Expat Tax Rules for U.S. Citizens Working Overseas
"Do U.S. citizens have to pay taxes on foreign income?" "How much taxes do I pay if I work overseas?" "As a citizen working abroad, what are my U.S. income tax filing requirements?"
If these questions sound familiar, you’re not alone—U.S. expat tax rules can be confusing and downright complicated for even the most financially-savvy Americans.
Despite what you might think, you do have a tax obligation to the United States as long as you’re a citizen—regardless if you’re currently living in Tokyo, Japan or St. Louis, Missouri.
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Do U.S. citizens have to pay taxes on foreign income?
Yes, U.S. citizens have to pay taxes on foreign income if they meet the filing thresholds, which are generally equivalent to the standard deduction for your filing status. You may wonder why U.S. citizens pay taxes on income earned abroad. U.S. taxes are based on citizenship, not country of residence. That means it doesn’t matter where you call home, if you’re considered a U.S. citizen, you have a tax obligation.
Your expat tax filing requirement doesn’t change even if you’re paid by a foreign employer overseas. In addition to federal income taxes, some U.S. citizens living abroad also need to file state taxes as well, depending on their last state of residence.
Taxable foreign-earned income includes:
- Rental Income
If you’re a U.S. citizen abroad and have never filed a tax return, you can relax. The IRS built in a safeguard for honest expats who truly didn’t know they had to file. You can get caught up penalty-free with Streamlined Filing Compliance Procedures. To qualify, you must:
- Have lived in a foreign country for at least 330 days during one of the last three years
- Confirm it was a genuine mistake you failed to file your U.S. tax return and FBAR
How much taxes do I pay if I work overseas?
Now that you know U.S. citizens have to pay taxes on foreign income, your next question is probably about how much in taxes you pay if you work overseas. You might wonder if you’ll have any money in the bank after paying both your U.S. and host country income tax liabilities!
Fortunately, even though most U.S. citizens working overseas must file taxes, expat tax rules have evolved so most expats don’t actually owe any amount at the end of the year.
While there is no overall U.S. expat tax exemption, there are exclusions and credits—like the foreign earned income exclusion and foreign tax credit—to help alleviate the tax burden for U.S. citizens living abroad. Tax exclusions and credits are just two examples of the many unique tax rules applicable to U.S. expats working overseas, so it could be helpful to work with a qualified and reputable expat Tax Advisor to help manage your worldwide tax burden.
Want to know more? Learn the top 20 things every American overseas should know about U.S. expat taxes.