US Citizen Planning to Work Abroad? Understand Your Tax Obligations!

If you are a US citizen planning to reside and work as an employee in a foreign country, you must understand your US tax obligations. Melanie Mackenzie, Co-Founder of USTaxGlobal, discusses below the basics you need to know about the US taxation of foreign employment income.

US citizens must report their worldwide income on their tax return regardless of where they reside, who their employer is, where they physically work, or where they are paid. Generally, US citizens residing abroad on April 15th are eligible for an automatic 2 month extension to file their annual US tax return by June 15th. However, all taxes should be paid by April 15th in order to avoid interest charges and possible penalties.

Taxpayers generally must pay taxes to the foreign country of residence too. Don’t worry! Filing a US return doesn’t result in double taxation. Taxes paid to a foreign country for work performed in a foreign country may be taken as a foreign tax credit on the US return thereby relieving double taxation. If the foreign country has higher tax rates than the US then the foreign tax credit will offset 100% of the US tax. If the foreign country has lower tax rates than the US then there won’t be enough foreign tax credits to fully offset the US tax. This would result in a net tax payable to the US. Note that higher income taxpayers are still potentially subject to the Net Investment Income Tax on investment income while residing abroad.

Some taxpayers who qualify could consider electing the Foreign Earned Income & Housing Exclusions (FEIE), which excludes all or a portion of foreign employment income from US tax. However, due to the interaction between the exclusion and the foreign tax credit, electing the FEIE doesn’t always result in a lower tax compared to claiming the foreign tax credit exclusively. Generally, an experienced expat tax advisor can evaluate all scenarios and determine the best filing strategy.

US citizens must also understand their foreign financial account reporting obligations. Foreign financial accounts include bank, brokerage, and pension accounts. The Foreign Bank Account Report (FBAR) must be separately filed if the aggregate value of these accounts exceeded $10,000 at any time during the year. For complete guidance get our free comprehensive FBAR guide HERE (link). Taxpayers with significant foreign financial accounts and assets may also be required to report all their foreign financial assets on Form 8938 with their tax return.

US citizens should avoid investing in foreign mutual funds, taking out a foreign mortgage, or creating a foreign corporation or trust without first obtaining specialist advice from an experienced tax advisor. These are all subject to complex regulations and mistakes can be costly.

Don’t forget to understand and plan for state income taxes. Some states expect expats to continue to file a resident state tax return and pay state income taxes on foreign employment earnings. Some states are much more lenient and treat expats as nonresidents not subject to tax.

This article isn’t tax or legal advice. It is recommended to engage a professional tax advisor such as USTaxGlobal.