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5 Things You Need to Know if You’re a US Citizen Living Abroad
Does a US Citizen Living Abroad Have To Pay Taxes? Read this blog to get the answers to your most pressing questions about living abroad as a US Citizen.
While it’s hard to know the exact number, some estimates suggest that around eight million US citizens call somewhere other than America home. The reasons for leaving the US vary greatly. They include exploring new financial opportunities, retiring in a dream location, and children born in the US who move with their family and grow up in their new home country, among many other reasons. Some US citizens living abroad never left, which might sound confusing, but due to how US citizenship can be passed down, some children born to an American parent(s) obtain US citizenship at birth without ever having set foot in the United States. US citizenship acquired this way isn’t something that’s opted into later in life or a switch these individuals get to decide to turn on. If you qualify as a US citizen at birth, even if your parents do not officially register you as one, you are one for life (unless you renounce, of course).
Whatever your reason for living abroad, there are some important things that every US citizen must take into consideration.
1) US Citizens Living Abroad Still Need to File US Taxes
The US is one of only two countries globally with a citizenship-based tax system (the other being Eritrea). This means that no matter where you live in the world or how you obtained your US citizenship, if you’re a US citizen living abroad, you have yearly US tax filing obligations in addition to those in your home country. Thanks to tax treaties with many nations and depending on the type of income you make, some US citizens living abroad file their taxes and owe nothing to the IRS. For many others, not only is there the additional cost and burden of filing, but they find themselves in a situation of “double taxation”—owing tax to a country they don’t live in (the US) and their home country. Whether you owe tax or not, it is essential for US citizens living abroad to file their taxes every year. Failure to file information returns required from all US citizens living abroad can lead to tens of thousands of dollars in failure-to-file penalties. Even if you do not owe tax to the US, be mindful of the penalties for not filing.
The good news is that there are IRS amnesty programs (Streamline, Relief Procedure, Delinquent International, etc.) currently in place that a non-compliant US expat can enter into, backfile only a few years back (not decades of missed tax returns) and get a full abatement of all penalties. If not US-tax complaint, one must go to the IRS before they find them to qualify. You’ll be in a much better position if you file voluntarily than if the IRS comes knocking.
2) Your Worldwide Assets are Subject to the US Estate Tax
Even if you aren’t thinking about what might happen when you leave this world, rest assured, the IRS definitely is. All US citizens, including those living abroad, are subject to the US estate tax on their worldwide assets at death. For those individuals with assets that exceed the exempted amount, you may owe up to 40% of the value of your assets in tax to the IRS. As of 2021, the exempted amount sits at $11.7M. However, President Joe Biden’s tax plan suggests that number could drop to under $2M, and the tax rate could climb to 55%. While we can’t say for sure whether this plan will come to fruition, it’s important to remember that these numbers are always subject to the government’s will and can change at any time. Just because you’re under the exempted amount today doesn’t mean you will be at the time of your death. Trying to predict when your death might occur, what order your family members might pass away in, how much you will be worth at the end and who will be in political power at that time, is not only incredibly morbid but an extremely difficult game to play in trying to plan for the US estate tax and proper planning is a must. For many, renouncing US citizenship to avoid the US estate tax at death entirely is an appealing option.
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3) Thanks to the Foreign Account Tax Compliance Act (FATCA), the IRS Probably Knows Where You Live
FATCA, passed into law under the Obama/Biden administration in 2010, requires foreign financial institutions to report any foreign assets held by US account holders. This means that if you’re banking abroad, the IRS almost surely knows about it. And if you’re a US citizen living abroad thinking, “Why should I file taxes? The IRS doesn’t know where I am,” you would be wrong. There is no hiding.
Not all accounts are subject to reporting, but bank accounts, mutual funds or similar investments, brokerage and custodial accounts, annuity contracts, and life insurance policies with cash value are. If you hold any of these in a foreign country, save yourself the trouble and file your US taxes. The system is built to make things much more manageable and pleasant if you go to the IRS before they find you. And FATCA makes it so that being found is more a question of “when” as opposed to “if” under today’s international information-sharing programs between the US and more than 100 other countries.
4) When the US Increases Spending, US Expats Carry the Burden
The US government is no stranger to spending massive amounts of money. While US citizens living in the United States may benefit from some of this spending (though rarely from a tax perspective), those who live abroad rarely do. As money goes out, money must come in, and while US expats don’t enjoy many of the same rewards as those living in the US, they certainly pay for them all the same. To increase the amount of money coming in, the US government is putting a heavier focus on tax compliance, including more complex investigations of US citizens living abroad and increased IRS visibility into investment and business activity. You might think it’s strange to live and work in an entirely different country and still owe tax to the US, but the IRS certainly doesn’t, and they will be looking to collect every penny owed.
5) Renouncing Your US Citizenship is an Option
For US citizens living abroad who no longer wish to be under watch from the IRS or deal with yearly filing and reporting obligations and the associated costs, double taxation, and the risk of the estate tax in death, there is always the option to renounce your US citizenship. It’s a big decision and can be a complex process. There are things to consider beforehand that include getting up to date with your tax filing obligations and careful planning required to ensure you avoid many of the pitfalls along the way. But, if done the right way, renouncing your US citizenship can remove the burden of the IRS tax system entirely and let you get on with living your life abroad.
If you’d like more information on renouncing your US citizenship, we strongly recommend you attend one of our webinars on the topic. Our team of US lawyers represents over 500 US citizens renouncing their US citizenship every year and more than any other firm in the world. Our webinars are completely free, and we’ll walk you through everything you need to know to ensure you renounce your US citizenship the right way.