Taking your new adventure abroad can be an awe-inspiring experience. There’s a wealth of opportunities around to gain new experiences, grow your career and immerse yourself within an entire culture. However, you will now need to consider your international tax obligations. Tax worries along with your tax obligations from other countries can cause confusion and less understanding of what you need to be doing. Even small mistakes can have significant financial impacts.
Whether you are brand new to living abroad or have been living abroad for several years, you need an efficient plan in place for managing your expat taxes. So we’ve put together this guide; to help you understand everything there is to know about expat taxes so that you’re in full compliance.
Understanding your world-wide tax obligations.
Many people living abroad will assume they’re not taxed anymore however many countries will require taxes on a worldwide basis. For example in the United States, citizens and green card holders will be taxed on a worldwide basis.
In any country you’re living in you’ll likely be required to complete a tax return with your home country. Even if you are paying taxes within the country you’re living in, unless you fall under any tax exempt measures, you will have to report a tax return annually. Knowing your tax thresholds will allow you to keep up to date and avoid getting surprise letters, interest and legal issues.
International relief.
Double taxation is one of the most common fears expats have. However there are tax relief options in place to help you:
- Foreign Earned Income Exclusion (FEIE) – A range of people are allowed to exclude a large amount of their income earned abroad from being taxed.
- Foreign tax credit (FTC) – To avoid double taxation you’re given a credit on your tax returns for the amount of tax you have paid on income to a foreign government.
- Foreign Housing Exclusion/Deduction – This allows you to claim back the high costs associated with living abroad, such as rent and utilities.
You may want to use a certain tax relief, depending on your income, tax rate in the country you’re living in and your goals for the future. Carefully understanding these options will ensure you never pay more than you should.
Foreign banks and tax requirements.
In addition to yearly tax returns, many governments will require you to declare your world-wide banking and investment accounts.
For example in the United States, you will need to complete:
- FBAR – If the total value of your foreign accounts exceed $10,000 at any point during the year, you will have to complete an FBAR.
- FATCA – If the value of your foreign financial assets exceeds specific amounts you will have to include foreign financial assets on this form.
If you don’t declare your Foreign Bank accounts you could end up facing significant financial penalties. Therefore it’s very important to take note of the highest value your accounts reached during the year.
State/local tax obligations.
Whilst most attention will be on your federal/national taxes remember you may have to pay taxes locally too. Some states and cities are infamous for making it hard to break residency. You will still be seen as a tax resident here unless you have made legal connections somewhere else.
Before leaving ensure you understand the rules for residency within your state. If you intend to move somewhere new as your tax home, take steps to ensure you’re no longer connected. This could include changing your voter registrations, driving license and ensuring your main bank account is changed.
Tax deadlines and extensions.
Now that you’re in a different time zone it’s important to keep track of your tax deadlines. Many tax advisor will allow you an extension on completing your tax returns whilst living abroad. For example in the United States, you’re given an automatic two month extension.
However you should always remember this is just an extension on completion, not payment. If you owe any taxes interest will start to build from the original date. Therefore, planning your taxes ahead of time will help you avoid any unnecessary stress.
Common mistakes expats make.
There are some common mistakes to avoid when managing your world-wide finances:
- Self Employment Tax – Many freelancers and independent contractors will still be liable to pay self employment taxes.
- Pension plans – Many foreign pension accounts and investments have complicated declaration requirements.
- Assuming tax treaties will apply – There are international tax treaties in place to reduce double taxation however these usually need to be declared.
Final thoughts – Get expat tax advice.
Expat taxes don’t have to be a worrying task. As long as you’re actively managing your taxes, keeping your financial records up to date and using any credits and exclusions you can, you’ll be completely in compliance.
As foreign tax laws are always changing it’s often best to invest in a qualified professional who specialises in international taxes. This way you can relax knowing your taxes are being managed by an expert, tailored to your situation.
