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Living abroad taxes for US citizen - a guide in 2023 - DNBC

Living abroad taxes for US citizen - a guide in 2023 - DNBC

If you're an American who lives abroad, you might believe that the hassles and anxieties of the US tax season are behind you. Contrary to common opinion, you must submit a US federal tax return even after leaving the country. DNBC Financial Group will go through what you need to know about living abroad taxes for US citizens in this post and get one of the top guides for 2023. If you're planning to move overseas, you'll need to know the tax requirements for living abroad.

Living abroad taxes for US citizen - a guide in 2023 - DNBC

Living abroad taxes for US citizen - a guide in 2023 - DNBC

Do US citizens have to pay taxes when living abroad?

Yes. No matter where you reside at the time, if you are an American living abroad as a US citizen, you are required to file a US federal tax return and pay US taxes on your global income. In other words, you must abide by the same income tax laws as Americans.

Why do Americans who live in other countries still pay US taxes?

The United States employs an unusual approach to individual income taxation. Most nations use one of two tax systems: territorial or residence-based. A territorial-based taxation system requires a government to tax individuals exclusively on income produced inside its borders.

The country taxes all income from domestic and foreign sources under residence-based taxation. (In these nations, nonresidents are taxed exclusively on income generated locally, comparable to the territorial-based system). 

The United States, on the other hand, is one of just two countries that levy citizenship-based taxes. (The other country with a similar system is Eritrea.) Under this arrangement, citizens are always taxed on their worldwide income regardless of where they live.

What taxes must I pay if I work abroad?

In the United States, overseas income is taxed at the same marginal rate as domestic income. This implies that if you are an American living overseas and your total income in 2021 exceeds any of the following minimum limits, you must submit a US federal tax return this year:

  • For citizens filing as single: 

$12,550 if under the age of 65 

$14,250 if 65 or over

  • Citizens filing jointly who are married:

$25,100 if both couples are younger than 65

$26,450 if both spouses are 65 or older and one is under 65.

$27,800 if both couples are 65 or older

  • Citizens filing jointly but separately: $5 
  • For self-employed citizens: $400
  • For citizens filing as head of household: 

$18,800 if under age 65 

$20,500 if age 65 or above

  • Citizens filing as a qualified widow(er) with a dependent child: 

$25,100 if under the age of 65 

$26,450 if above the age of 65

Even if you have not lived in the US at any point throughout the year and have earned all of your income in a foreign territory, the IRS nevertheless expects you to file a tax return.

How can I avoid paying US taxes while living abroad?

According to current US tax regulations, giving up your citizenship is the only way to avoid filing a US tax return and paying US taxes overseas. However, choosing to renounce your US citizenship should not be made lightly since it is severe and permanent. Therefore, it is essential to educate yourself on the requirements and effects of losing your citizenship before making this decision.

However, if you are a US citizen or holder of a green card, you must submit an annual tax return and pay the related taxes even if you live overseas. However, unique tax credits, deductions, and exclusions available to Americans residing overseas can help you avoid double taxation and lower your US tax burden.

How to prevent paying two taxes on foreign income?

One problem with a citizenship-based taxation system is the potential for double taxation on the income generated by an individual in the US and their current nation of residence. An American who lives overseas permanently and could be considered a resident under other local tax systems should pay particular attention to this circumstance.

The US tax legislation includes a clause known as the Foreign Earned Income Exclusion to prevent this unfavorable outcome (FEIE). As a result, expats can deduct the $112,000 in the income generated overseas from their US tax obligations under the 2022 FEIE.

We hope this guide has made it easier for you to understand that living abroad taxes for Us citizen. You can legally pay US tax on living abroad using these simple steps.

What will happen if US citizens don’t file their taxes while living abroad?

If a US person fails to submit US taxes while living overseas, they may face penalties, interest charges, or even criminal prosecution. The IRS imposes penalties for both late filings and late payments. You may face more significant legal implications if you willfully dodged your US tax obligations while residing overseas.

  • Penalty for Failure to File: 5% of unpaid taxes for each month the tax return is late, up to 25%
  • Failure to Pay Penalty: 0.5% of unpaid taxes for each month tax payment is late, up to a maximum of 25%
  • More than 60 days late: The maximum penalty for this is 25% of your unpaid taxes.

Fortunately, the IRS allows a penalty-free option for Americans living abroad to get caught up if they didn't realize they needed to submit US taxes while residing abroad. Regardless of how many years you've missed, the Streamlined Filing Compliance Procedures require you to file the most recent three years of federal tax returns and the most recent six years of FBARs, making it a simpler and less expensive approach to become compliant.

About DNBC Financial Group

DNBC Financial Group is passionate about streamlining global financial transactions. We've expanded quickly to help businesses and individuals all over the world reduce the cost of sending and spending money abroad, collecting payments from international customers, moving cash between international subsidiaries, and managing the risk of currency fluctuations.

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