Tax Obligations and Incentives for Ex-Pats Living Abroad

If you are an ex-pat living abroad or you are considering moving abroad, it is important to ensure you have a good understanding of your tax obligations as well as the various incentives available to you. Among the most common misconceptions about U.S. citizens or residents who are living abroad is that the requirement to pay U.S. federal taxes does not apply. This is actually not true. Even if you are living abroad, you are still required to meet your tax obligations.

Although this may sound like bad news, there is some good news and it is that as an ex-pat living abroad, you have a few tax breaks available to you. Among those tax incentives is the Foreign Earned Income Exclusion, the Foreign Tax Credit, and the Foreign Housing Exclusion or Deduction. It should be kept in mind that you must comply with several foreign reporting requirements.

What Is the Foreign Earned Income Exclusion?
Under the Internal Revenue Code, you can take advantage of what is largely known as the escape clause if you live abroad. Under this clause, you can earn up to $97,600 per year tax free. If you are married and your U.S. spouse lives with you abroad, you are able to double this exemption and earn up to $192,500 jointly per year, completely free of U.S. income tax. With that said, you are still required to file a tax return along with an additional form.

Foreign Housing Exclusion/Deduction
U.S. persons living abroad may also be able to quality for the Foreign Housing Exclusion/Deduction. In order to qualify for this exclusion, you must meet what is known as the Bona Fide Residence Test, which means you must reside abroad for an uninterrupted period generally equivalent to one calendar year. Under this exclusion, the deduction can be applied to qualifying expenses such as utilities, rent, and insurance.

Foreign Tax Credit
With the Foreign Tax Credit, you receive a dollar-for-dollar credit that can be applied against your U.S. income tax liability for income taxes that you pay while you are either living or investing abroad. It should be kept in mind that strict limits apply to the FTC. For example, the FTC cannot be applied to social security taxes that you pay while living in another country.

Regardless of where a U.S. citizen lives, they are required to report financial interest in any foreign financial accounts along with certain types of transactions with various types of foreign entities, such as foreign partnerships, foreign corporations, foreign trusts, and offshore mutual funds.

We highly recommend that you consult your tax professional to ensure you're taking advantage of all incentives AND meeting all obligations.