How US citizens working and living overseas are defined for tax purposes
Americans working and living abroad are commonly referred to as expatriates. The term does not mean they have given up their US citizenship. It only means they are taking an assignment as an employee or are self-employed in a foreign country and maintain a residence in that country.
The more technical description of an “expat” is someone who moves to another country to work but intends to return to the US within five years. Expatriates are still subject to U.S. taxes each year. The IRS even has tax treaties with some countries allowing the exchange of information on taxpayers living in each other’s countries.
Income Taxes
There are many ways for an expatriate to exclude income they’ve earned while in a foreign country or deductions they can take on reported income. The foreign earned income exclusion allows expats to exclude income they earn abroad up to a maximum amount set by the IRS each year. There are rules to follow to qualify for the exclusion like residency requirements. Also, it’s an all-or-nothing deal. All foreign income must be excluded or none of it.
If an expatriate doesn’t qualify for the income exclusion, they may be able to a foreign tax credit which can directly offset taxes owed to the US if taxes are paid to the government where they are working abroad.
Self Employment Taxes and Social Security
If an expatriate is an employee of a foreign country while living abroad and has that country’s taxes withheld from their pay, no social security or self employment taxes are owed to the U.S. However, if the expat is self-employed or an independent contractor they may be subject to self-employment taxes even if they qualify for the foreign earned income exclusion.
State Taxes
State taxes for expatriates can be tricky. Each state determines its own rules for residency and they can independently file claims against workers residing overseas if the state determines an expat is still a resident. Some of the criteria states use for residency is driver’s licenses, voter’s registration, maintaining an address or bank account, and utility bills. Even if an expatriate no longer has residence in a state, they will still have to pay state taxes on any income from rental properties or businesses located in the state.
The rules can be a bit confusing for expatriates. An online tax preparation site can help by asking pertinent questions related to your residence and sources of income. It will also help you with filing by the correct date. If an expat resides in a foreign country on April 15th there is an automatic extension to file the return, but not to pay the taxes. The tax preparation site will help you with the correct filing dates and requirements for expatriates.