Moving Out: Understanding Your US Tax Responsibilities If You Move to Another Country

It seems that in every election cycle in recent memory, there is a lot of talk along the lines of “The country is over if _______ wins. If that happens I’m moving to _______.” Despite all of that sort of breathlessness, very few United States citizens, estimated as being in the low thousands annually, actually renounce their citizenship. If you are considering such a step, you will have issues with the IRS and the State Department that go well beyond the scope of this note.

On the other hand, in an ever more-complicated world economy, more and more United States citizens have some economic interaction with foreign countries that implicate their tax liabilities and reporting responsibilities. Notwithstanding that you may be located abroad for work or personal reasons, full or part time or even permanently, so long as you remain a U.S. citizen you will be a U.S. taxpayer.

The United States is one of only two countries in the world that taxes on the basis of citizenship rather than residency. There are deductions, exclusions and credits available, designed to prevent double taxation, but attentive readers of these notes will not be surprised that these rules can become very complicated at the margin, and they do not always have their intended effect. If you’re planning on becoming a resident of a foreign country, get advised about your new tax responsibilities so you can plan accordingly.

If you are living and earning income while abroad, you will ordinarily be required to file two annual tax returns: one to the government of your new country of residence, and one to the US (even if, as a result of the available exclusions, deductions and credits, you do not owe any U.S. tax). Qualifying U.S. citizens residing abroad get an automatic 2-month extension of the tax return filing deadline, meaning your due date will be June 15. You can also request an extension to October 15. Either way, you could still be subject to late penalties, and you will have to pay interest on any tax not paid by April 15 (the regular due date for U.S. taxpayers).

Beyond this there is an entire tax and reporting regime that will apply, depending on your particular circumstances. As a general rule, things will be easier, less subject to interpretation, and much more straightforward if you are residing in one of the more than 70 foreign countries with which the United States has entered into a tax treaty.  Even so, every situation is different, so it may be difficult to predict how your tax situation will play out after you move abroad. One of these common scenarios may apply to you.

I still own property in the U.S.

If you want to keep your U.S. property while you’re living abroad, you have a few options. You can lease your property through a reputable property management company, but the rental income will be subject to income tax. If you sell your property, the capital gains tax rules will  apply.

I work for a U.S. company.

If you are working abroad for a U.S. company, your employer is legally required to withhold income tax from your pay. There are two exceptions: if your employer is required by law to withhold foreign income tax, or if you will exclude the income under the earned income exclusion and supply your employer with a completed Form 673.

I am self-employed.

If you work as an independent contractor, and your net earnings from self-employment equal $400 or more per year, you are generally liable for self-employment tax. You need to account for all of your self-employment income, even income rendered tax-exempt by the foreign income exclusion.

I have a bank account outside the U.S.

You must report your foreign bank accounts to the Department of the Treasury every year. The Foreign Bank and Financial Accounts (FBAR) form is due by June 30 every year, as long as you have more than $10,000 USD in foreign accounts. If you have foreign accounts exceeding $50,000 USD on the last day of the tax year or exceeding $75,000 USD at any time during the tax year, you will also be required to file Form 8938 as part of your U.S. tax return.

I have an equity interest in a foreign corporation.

In general, you must report your ownership stake in a foreign corporation if it exceeds a 10% interest. You may owe taxes on your share of any profits this corporation makes.

My situation is not so straightforward.

Don’t worry if your tax situation is not as clear-cut as these general examples. An experienced tax lawyer can shed light on your particular situation, including any tax exclusions and deductions that you may be eligible for. You can obtain the well-informed tax advice you need at the law office of Morgan Maxwell. Contact us to discuss your unique situation and learn how we can help.

Written by E. Morgan Maxwell

E. Morgan Maxwell

Since beginning his own firm, Mr. Maxwell has continued a tax-law oriented practice encompassing a wide range of transactions, planning and dispute resolution. His dispute resolution experience includes involvement at all levels of the Internal Revenue Service (Examinations, Appeals, Collections, Office of Professional Responsibility, the U.S. Tax Court), the Pennsylvania Department of Revenue, the Tax Litigation Section of the Pennsylvania Attorney General’s Office, Pennsylvania Commonwealth Court, Common Pleas Court and local taxing jurisdictions in southeastern Pennsylvania.

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