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Do American Expats Have to Pay Double Taxes?

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People move overseas for many reasons, but one is to escape the United States' high cost of living. What many American expats don't give a lot of thought to, though, is that they may end up paying taxes in both countries. There are ways around it, though. Of course, you'll want to consult a tax professional and not take our word as legal advice.

The IRS is pretty clever about tracking people down and ensuring they get their share of foreign-earned income. Don't worry too much, though. There are laws in place to prevent you from being unfairly double taxed. 

Foreign earned income exclusion

The Foreign Earned Income Exclusion protects you from most double taxation by excluding around $100,000 of foreign-earned income per year. That amount is adjusted for inflation each year. You can also exclude some housing expenses in foreign lands. If you are a civilian or military government employee, your income is not considered to be foreign-earned. 

If you are self-employed, things get a bit more complicated. You are still eligible for the Foreign Earned Income Exclusion, but you will be responsible for self-employment taxes. Instead of a housing exclusion, your housing will be a deduction. 

how to qualify for the foreign earned income exclusion

To qualify for the Foreign Earned Income Exclusion, you need to jump through several hoops. For starters, cut all ties to the United States. Of course, that doesn't mean you have to dump your friends and family, but you'll need to sell your house or end your apartment lease. Cancel ties like gym memberships. Then you'll need to find a home in your new destination. Either sign a long-term lease or buy. You should also establish other signs of residency, such as utilities, a library card, and a gym membership., The exclusion isn't offered to people who jump between the US and another country. Plan on spending at least 330 days a  year (not necessarily consecutive) outside of the United States to qualify. That means that even if you live relatively close, like in Canada or Mexico, jumping across the border to visit family can cost you thousands if you do it for more than 35 days out of the year. Note that the IRS counts any days spent hold up in an airport because of weather delays. If your plane even enters US airspace on the way to another country, that will count as one of your 35 days. 

What about taxes in your destination country?

Whether you'll owe taxes in your destination country depends on a few factors. If you spend 183 days in a country (about half the year), you are generally considered a resident, which means you may owe taxes in that country. If you make your living online, there may be exceptions. Some countries don't charge expats taxes at all:

Some countries — like Costa RicaHong Kong, Panama, the Seychelles, Singapore and Taiwan — have a “territorial tax system,” and only tax income generated within the country’s borders. There are also a handful of countries that have no income taxation in place at all, including Andorra, the Bahamas, Bermuda, the Cayman IslandsMonaco and the United Arab Emirates.

Source:The Points Guy


Yes, it gets a little confusing, which is why you should consult a tax professional before leaving the country. That being said, in many circumstances a move out of the country can save you big come tax time. 



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