Tax Tips for U.S. Americans Abroad
Did you know: Double taxation for Americans abroad is when you have to pay taxes twice on the same bucket of income? Yup. The U.S. and Eritrea are the only two countries in the world that enforce a citizen-based taxation system. This can result in the double taxation of U.S. citizens abroad since their host (or foreign country) also taxes them.
To put it simply, double taxation is when your income taxes are paid twice on the same source of income. For example, you could be working as a sales manager in Amsterdam as a U.S. citizen. When tax season hits, you not only need to pay Amsterdam taxes, but USA taxes from the same pot of money as well. This is double taxation, but not a real life example because there are treaties that can prevent you from being double taxed.
In regards to double taxation for Americans abroad, citizen-based taxation can certainly be frustrating…
Double-Taxation for Americans Abroad
You may ask why is double taxation allowed. It’s simply in creation because of the individuals that the people of the United States elect into their government. And so it’s the people within the government that make double taxation possible.
Don’t fret just yet, because the US actually has a lot of expat tax benefits and tax treaties in place to prevent double taxation for Americans abroad. For example, there are two treaty types you should be aware of: Country Specific Tax Treaties (Concerning Income Tax) and Totalization Agreements (Concerning Social Security Benefits and Tax), where the U.S. has made agreements with certain countries around the world to prevent double-taxation.
So moneywise, you’re probably not going to end up paying additional U.S. taxes… but the tax preparation fees can be significant (that’s why we’re here!).
And for Accidental Americans, this post is also for you. Your U.S. citizenship dictates your tax responsibility, even if you are living outside the states. So to avoid double taxation should just be as important for you.
How Does a Treaty Provide U.S. Expat Tax Benefits?
- It provides guidance on how certain types of income are sourced and which country has primary taxing rights
- More importantly, it can also define which income types can be completely excluded from either the U.S.’ or your host country’s taxation system
This is especially important for tricker income sources such as social security benefits, pension, unemployment, paternity pay… you name it!
To claim a treaty tax benefit, you would have to normally file Form 8833: Treaty-Based Return Position Disclosure (hint: we include some common treaty benefit claims in MyExpatTaxes’ tax software so you don’t have to read through the treaties yourself!). This form requires you to inform the IRS of what treaty article you are intending to use your position on the claim.
Non-Country Specific Expat Tax Benefits
For non-tricky income types such as salary/wages, you don’t need to spend your precious time scanning these treaties. The IRS has some standard benefits that you can as a U.S. Expat in general, regardless of the country (as always some exceptions do apply…)
- Foreign Earned Income Exclusion: You can exclude up to approximately $100K USD of foreign earned income per year if you are a bona fide resident abroad or have been physically out of the US for 330 full days.
- Foreign Tax Credit: Do you pay income taxes in your host country? Then most likely you can take a $ for $ credit for your owed U.S. taxes. If you’re living in a country where the income tax rate is higher than the U.S. (most European countries), then you will probably always have a more foreign tax credit than you can even use!
Claim Your Benefits
If you live in a country with a lower income tax rate, you may still owe some U.S. taxes but only as much as you would have paid making that same salary in the states. The trick is knowing how to claim those benefits! That’s how we at MyExpatTaxes can help you! We provide the only tax software designed for U.S. expats with a fixed/affordable price.