Ways to Avoid Paying US Taxes Abroad
Americans who live abroad are required to file a US tax return reporting their worldwide income, just the same as if they were living in the States.
Because many American expats also have to file foreign taxes in their country of residence, the IRS has made available a number of provisions that expats can claim when they file to help them reduce their US tax bill. In many cases, this will mean that they won’t end up paying US taxes at all (and the same applies for many expats who don’t pay foreign taxes either).
Expats should be aware that the tax treaties that the US has signed with other countries don’t prevent Americans living abroad from having to file US taxes.
Instead, Americans who pay taxes abroad can claim the IRS Foreign Tax Credit when they file their federal return.
This allows them to claim a one dollar US tax credit for every dollar of foreign tax that they’ve paid abroad. So if they are paying foreign income taxes at a higher rate than the US rate, they will avoid paying any US taxes. Expats can claim the Foreign Tax Credit by filing IRS Form 1116.
Some expats don’t pay foreign taxes though, either because they don’t spend enough time in any one foreign country to qualify to pay taxes there (such as many American Digital Nomads), or because they live in a country that doesn’t charge income taxes on their income.
These expats can often claim the Foreign Earned Income Exclusion instead, which allows them to simply exclude the first around $100,000 (the exact figure is adjusted for inflation) from US taxation every year.
To claim the Foreign Earned Income Exclusion, expats must file Form 2555. They must also prove that they live abroad either by demonstrating permanent residence in another country, or by demonstrating that they spent at least 330 days outside the US in a 365 day period that is either the tax year, or coincides with the tax year.
Expats who claim the Foreign Earned Income Exclusion and who rent their home abroad can also claim the Foreign Housing Exclusion to exclude more of their income over $100,000.
Filing US taxes from abroad is typically more complex than filing from in the US, as, as well as claiming the most beneficial provisions to reduce or avoid paying US taxes, expats may also have to report their foreign bank accounts, investments, and business interests. As such, expats should always seek assistance from a specialist expat tax expert.