Tax Tips for Americans Living Abroad

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Filing income tax returns is an arduous and stressful task for a person living in the United States. But the process is simple compared with that of U.S. citizens living abroad.

According to the State Department, some 5.2 million Americans live outside U.S. borders. And just like other American citizens, these people must file an annual income tax return.

[See Take Advantage of These Tax Breaks.]

For Americans abroad, this is no easy task. Complicated foreign tax laws, treaties, and a host of other challenges make the process difficult. According to tax experts, there are steps to make the filing process easier. But even with a simplified process, there are few advantages for Americans living overseas.

Income overseas, taxes at home. According to Robert Goulder, editor-in-chief of international tax publications for Tax Analysts, a nonprofit publisher, all income earned overseas must be reported at home.

"The U.S. individual income tax operates on a ´worldwide´ basis, meaning taxable income must be reported on your Form 1040 regardless of geographic source," Goulder says. "Both foreign-source and domestic-source income falls within the U.S. tax net. Absent some form of specific relief, your foreign income will be subject to double taxation–once in the source country [where the money was earned], and again in the U.S."

This means people living overseas are hit twice by taxes. For instance, someone living in the United Kingdom has to pay U.K. taxes as well as U.S. taxes.

However, Goulder says that people living abroad can claim a credit for taxes they paid overseas, eliminating double taxation. But this is easier said than done, he says.

“The IRS may reject a taxpayer’s claim for this credit unless they can provide official documentation establishing that the foreign tax was, in fact, paid. This often creates timing problems where the taxpayer has yet to receive the necessary documentation by the time the U.S. filing deadline rolls around,” Goulder says.

[See How to Avoid an IRS Audit.]

Small upside, big downside. Michelle Koroghlanian, technical manager of taxation at the American Institute of CPAs, says one of the potential upsides to living abroad is that certain countries have more favorable deduction laws than the United States.

But these deductions hardly offset the downsides to filing taxes from abroad. According to Koroghlanian, one of the most challenging aspects is the informal filing process.

"The biggest disadvantage is how confusing the rules are. When you are living overseas, you have to figure out what you owe on the U.S. side,” Koroghlanian says. “Then you get into what you owe the foreign side. You’re used to a system when you get W2s and 1099s and prepare a return with a due date. Not every country has a system like that."

Goulder adds that the sale of assets in the United States by people living overseas is also taxed differently. He recounted a situation in which friends living in Europe attempted to sell a house they owned in Maryland. If they sold the house, they’d be responsible for a large tax on the money they made from the sale, or a capital gains tax. If these friends were citizens living inside the United States, these gains would not be taxed.

"Our tax code is essentially preventing them from disposing of an asset," Goulder says. A large slice of their personal wealth is tied up in the house, which they desperately want to sell, but can´t without suffering a tax hit."

[See 4 Tax Breaks of Homeownership.]

Goulder also dismisses any ideas about stashing assets in an offshore account. "Stashing your assets in an offshore account or holding company leaves you no better off than if it were invested ´onshore.´ … All income is subject to U.S. tax regardless of its geographic source," he says. "It all goes on your tax return just the same. The only benefit of having an offshore account is if you don’t report the income–and that’s illegal, regardless of the misleading gimmicks you occasionally see on some unsavory website."

A drastic option. There is one way to avoid paying U.S. income tax: Give up U.S. citizenship and acquire citizenship of the other country. The downside to this move if that a person loses all the benefits of being an American abroad. The upside is that the IRS no longer has jurisdiction.

According to Koroghlanian, this could be an option for retirees who have settled elsewhere. “During retirement, it’s going to be much the same system as long as the retiree is keeping U.S. citizenship,” she says. “Some decide to give up U.S. citizenship, but as long as they keep it, they have the responsibility to file and pay U.S. income tax on their worldwide income.”

Twitter: @davidcfrancis


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  • No, Ron Paul doesn’t want a corporate cnoime tax either. He want’s to cut the federal government by at least half and to force that to happen by abolishing cnoime tax and replacing it with nothing. As far as revenue goes there WAS a federal government before the 16th amendment and it was funded by tariffs. Of course we barely have a FEDERAL government anymore it’s basically a NATIONAL government and if you got it back to it’s proper functions (protecting our liberties from those that would take them away, foreign and domestic .that’s it) and out of all the ridiculous things they stick their nose into now you wouldn’t need the revenue of an cnoime tax.The sick part about the health care debate is that ending your burden of health care costs on employers and business owners will always be demonized as Taxing Your Health Care Benefits For The First Time In US History when it’s really leveling the playing field by ending the deduction for employers health care costs or at least giving the deduction to individuals too. You saw how well that idea worked for McCain along with buying insurance across state lines. 2 great ideas for lowering costs, instead we got 10 billion page red tape obamacare passed awesome.The real key to getting health care costs under control is to end the 3rd party payer system. It’s just like your driving the rental car illustration in a different post. People with insurance don’t care what the bill is because they don’t see it all they see is the copay and coinsurance. Do you think that car insurance companies could survive if you couldn’t deny based on pre-existing conditions? Wreck your car and then the next day buy insurance to get it fixed after the fact sure I’ll pay the $500 deductable to have you fix the $9000 worth of damage I did yesterday. That’s welfare not insurance. Insurance only works if MOST of the people get paid out less than they pay in for the security of knowing they are covered if they are one of the FEW that need way more than they pay in. If everybody is getting paid out more than they pay in (ahem Social Security) it’s unsustainable and will go under.Health insurance should be the same way as every other insurance, catastrophic coverage only. Would you rather pay $500 a month for car insurance but only pay $1 for an oil change or $5 for a tuneup? Hell no, budget for and pay for your body’s maintenance yourself and premiums would drop like a stone if they didn’t have to cover a common cold you would have gotten over in a week anyway without going to the doctor.

  • Hi @Amy, thanks for sntpiog your question. I’m a little confused because you say that you bought your place in March 2006, AND are a first time home buyer. I guess maybe you mean that your March 2006 purchase was your first home buying experience. Unfortunately, under these facts, you would not be eligible for either the first-time home buyer tax credit or the step-up credit for long-time homeowners. The reason is that you have not owned your current place for the requisite five consecutive year period, since you only bought it in March 2006 (that gives you upwards of 4 years this upcoming March). And you’re not a first-time home buyer if you currently own that place you bought in March 2006, because to qualify as a first-time you can’t have owned a home within the three years prior to closing and you apparently own your own home now. Sorry to be the bearer of bad tidings. Let me know if I’m misunderstanding your question, though.By the way, refinancing doesn’t matter at all. You can refinance all you want. The issue is whether you’ve owned your own place, and for how long.