Tax Rules for American Expats and Long-Term Travelers

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Cover of a book about Tax Rules for American Expats and Long-Term Travelers.

What? You didn’t know that as an American you are taxed no matter where you live or earn your income? Tax rules for American expats and long-term travelers can be very confusing. If you’re reading this, you probably fall into one of the following three categories:

Expats

Expats are what most people think of when they picture an American who has left his home country. They live permanently or semi-permanently outside the U.S. in another country, but they have retained their American citizenship. They could be permanently retired or could be working long-term in a regular job in their new location. Expats pay taxes in the foreign country where they live, which allows them to use a Foreign Tax Credit when filing their returns back home.

Perpetual Travelers

A true nomad is somebody who travels from place to place constantly, rarely staying in one place for more than a few weeks or months. Because of this transient lifestyle, they do not ever establish enough ties to any country to become a taxpayer there.

Backpacker, her back to us, looking out front to one of the deltas of the Mekong river. The background is tropical and lush with palms and the brown-water Mekong.

Most of them either have a nest egg of savings, are retired, or run an online business from wherever they go as digital nomads. This is a desirable path for Americans because it is the only way to make it so you never have to pay taxes because you never have to file a return anywhere else.

Accidental Americans

An accidental American is someone who may not even realize for most of their life that they are, in fact, technically American citizens. Usually, they were born in the US, but they moved somewhere else when they were very young. Because everyone born on American soil is granted citizenship by default, these people have been carrying this status with them for years and are blissfully unaware of the tax consequences it carries.

US Tax Filing Deadline and Extensions

April 15 is generally known as the due date for taxes. But the truth is that date only applies if you are living within the U.S. when it happens. If you’re living in a foreign country on April 15, you have until June 15, 2017, to file. You do not need to file for this extension; it is automatically afforded to any-body living overseas.

If you need even more time, you can apply for an extension that will give you until October 16, 2017, to file. No response from the IRS is needed. So long as you’ve sent off Form 4868 by the June or April due date, your late tax return is covered.

The Foreign Earned Income Exclusion (FEIE) and Foreign Tax Credit (FTC)

If you have lived outside of the country most of the year, you can have up to $101,300 of your income excluded from federal taxes under the Foreign Earned Income Exclusion (FEIE). You can also claim a credit for any taxes you have paid to foreign governments through the Foreign Tax Credit (FTC). This is very useful if you are a resident or worker in another country.

Banking, Incorporation, and the FBAR

Because having a bank account in the jurisdiction where you now live or work is so convenient, the majority of overseas residents will have to file an FBAR. Having more than $10,000 (cumulatively in all your accounts at any time during the year) is what will cause you to have to file an FBAR. But certain other forms can apply to your situation as well. Generally, the IRS will pay more attention to accounts with large balances, situations with more entities involved, or instances in which the failure to file was willful.

Hong Kong is popularly cited as an ideal place to in-corporate and bank.

Singapore also holds high regard as being great for banking.

However, Singapore is now almost entirely off limits to U.S. citizens because Singaporean banks don’t want the hassle of FACTA reporting. If you are very wealthy (able to work with an opening de-posit of $250,000 or more) or a legal resident of Singapore, you may be able to find banks who will make an exception for you.

Hong Kong harbor with vignetting and a classic red-sail sailboat cruising in the harbor foreground.

Hong Kong is likewise now much harder to bank in than it used to be, but it is still possible for those with local operations. However, operating in Hong Kong would also subject you to Hong Kong income tax (15%). Hong Kong doesn’t impose tax on those with no Hong Kong income, but it is getting much harder to qualify for this exception.

Social Security as an Expat

As an American, you are obligated to pay Social Security to the U.S. government regardless of where you reside. However, some other countries offer similar pro-grams to their residents. Thus, the United States government has established international Social Security agreements, often called “Totalization Agreements”. The purpose of these agreements is to eliminate dual Social Security Taxation.

Italy was the first to enact Social Security agreements with the U.S. in 1978. Most of Europe followed suit, along with Canada, South Korea, Chile, Australia, and Japan. So, if you’re paying into the Social Security systems for any of these countries, you don’t have to pay into the U.S. Social Security system.

The Consequences of Not Filing

Many Americans have always been non-compliant. They have spent their whole adult lives outside the U.S. Others figure that since they won’t be within U.S. borders, it would be impossible or impractical for the government to take any collection measures. As FATCA is now a reality, and all your personal information is digitized, this assumption is becoming less and less valid.

My advice to everyone who does not already file is simple: you have a lot more to lose by not filing than by getting caught up with your taxes. You may not have to face the consequences of it today or tomorrow, but the longer you go without paying your legal dues, the more likely it is that it will eventually come back to bite you (and the worse the bite will be when it happens).

Were you aware of these tax rules for American expats and long-term travelers? Which of these rules do you feel are unfair to the American expats, when compared to other nationalities?

 

About the Author

Certified Public Accountant, U.S. immigrant, expat, and perpetual traveler Olivier Wagner preaches the philosophy of being a worldly American. In his new book, U.S. Taxes for Worldly Americans, he uses his expertise to show you how to use 100% legal strategies (beyond traditionally maligned “tax havens”) to keep your income and assets safe from the IRS.

Picture of Olivier Wagner, author of "US Taxes for Worldly Americans".

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