Expats, dual citizens, digital nomads: all people who may retain American citizenship but don’t spend much time in the US which can lead to serious headaches at tax time. Here are some tips to help you understand your dual citizen and expat taxes.
Why Do I Need to File a Tax Return if I Don’t Live in the US Anymore?
The United States and Eritrea are the only countries in the world that tax you based on your citizenship, not your residency. If you haven’t turned in your passport, you still need to file a federal tax return even if you didn’t have any US-sourced income. Even if you have to file a tax return in the country(ies) you’ve lived in most of the year, it doesn’t relieve you of being obligated to file a tax return.
However, while you still have to file a return it may not mean you’ll need to pay taxes. Whether you have to pay taxes depends on your sources of your income as well as how long you’ve lived outside the US during the year. The income must be reported but may not necessarily be taxed.
You also may or may not need to file state income tax returns. If you own interest in a business as an investor or participating in it from around the world as digital nomads are wont to do, you need to worry about this more than an expat with a job. State taxes may also be a concern for you if you own rental real estate.
US Income Tax Relief if You Live Abroad
Your US-sourced income will still be subject to income tax regardless of the amount. For your foreign-source income, the two most common tax relief measures available to most expats are the foreign earned income exclusion and foreign tax credit.
The foreign earned income exclusion (FEI) for the 2015 tax year is $100,800. You can exclude up to $100,800 USD of foreign-sourced income from federal taxation while any income over that amount is not exempt. There are also certain residency and physical presence tests you must meet to qualify for FEI.
Self-employed expats can use FEI for US-sourced clients and gigs, but are still subject to self-employment tax unless you are a resident of a country that has a totalization agreement with the US.
The foreign tax credit is less strict than FEI when it comes to residency, in that you can claim a credit for foreign income taxes regardless of if you hold citizenship in that country or lived there most of the year. But you can’t take both the credit and deduction, only one.
What Records Do I Need to Keep?
Keep track of dates you enter and leave the US as you must report how many days you lived abroad to claim FEI. Digital nomads need to be particularly careful with the “substantial presence” test, as hopping countries and states may mean just missing the 330 day mark of being able to claim FEI.
Carefully note how much you pay in foreign income taxes. If self-employed, make sure to keep track of where you performed services and for whom.
Dukhon Tax is available to assist dual citizens, expats, digital nomads, and other taxpayers living abroad with their federal and state tax concerns.