Do Americans living abroad need to pay taxes?

Americans living abroad must file US federal tax returns and pay US taxes on their global income no matter where they reside at the time of taxation. In other words, they are subject to the same taxation rules regarding income taxation as people living in the United States of America.

Why do US citizens living abroad have to pay their US taxes?

The United States has a different approach to taxing individual income. The Citizenship-based taxation approach makes every citizen of America liable, no matter where they reside, to pay their US taxes on time.

Under the US tax system, foreign income is taxed at the same rate as other income earned inside the country. This means that American living abroad or green card holders must file a US federal tax return regardless of where they earned income.

Even though you have not lived in the US at any point during the year and have earned income in foreign territory, the IRS still expects you to file a tax return. Furthermore, you may be required to file a state tax return depending on where you lived before moving abroad. 

Can expats avoid paying US taxes?      

Based on the current US tax laws, the only way to avoid paying US taxes for the expats is to forgo your US citizenship. Renouncing your US citizenship is a painful and permanent decision that should not be taken lightly. 

If you are a US citizen or a green card holder, you must file your tax return annually and pay the taxes while living abroad. It is also possible to avoid double taxation and minimize your US tax bill using notable tax credits, deductions and exclusions available to American expats.   

How to avoid double taxation or Foreign income

One issue that arises in the tax system is that an individual could theoretically be doubly taxed on their income earned- both by their country of current residence and the US. This scenario is also relevant for an American living abroad full-time who may qualify as a resident in other local tax systems.

Another provision to help expats mitigate double taxation is the Foreign tax credit. The US tax system contains a provision called – Foreign earned income exclusion (FEIE). 

Wrap up

When filing US expat taxes, there are more items you will need to report apart from your income earned abroad. You also will need to disclose your foreign accounts and assets that cross a specific value. 

It is essential for Americans living abroad to be aware of everything that they are required to report in their filing. Hire dedicated tax experts that help you navigate federal tax returns easily.