5 Things to Know About Taxes Before You Move Overseas

If you’ve ever watched an episode of Snapped, you’ll notice most offenders are on this show because they have trouble letting go when people walk away. As a CPA specializing in US international individual taxation, I’m reminded of the relationship that the Internal Revenue Service (IRS) has with US taxpayers.

As a US citizen or green card holder, you’re required to report and pay tax in the US on your worldwide income—even if you didn’t live or work in the US during the tax year. As one of only a few countries with this policy, it’s imperative that US taxpayers understand their filing requirements. To assist US taxpayers with this transition, I’ve put together a list of the five things that Americans taxpayers should know prior to moving overseas… based on my experience working with US expatriates.

1. You ALWAYS have to file, even if you don’t owe any tax.

Many think that because they’re living outside of the US, working for a non-US employer, or paying tax in their host jurisdiction, that they’re no longer responsible for filing and/or paying tax in the US. This is most misunderstood by US green card holders, who (understandably) assume that if their green card has expired and/or is no longer valid for immigration purposes due to the taxpayer being outside of the US for an extended time, that their US filing requirements are nullified as well.

This is incorrect. One of my colleagues, David Lesperance, put it like this: “Your green card expiring doesn’t change your tax status, just like an expired passport doesn’t change your citizenship.”

To terminate their tax relationship with the US, a US green card holder or citizen will have to expatriate based on the US Expatriation Provisions under the Heart Act (IRC §877A).

That means surrendering their green card or passport to a US consular officer, to start. And depending on whether they meet the definition of a “covered expatriate,” meaning that the IRS may deem their request to expatriate as tax evasion, they could still be required to file US tax returns for the next 10 years—even if they have no US source income to report.

In addition to the ongoing federal filing requirements, the taxpayer may also have trailing state and/or local tax filing requirements. It may be best to visit your state and/or local taxing authorities prior to departure to understand what to expect.

2 . The IRS offers ways to offset double taxation.

Though the IRS will subject your income to worldwide taxation, you will also likely still be subject to tax in your host country. Many taxpayers, upon learning that they will have filing requirements (and potential tax liabilities) in both their home and host country, expect to take advantage of income tax treaties to offset their double taxation. These are bilateral agreements that provide relief for individuals and entities in the event of double taxation. Find the full list of income tax treaties here.

In situations where a taxpayer is a tax resident of both jurisdictions, the income tax treaty determines which jurisdiction has the ability to tax the resident. However, in most income tax treaties, there’s something called a “savings clause” that allows both countries to tax their citizens.

That means if you’re a US citizen looking to offset double taxation on your US individual income tax return, then you’re out of luck.

You may still be able to apply the benefits of an income tax treaty and avoid double taxation, but only on your host country tax return. For example, if an income tax treaty allows taxpayers to exempt a certain type of income from taxation, the income would be exempt on the host country tax return only, but not on the US tax return of the US Citizen.

If you’re a dual citizen of both the US and your host country, you may not be able to use the income tax treaty at all. For US green card holders, this treatment will vary based on which treaty you apply. Taxpayer may apply the treaty of their country of nationality, or their host location, depending on the “Residency Clause,” contained within the treaty.

Now for the good news. I mentioned that the IRS has ways to offset double taxation—specifically, by taking advantage of either the Foreign Earned Income Exclusion (FEIE), the individual Foreign Tax Credit (FTC), or both. With the FEIE, taxpayers can exclude from their adjusted gross income an amount (for the 2023 tax year the amount is $126,000) of their income earned outside of the US.

Earned income is income made while physically located outside of the US. It doesn’t take into consideration the location of the payer or the payment—meaning income paid by a US employer that is reported on a W-2 may still be deemed foreign-source and qualify for the exclusion if you are living and working outside of the US. This also means that income paid by a foreign employer earned while working in the US may be deemed as US-source and wouldn’t qualify for the exclusion.

Please note: If your income is less than the FEIE, that does NOT mean you don’t have a filing requirement. By attaching the IRS Form 2555 and taking advantage of the FEIE, you’re making an election and you have to file your return to take advantage of it; it isn’t automatically applied.

