Income Tax Requirements When Living Out of the Country
Living in a foreign country holds a lot of appeal. It gives an exotic impression and seems like a never-ending vacation. But it doesn’t matter where you go, because the US government still expects you to file a tax return and pay taxes. This is true even if you become a citizen of the other country and live there full time.
The United States might be the only country in the world that does this.
If you were a citizen of Italy but living and working in Argentina, Italy wouldn’t expect you to pay any taxes! You would have to pay them in Argentina, though. The US would expect you to pay both.
For your peace of mind and to keep you out of jail, become familiar with the income tax rules that apply to you as a citizen of the United States living outside the country.
Income tax rules for US citizens living abroad:
- No matter where you live, you must file a tax return. It’s entirely possible that you won’t owe any taxes, but you must file an income tax return each year.
- You’re still subjected to all US tax laws. This includes income tax rates and the same credits and deductions.
- There are 2 primary ways to reduce your taxes owed in the United States. The United States has a reputation for double taxation, but in practice that only applies above certain income limits.
- Foreign tax credit: This credit is intended to protect American citizens from paying taxes twice on the same income. In essence, you can deduct any income taxes you’ve paid in the foreign country from your taxes owed in the US. There is a limit, however.
- If you paid $12,000 in foreign taxes, you could reduce your US tax bill by $12,000. Simple enough.
- Income exclusions: This is the other option. You can’t claim both. The income exclusion allows you to reduce your gross income by up to $97,600. You can also subtract housing costs up to a maximum amount.
- As an example, if you earned $100,000 in a foreign country, your taxable income would be only $2,400. It would be even less after the housing cost credit.
- The housing credit is equal to the cost of housing minus $15,216. The maximum is 30% of $97,600. If your housing costs were $25,000, you could claim an additional deduction of $9,784 from your gross income.