Josh F. Says:
Do I still need to pay taxes in the U.S. if I move overseas?
IL Executive Editor Jennifer Stevens Says:
Hi Josh,
Let me say up front, I’m not a tax professional. Down below, I’ll recommend a resource for you that’ll answer ALL your questions and connect you to the experts.
But let me give you the lay of the land.
The short answer is: Yes. You will pay U.S. taxes—on your worldwide income—whether you live in the U.S. or not. (Though that comes with a caveat: You can arrange your affairs so that you pay much less. And some people are, in fact, able to reduce their U.S. tax bill to zero.)
But regardless of whether you owe taxes or not—as a U.S. citizen, you do need to file a return.
The U.S. has a citizenship-based taxation system. It’s the only developed nation that does it this way. In other countries (with the exception of Eritrea), it’s residence- or territorial-based, which means their citizens pay if they live there and not if they don’t.
We’re not so lucky. As a U.S. citizen, no matter where you live, you’ll need to file your tax return with the U.S. government. And, typically, you’ll have to file a second return with your country of residence.
Now, the U.S. does have tax treaties with more than 60 countries, and these will allow you to avoid double taxation. The most common way is by claiming tax credits when you file your U.S. tax return. You effectively say: “I already paid X dollars in the place where I live.” And then you’re able to subtract that from what you owe to the U.S.
The cleanest thing to do, then, is to file your foreign taxes first and then your U.S. taxes. When you file your U.S. taxes, file an additional form (Form 1116) to claim the U.S. Foreign Tax Credit.
Alternatively, the U.S. has a provision called the Foreign Earned Income Exclusion (FEIE), which can be claimed on IRS Form 2555. In 2022, it allows U.S. citizens abroad to simply exclude the first $108,700 (the exact amount varies each year) of your foreign-earned income from U.S. taxation.
So, if you’ve arranged your affairs such that you’re being paid by sources outside the U.S., and you’re also physically outside the U.S. for the required number of days, then you can exempt, as I said, the first $108,700 of your income from U.S. taxes in 2022.
Let me say: It’s complicated. You will definitely want to check in with a tax professional—ideally before you make a move—so you’ve got a clear understanding of how the tax laws will affect your personal situation, and you can proactively arrange your life so that you’re paying less if that’s a priority for you.
As I mentioned, the FEIE comes with a rule about the number of days you must be physically outside the U.S.—so you’ll want to know how that works that before you go, so that you don’t make an avoidable mistake and come back to visit two days before you should have, for instance, and accidentally trigger hundreds or thousands in taxes.
For a more complete look at the situation, I recommend picking up a copy of our detailed guidebook, Expat Taxes Made Easy: The Complete Guide to U.S. and Foreign Taxes for the American Overseas.
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