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Tuesday, May 21, 2024

Staying in Compliance With Expat Taxes

Being an expat can be fun, but it’s not a continual holiday. More and more people decide to relocate and enjoy the numerous benefits of being Americans in countries with cheaper costs of living and beneficial taxation systems.

While there’s nothing amiss with this kind of logic, prospective expats should know that merely changing locations won’t excuse them from paying state and federal taxes.

We’ll hereby summarize points of interest in this matter, so read on!

Who Is Obliged to Pay State Taxes?

Americans living abroad must file US federal tax returns and pay taxes on their income regardless of where it was earned as long as they are US citizens. In addition, Americans who are considered residents and who have income in the state also need to follow this pattern.

An American expat is considered a resident if:

  • They lived in the state for any duration during the tax year
  • They have a permanent place of residence in the state
  • They have immediate family that lives in the state while they’re abroad
  • They keep their voting rights, ID card, or driver’s license in the state (any of these)

American Expats are considered to have income in the state if:

  • They earn income in the state regardless of where they live
  • They get pensions, retirement income and or any other government benefit in the state

The USA is only one of two countries that imposes citizenship-based taxation. However, some U.S. states are more beneficial than others in this regard.

The U.S. states that don’t apply state income taxes to are expats Alaska, Florida, Nevada, South Dakota, Texas, Washington State and Wyoming. New Hampshire and Tennessee apply income tax on dividends and interest income only.

California, South Carolina, New Mexico and Virginia apply state income taxes to American expats who:

  • Own a property in the state
  • Own a bank or investments account in the state
  • Hold an ID card, a driving license, or a voter registration in the state
  • Have a mailing address in the state or if their relatives do
  • Have dependents in the state

What Happens if an American Expat Fails to File Taxes While Living Abroad?

American expats who fail to file U.S. taxes while living abroad may face a number of complications, including penalties and interest costs. In the worst-case scenario, criminal charges are also possible.

Late filing and late payments are subject to penalties imposed by the IRS when an American expat knowingly avoids the tax requirements.

For illustrative purposes, failure to file a penalty will result in a 5% monthly fine applied to the unpaid taxes, with the maximum sum being 25% of the unpaid taxes. A failure to pay a penalty will result in a 0.5% monthly fine applied to the unpaid taxes, with the maximum sum being 25% of the unpaid taxes. Payments that are overdue 60+ days will result in a fine of up to 25% of the unpaid taxes.

That being said, unless you’re planning to renounce your U.S. citizenship, you should familiarize yourself with tax deadlines for American expats.

The U.S. tax year equals the calendar year (Jan. 1 to Dec. 31). 

Preventing Double Taxation

Fortunately, there are ways to prevent double taxation for American expats. Usually, every expat should be able to qualify for one of the programs mentioned below. Note that only one program should be picked, so if you happen to qualify for multiple ones, pick the one that suits your circumstances best.

Available to expat Americans are the programs, namely tax treaties, The Foreign Earned Income Exclusion (FEIE) and The Foreign Tax Credit (FTC).

Let’s take a look at each of these options briefly.

Tax Treaties

The U.S. has tax treaties with 70 countries. If you establish a business in a country that has a tax treaty with the U.S., you qualify for this program. Look up the list of countries the U.S. has tax treaties with.

The Foreign Earned Income Exclusion (FEIE)

If you can pass either the Bona Fide Residency test or the Physical Presence Test, you qualify for the FEIE. This program allows the exclusion of up to $107,620 of your foreign-earned income in a tax year.

The Foreign Tax Credit (FTC)

The FTC allows American expats to claim a dollar-for-dollar credit on foreign income taxes. To qualify, they should obtain a foreign tax liability. 

Additionally, there is a housing exclusion and a foreign tax credit.

Streamlined Tax Filing Procedures: An Alternative for American Expats

The Streamlined Filing Procedures (SFP) are designed for American expats looking for an alternative to IRS procedures. Basically, they help expats keep up with the missed taxes and also provide a number of tax returns.

To qualify for the program, an expat should:

  • Demonstrate that the reason for not filing taxes in the past was because you didn’t know you were required to
  • Have lived outside the U.S. for at least 330 full days during one or more of the three most recent tax years
  • Not have had an abode in the U.S. for one or more of the three most recent tax years
  • Produce a signed statement (Form 14653) certifying all of the above

Overall, there are plenty of solutions for American and other expats. Filing taxes may be cumbersome (and expensive!) but there is a fair number of alternatives. Look up all of the benefits mentioned above and pick a program that suits you best.

Jack henry
Jack henry
Hi, I'm admin of techfily.com if you need any post and any information then kindly contact us! Mail: techfily.com@gmail.com WhatsApp: +923233319956 Best Regards,

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