The benefit of having an American passport is essentially unfettered access to 173 countries in the world, and a government that will ostensibly send a fighter jet to retrieve you if you find yourself stuck in some geopolitical crisis.
On the other hand, you have to pay taxes forever. Some might call this a fair trade, but let’s be honest — it sucks. As a fun fact, the US and Eritrea are the only countries in the world with citizenship-based taxation. Disturbingly, if you do not pay your taxes as an Eriteran living abroad, they will harass your family in Eritrea and arrest you if you attempt to enter the country. In America, I guess you just have to deal with the IRS.
I won’t lie, the fact that moving to London made me have to think about taxes more than I ever have is annoying, but worth it, I guess, to keep living the European(?) dream.
Disclaimer: This is not financial advice, and I am not an accountant or financial planner! Just a girl with too much time on her hands. Consider this a high level view of what you need to consider when paying your taxes.
Part 1: General earned income taxes
What’s the deal?
US citizens are required to file a tax return every year1, even if they are living abroad and made no income based in the US.
This means that if you leave the US, you’ll still need to submit a tax return like everyone else. Actually, you can get an automatic 2 month extension on filing, but if you don’t actually pay taxes by the April deadline, your tax bill will accrue interest :) So, it’s best to know how much you’re likely going to need to pay by the April deadline, and you can make any changes on the margin by June.
Do I have to pay double taxes?
The government isn’t completely evil though, so you probably won’t have to pay double taxes (unless you’re making a lot of money or have some interesting investments, which is a conversation for a different day).
There are a few mechanisms that the government came up with to prevent this:
Tax treaties — The US government has brokered tax treaties2 with a number of major economies around the world that govern the way US citizens who reside in these countries are assessed for taxation. The details of these treaties are heavy on the legalese, but generally the goal is to prevent double taxation across taxable items (including income, investments, real estate, war profits..?)
Foreign Earned Income Exclusion (FEIE) — If you earned less than $112,000 in 2022, all of your earned income is excluded from taxation by the US. You still need to submit a tax return, but you would likely not be liable to pay taxes up to this amount. You would of course pay taxes at a marginal rate for income above $112K.
Foreign Tax Credit (FTC) — Alternatively, you can use the Foreign Tax Credit to reduce your tax bill by one dollar for every dollar you’ve already paid in foreign taxes. This is generally more useful when you have moved to a country with higher taxes than the US.
You can only use the FEIE or the FTC on the same pot of income! E.g. if you make less than $120,000, you can’t also claim the credit because you wouldn’t have paid taxes on that amount anyway! But if you made $140K, you could exclude the first $120K, and then use the FTC against the remaining $20K. This varies greatly on a case by case basis, so more information on that here.
How do I file taxes? Can I file them myself?
You can file taxes like normal, online or via the mail (Idk why you would choose this method, though). Technically, you can file your own US citizen abroad taxes with TurboTax or whatever tax software you like. Don’t forget that you’ll also need to account for an investment, dividend, real estate, or interest income for your taxes (just like you would if you were living in the US).
But if you’re scared of inadvertently committing tax evasion, you can also use one of the handful of online “expat” tax accountants or a more bespoke private accountant that is also familiar with the tax laws in your country as they relate to the US.
Is that all I need to do?
An additional thing you need to do if you live outside of the US is report all of your bank or investment accounts with funds greater than $10,000. You need to file this even if those funds were only in your account for a single day. This directive is called FBAR (Report of Foreign Bank and Financial Accounts).
You can also file your FBAR on your own, but accountants will do this for you in addition to your taxes for additional fees.
Alright, that’s it for today. We have scratched the surface on taxes… with more to come on taxes within your new country and taxes on your investments (where things really get spicy).
Stay tuned for part 2!
Would love to hear from you at lola dot agabalogun at gmail dot com.
If you have earned above minimum income thresholds.
A list of countries with tax treaties, straight from our friends at the IRS.