Paying too much?

How to Minimize Your Taxes as an Expatriate living abroad

Becoming an expatriate doesn’t mean that you’re no longer an American citizen. If you remain a citizen of the United States, you’re required to pay taxes to the American government. But expatriates may wonder if they’re perhaps paying too much in taxes or if they’re eligible for certain benefits that could result in a higher tax refund or lower tax payment, and whether moving somewhere else could affect this.

even expatriates need to pay federal income tax

The truth is, even expatriates need to pay federal income tax. Short of renouncing your American citizenship, there’s no way for expatriates to avoid their taxes. There’s no one place to live outside of the United States that best minimizes your taxes. However, there are some potential tax benefits that you may be eligible for as an expatriate. While you will still have to pay federal income tax, it may be reduced if you’re eligible for the Foreign Earned Income Exclusion and Foreign Tax Credit benefits. You might receive a larger tax refund and may still be eligible for the same tax credits you were when you lived in America, or you could ultimately pay the same tax.

two benefits

The Foreign Earned Income Exclusion allows expatriates to exclude a certain amount of their annual foreign income from their federal taxes. For 2021, the maximum exclusion is $108,700 per person. For married couples, the maximum exclusion is $217,400 jointly. That means the IRS can deduct that amount from your taxable income for the 2021 tax year. The Foreign Earned Income Exclusion benefit only concerns foreign income, meaning money made in the country you reside in. For example, if you live in a foreign country yet work remotely for an American company, the benefit wouldn’t apply. While there are eligibility requirements, the Foreign Earned Income Exclusion benefit can greatly reduce the federal income tax ex-pats are required to pay.

The Foreign Tax Credit benefit allows eligible expatriates to claim taxes paid in their country of residence as a credit. For example, say you paid the equivalent of $100 in taxes to your country of residence, that amount would be credited toward your tax bill.

These two benefits allow expatriates to reduce the taxes they’re obliged to pay to the IRS. Essentially, living outside of the United States can lower your taxes. However, you will still have to file your taxes with the IRS and will likely have to pay taxes in your country of residence. Though you may pay less in United States taxes, living outside of the country doesn’t exempt you from filing.

No State Taxes

Also, expatriates may no longer have to file state taxes in their previous state of residence. Generally, most states only require ex-pats to file state taxes if they have lived in that state during the specific tax year and if they generated some of their income in that state. However, some states still require you to pay state taxes if you own property, have an ID from, or have bank accounts located in that state. If you’re still paying state taxes as an expatriate for several years, you may be able to stop.

Expatriates remain eligible for the Child Tax Credit, even when residing in another country. It applies to taxpayers with children and dependents, offering credit to guardians for each dependent they have. The credit received is decided by income and number of dependents, so it looks different for each family. However, this is an example of the tax credits expatriates are still eligible for, despite living outside the country. Expatriates may be unaware of the tax credits that apply to them once they have moved outside of the United States.

Though expatriates live outside of the United States, they’re likely still entitled to the same tax benefits and credits they were eligible for while they resided in America. At Allure Accounting, we can help you understand what credits and deductions you qualify for as an expatriate, minimizing your taxes. 

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