The Expat Tax Guide

This is our Expat Tax Guide for those of you living outside of the U.S… or anyone who’s “expat curious”. 

In this post, we’ll explain the tax requirements of expats – including a detailed explanation of tax credits that expats can use to save tax money. So let’s dive in!

Woes Of Being An Expat

U.S. Expats, you’re not alone. According to the AARO (Association of Americans Resident Overseas), there are at least 5.4 million Americans currently living outside of the US. If you’re keeping score, this would represent the 23rd most populous U.S. state (between Minnesota and South Carolina). 

This 5.4 million includes everyone. From digital nomads in Southeast Asia to NGO workers in Brazil. From retirees in the Philippines, to that guy who met a local and decided to set up a base in Italy (like our Director of Tax, Jeremy). 

Despite this wide diversity, U.S. expats all over usually quickly realize there is also a lot of common ground. Struggles that unite expats include…

– Adventures in foreign bureaucracy (obtaining visas, residence permits, and dual citizenship)

– Complexities with finances (e.g. banking, investing, and with retirement savings)

– And of course… the one thing that brings us all together despite our differences: the requirement to file U.S. taxes even in the absence of U.S. income!

Yes, the U.S. is one of the few countries (basically just 3) in the world which taxes ALL citizens on their worldwide income.  

Therefore, if you are a U.S. citizen or resident, you have to report your worldwide income and pay taxes (if due) to the U.S. Period!

Working for a U.S. company abroad? A U.S. tax return is required!

Working for a foreign company abroad with no connection to the U.S.? You need to file too.

You’ve never set foot in the U.S., but one of your parents is American, so you have citizenship? You too are obliged to report your worldwide income on a U.S. tax return. 

Have your own foreign company? Not only do you have to file, you also have to submit a myriad of complex forms as part of the return.

Simple, right? 

At this point, a common question we get is: “If I’m already paying taxes to another country, do I also have to pay them in the U.S. (so double taxation)?”

Here the situation gets complicated. 

While, yes, it is true that all U.S. citizens are taxed on their worldwide income, fortunately there do exist provisions that mitigate double taxation.  

Without going too far into the specifics, we’ll briefly talk about the two most common: the Foreign Earned Income Exclusion and the Foreign Tax Credit.

Foreign Earned Income Exclusion (FEIE)

The concept of the FEIE (claimed on form 2555 of your normal tax return) is straightforward, but of course there are complex qualifying requirements. Otherwise it’d be too easy. 

If you have spent most of the year (over 330 days) outside of the U.S. or meet other foreign residency requirements, you can qualify to exclude a certain amount (in 2024, $125,600) of earned income from U.S. taxation. 

Earned income includes income from wages or self-employment income but not investment income (so interest, dividends, capital gains, etc.)

This is a common way that U.S. expats making less than the FEIE amount can reduce or eliminate their tax due to the U.S.

Foreign Tax Credit (FTC)

The foreign tax credit (claimed on form 1116) is a second provision that helps avoid double taxation.  

The concept is quite simple here too, although with various complications if you get into the specifics.

Basically, if you pay income tax to a foreign government, you are eligible for a U.S. tax credit equal to the amount paid. 

So your tax due to the U.S. decreases by the amount of tax paid to the foreign government. 

If the tax due to the U.S. is more than the tax paid, you pay just the difference to the U.S. If the tax due in the U.S. is less, you don’t get an immediate refund, but you can carry over the difference to get a tax break in future years.  

Hence, if you pay taxes to a country with a high income tax rate, using the FTC will allow you to greatly reduce or even eliminate your U.S. income tax burden, even if you make more than the FEIE amount.  

Hope that helps you have an initial understanding of the tax situation for expats.  

Need More Help?

Here at Gradient, we have some exciting services and partnerships created to help expats with their tax situations, including an expat DIY walkthrough where we teach you how to do your own expat taxes.

If you’re interested, just click below to fill out our interest form, and you’ll be put in touch with our tax team.  

https://us7.list-manage.com/survey?u=141f6f41061cb9017a8dd326a&id=c5144962ae&e=*%7CUNIQID%7C*