possibly some state income tax, it does not exempt you from paying Social Security tax and Medicare tax.
If you are self-employed, you must pay these taxes both as an employee and as an employer. However, there are ways around this if you set up an offshore company correctly.
Obtaining dual citizenship and a second passport is a common strategy for tax reduction. However, getting a second citizenship will not get you to pay taxes to the US.
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Being a citizen of two or more countries does not mean that you get to choose which country’s laws you listen to. Both countries will consider you a citizen and both expect you to obey their laws.
So being a dual citizen in Canada or Saint Lucia or wherever doesn’t excuse you from paying US taxes if you still have US citizenship.
What a second citizenship does is renounce US citizenship. You can’t renounce your first citizenship if you don’t have a backup.
The only way to be completely free from US tax and reporting requirements is to cut ties with the US completely. This includes renouncing US citizenship.
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Renouncing your citizenship can be quite a big decision. You will need to surrender your US passport.
While some people consider the US passport to be one of the most valuable Tier A passports, a combination of multiple other passports or passports from multiple countries will get you to the same places as your US passport. This is one reason why it is important to have multiple citizenships.
Different countries have different expatriation programs. In the US, you have to pay an exit tax when you opt out, unless you have a net worth of less than $2 million, in which case you don’t pay an exit tax.
So now you are sitting on a beach in Mauritius or a desk in Germany or your home in Malaysia or wherever you are. It is up to you to decide how to proceed.
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Unless you are willing to renounce your US citizenship, you will be filing and paying US taxes in the near future.
While you can’t completely avoid these taxes while maintaining U.S. citizenship, hiring a tax professional is the best way to understand what you owe and what exclusions and deductions you’re eligible for.
A tax professional can also help you understand what forms to fill out and what to report. Most importantly, they can advise you on a tax strategy that can save you money. No matter where you are, our US expat tax services can be accessed in a few easy steps. Our team will contact you within one business day to explain the process. During the free consultation our US tax expert will answer your questions and provide you with the best solution.
We’ll create an account for you on our secure customer portal and simply upload your documents. And that’s it. Sit back and relax while we take care of your confession.
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Your assigned accountant will prepare your US tax return and send you a final review and confirmation. We offer flat fees for tax services to US expats and you will send payment after all work is completed. Easy and hassle-free.
We always agree on a specific fee before we start, so you
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