The FTC allows taxpayers to offset their global tax liability by offering taxpayers a dollar-for-dollar credit reduction of their US tax liability.

The FTC is calculated separately for regular and Alternative Minimum Tax (AMT) purposes, but doesn’t offset any self-employment tax for self-employed individuals. If the taxpayer’s host country has higher taxes than the US, this may reduce their US tax liability down to $0… but will not generate a refund.

In countries where the income tax is lower than the US, the taxpayer can receive a credit in the amount of the other country’s taxation. For example, if you’re in a 15% tax country and your effective tax rate in the US is 25%, you’d pay the 15% tax in the host country, receive a Foreign Tax Credit of 15% on your US return, and pay only 10% to the US. In essence, you’d pay the higher of the two tax rates (25%), but not the combined tax rate (25% plus 15%). Assess the use of the FEIE and the FTC separately and together to determine the best tax outcome for you.

3. You can’t hide from the IRS.

The Foreign Account Tax Compliance Act, or FATCA, was passed as part of the HIRE Act in 2010. The FATCA regulations require Foreign Financial Institutions (FFIs), like non-US banks and Non-Foreign Financial Entities (NFFEs) to report back to the IRS any US taxpayers with whom they did business. For example, if you have money in a foreign bank account, then the IRS can access the information in that account to determine whether you’re properly reporting your income on your US tax return. So, if you haven’t filed your US tax returns in five years, and your foreign bank account shows bi-weekly deposits of €2,000… then the IRS has a straight line to audit you.

Let’s say you’re retired and living from your savings. You may still have a filing requirement, such as the Report of Foreign Bank and Financial Accounts (FBAR), foreign trust filings, Passive Foreign Investment Company filings (foreign mutual funds qualify here), etc., which can require annual disclosure. If you skip these and live in a country with either an Intergovernmental Agreement (IGA) or an Understanding, it’s just a matter of time before the IRS gets around to you.

The IRS takes these violations very seriously and has gone as far as putting their Large Business & International (LB&I) Division in charge of going after:

• US taxpayers living overseas
• US taxpayers with delinquent foreign bank account reports (FBARs), and
• US taxpayers with unreported cryp-to-currency.

4. Social taxes can be minimized with Totalization Agreements.

This is only for taxpayers that are still on a US payroll, but also subject to tax in their host jurisdiction. In those cases, if the host country has a totalization agreement in place, the taxpayer may be able to exempt themselves from social tax, the equivalent of US FICA tax, in their host country.

A Totalization Agreement is a separate social tax-specific document like an income tax treaty. It addresses where a taxpayer is required to contribute social tax in situations when they contribute to multiple jurisdictions based on the same income. Totalization agreements will typically allow the taxpayer to contribute to the country for which they’d receive the greatest benefit (typically their home country). This is a benefit to both the taxpayer’s employer and the taxpayer, as social tax benefits are required to be paid by both.

For self-employed taxpayers, the totalization agreement may exempt them from the US self-employment tax—if they can show they’re paying social tax in their host country by obtaining a Certificate of Coverage. (For more information on which countries have Totalization Agreements and how to obtain Certificates of Coverage, go here.)

5. If you’ve been tax delinquent, you have a clear path to recovery.

If you’ve read this article and are currently having a panic attack because you haven’t filed your tax returns, take heart! The IRS offers two separate processes to allow delinquent taxpayers to come into compliance: the Streamlined Foreign Offshore Procedures (SFOP) and the Streamlined Domestic Offshore Procedures (SDOP).

Under each, you would file your three most recently delinquent tax returns, including the informational filings and the six most recently delinquent FBARs (FinCen Form 114). No other tax returns are required, even if more returns are outstanding. Typically, if the filings are prepared properly and any tax due is paid, the IRS doesn’t respond directly to the taxpayer relating to these filings unless there’s an issue with the filing or if there is missing or incomplete information.

Individual international taxation is a complex area of the already-complicated Internal Revenue Code. As such, it’s best that taxpayers planning to relocate overseas find the proper support to assist them.