Expats have it easy — that’s what many people think. However, whether an expat is working abroad or is retired, there are still taxes to consider. That’s why there are a couple of things to learn before setting off.
Let’s take a look at the 3 most crucial ones.
1. State Taxes at a Glance
All U.S. citizens, no matter where they are, are eligible for taxes while living abroad unless: They’re not a resident of the state for tax purposes
A resident is a person who:
- Lived in the state for any duration during the tax year
- Has a permanent place of residence in the state
- Has immediate family living in the state while they’re abroad
- Keeps voting rights, ID card or driver’s license in the state
- Don’t have income in the state
Income earned in the state is taxable in that state. Income comprises salaries, pensions, retirement income and government benefits.
The states that don’t levy state income taxes are:
- South Dakota
- Washington State
New Hampshire and Tennessee only apply income tax on dividend and interest income. California, South Carolina, New Mexico and Virginia have more rigorous rules. Citizens of these states need to pay the taxes even if they didn’t live in the state during a year if:
- They own a property
- They own a bank or investments account
- They hold an ID card, a driving license and/or a voter registration
- They have a mailing address in the state (relatives included)
- They have dependents in the state
2. Establish a Sole Proprietorship
Establishing a sole proprietorship is a good way to keep taxes at bay. Taxes vary from country to country, however, so make sure to choose a country with a beneficial taxation system before you start traveling further.
3. Prevent Double Taxation
There are three ways to prevent being taxed on foreign-earned income, as follows:
The Foreign Tax Credit (FTC)
The FTC is designed to help expats claim a dollar-for-dollar credit on foreign income taxes. If you have obtained a foreign tax liability, you qualify for the program.
The Foreign Earned Income Exclusion (FEIE)
The FEIE is applicable to expats who can pass one of the following:
- The Bona Fide Residency test
- The Physical Presence Test
You can exclude up to $112,000 of your foreign earned income in tax year 2022 with the help of the FEIE.
The U.S. has tax treaties with 70 countries or so. Not all of them are the same, though, so look up the options before setting off.
Everything considered, there are ways to make your tax year easier, so use all the benefits you can. Lastly, if you haven’t done so already, make sure to claim your Coronavirus Stimulus Checks. Yes, even expats qualify, so grab the opportunity. Any foreign tax credit is a welcome addition, too.