Taxation for Expats – Tips Before Moving Abroad (US Perspective)

March 24 , 2021 by: Leah Martin

Making the decision to move your entire life abroad can be a stressful and manic process. There are a whole host of things which American citizens need to consider when they make another country their home. One of the most important things is how you will handle your taxes. While this may be scary on the surface, the reality is that expat life can actually pose some significant tax benefits.

Expats Need To File US Tax Returns

A common misconception by most expats is that once they leave the US, they no longer need to submit US Tax Returns. However, this reporting and filing obligation is still in place once you move. The US government taxes their citizens on income no matter where in the world they are. Therefore, filing your tax return is important regardless of where your current active residence is. It is also worth noting that even if you don’t owe any tax, you will still need to submit your return.

Save on Taxes with FEIE & FTC

The idea of potentially being taxed in two countries can be a little overwhelming. However, as previously noted there are tax benefits of being an expat too, which will potentially reduce or eliminate your US tax burden.

The Foreign Earned Income Exclusion (FEIE) is the most common option utilized by expats. This allows you to exclude over $100,000 from your income tax submission.

In order to qualify for FEIE, expats will be required to either be a bona fide resident of the country they are currently living in, or to spend 30 days or less in the US per year. Seems relatively simple, right?

The alternative option is Foreign Tax Credit (FTC). This gives US expats tax credits for tax they have paid to a foreign government on income they have achieved while abroad.

It is also possible to combine FTC & FEIE to get the ultimate tax benefit as an expat. But you must apply for both, as neither are automatically applied.

Recognition of Foreign Bank Accounts

It is essential that you recognise your foreign bank accounts and assets. These can be announced through the Financial Bank Account Report (FBAR). On this report, expats must report any bank accounts they have opened in the foreign country they are living in, or any accounts they have signatory authority over. If the account is small in total balance, then you may be able to avoid doing this. Alternatively, the FBAR is also required if you possess assets/investments which exceed a certain value threshold.

Move to a No Income Tax State

As we know, some US states are more complex than others when it comes to taxation. This is also the case for expats in relation to their ‘home state’. Many US citizens are not aware that it is possible to have remaining tax obligations in the state that they were living in before they moved to a foreign country.

The complexity of this is very much dependent on which state you moved from. Some well known complex states are Virginia, California, and New Mexico. These states may still consider you as a tax resident and responsible for taxation even once you have left the country.

If you live in a state which is somewhat complex, then it might be worth moving state and establishing tax residency in a no income tax state before choosing to move abroad and become an expat.

Deciding When To Move Is Critical

Choosing when you move and become an expat is going to be heavily dependent on your personal situation. You may have a job offer which requires you to start on a specified date, and therefore you have little flexibility on when you move. However, if you do have flexibility, then the time which you choose to move could have a large impact on your tax filing.

Choosing to leave the country closer to the beginning of the year gives you a longer period of time to register for the FEIE benefit previously mentioned. This means that you will hopefully be fully signed up to FEIE by the time that US tax returns are due.

Capitalize on Tax Treaties

Research should be completed on the tax treaties between the US and the country you are planning to move to. Some countries have better tax treaties than others, and if you’re not fixed on a specific country, then it might be worth moving to one with a more favourable treaty in place.

Favourable tax treaties typically will reduce your tax requirements as an expat. These will reduce your income taxes.

There are also totalization agreements which will impact any social security which you may be required to pay.

A tax treaty essentially provides protection against any double taxation which may be in place.

Alexandra on Pixabay

Get an Accountant

The biggest piece of advice that could be given is to get an Accountant who is well versed in expat taxation. It would be recommended to find this Accountant before making your move, and discussing the future country of residence with them beforehand. This way you can gain a full understanding of your taxation requirements, as well as any small specifics you may not have known about before your move. It is always better to learn of any intricacies before moving, as they can make a big impact on your decisions.

Most US Accountants are not overly familiar with the specific exclusions, tax deductions and other tax benefits for expats. Therefore, it is essential to find a tax Accountant with expat experience, or even experience with dual taxation between the US and the country you plan to move to.

The Accountant should be someone that you trust with your financial data, and should know your personal expat taxation situation like the back of their hand. This is why it is recommended to find the Accountant before you move abroad, as meeting them in person can give you a better idea for their level of knowledge, and whether you trust them.


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