A blog post about taxes for expats? I know — not very sexy. But I’m not here to only sing about peaches and rainbows when it comes to becoming an expat. I am also going to talk about the boring but essential stuff. All other travel and expat bloggers only talk about the good stuff and how happy they are. But here I talk about the Good, the Bad and the Ugly.
Taxes definitely belong in the ‘Ugly‘ category.
Note: If you are not a US citizen, this post may not apply to you. However, you’ll have to do your own due diligence on tax laws in your country and what they mean if you expatriate.
Other than the type of business structure you register under, it also matters where — or under which jurisdiction — you register your business. Some states in the US have no state income tax, so if you are planning on location independence, you probably will want to choose a state that does not collect income taxes to register your business. You’d only have to pay federal income and self employment taxes.
You can even register your business outside of your own country. However, as a US citizen, you’ll have to mind the IRS reporting rules if you own any businesses registered outside of the US, as they may fall under “foreign entities” beholden to FATCA reporting requirements.
Generally if you are living outside of your own country of citizenship for a certain amount of time within a calendar year, you do not have to pay taxes to the government of said country. For example, if you’re from the UK, if you’re living outside of the UK for at least 180 days of the year, you’re exempt from paying taxes to the British government.
Sadly, the United States is the only exception. US citizens have the unfortunate privilege of worldwide taxation. We have to pay taxes to the US government on any income we earn no matter where we are in the world. The good news is there are exceptions. The Foreign Earned Income Exclusion is one such exception. You can claim this exclusion if you pass either the Bona Fide Residency test or the Physical Presence Test.
Bona Fide Residency
One way get around this is to become a Bona Fide Resident in a country with a tax treaty agreement with the US to save you from getting double taxed on the same income. Although you can also claim “bona fide residency” in another country, you have to file IRS Form 2555, and based on the factors you report to them, the IRS makes a case-by-case determination on whether you qualify. So this is more like a shot in the dark and hope nothing bad happens.
Physical Presence Test
Another exception is maintaining your presence outside of the US long enough to exclude the first $100k from taxation. If you, as a US citizen, stay off US soil for at least 330 days within any consecutive 12 month period, you pass the Physical Presence Test and therefore you can claim the Foreign Earned Income Exclusion. Then you don’t have to pay income tax on the first $100k. While you still would pay self employment taxes on those dollars, taking advantage of the income exclusion would still save you tons of money.
The physical presence test is more clear-cut than bona fide residency because it isn’t decided by the IRS on a case-by-case basis. If you’re off US soil for 330 days or more, you qualify. Period.
Personally, my plan is to take advantage of the foreign earned income exclusion by staying off US soil for at least 330 days each year. This means I can only visit for up to one month per 12 month period. It sucks because I have family and friends here, but I was well aware of this when I made my decision.
Another sticky issue with US expats is that if you open a new bank account overseas, there are FATCA and FBAR reporting requirements. The totalitarian Foreign Account Tax Compliance Act requires all foreign banks to report about bank accounts held by US taxpayers or foreign entities in which US taxpayers hold a significant ownership interest (including companies registered outside of the US).
The FBAR reporting requirement also requires US expats with foreign bank accounts to report if their account balance reaches the $10,000 threshold at any time. Not doing so means extreme fines and possible jail time. You have been warned!
More FATCA information here:
I’ll be frank. FATCA is a terrible law and it ought to be repealed and put through the shredder. There have been recent reports of foreign banks turning away US citizens who wanted to open accounts there because they didn’t want to deal with the reporting requirements.
If you’re not an US citizen, count your lucky stars that you don’t have to bother with the minefield of US taxation. However you should do your own research on the taxation and residency rules of your own country with respect to being an expat. Google is your best friend, and if that doesn’t deliver, talk to an accountant over a free/cheap initial consult. Additional content about expat taxation will be made available on this blog in the coming weeks and months.