Understanding International Tax: A Beginner’s Guide

International tax rules are notoriously complicated. With the rules on tax differing in every country, and tax obligations back home, it can be complicated for U.S. expatriates to know what they need to do to remain compliant with tax authorities worldwide.

Anyone who earns an income or purchases assets abroad must take advantage of global tax advisors to guarantee compliance and minimize their tax burden.

Here’s what you need to know about international tax planning and why a global tax service is beneficial for you.

What to Know About International Taxes as an Expat

Any international tax advisor will tell expats that the U.S. is one of only two countries in the world that taxes its people based on their citizenship rather than where they earn their income. That means as long as someone holds a U.S. passport, they are liable for Federal taxes.

However, if you have lived outside of the U.S. for at least half the year, you may claim the Foreign Earned Income Exclusion (FEIE).

FEIE allows expats to exclude up to $101,300 of their income from federal tax, so most expats will never pay any U.S. taxes. However, the law states that all Americans must continue to file tax returns, regardless of how much or how little they owe.

Another option an international tax specialist may float is claiming the Foreign Tax Credit (claimed through Form 1116). Claiming the tax credit is generally better for resident expats or Americans working in a foreign country.

Take Note: Americans also continue to be eligible to pay state taxes, which is why many expats change their state of residence to places like Texas, as some states levy no state taxes.

International Tax Advice from Experts

How can American expats pay no tax when living abroad? For the vast majority of expats, consulting a global tax service can enable them to pay zero, or near-zero, in taxes.

Here are some top tips from Porte Brown, your international tax experts.

Most Expats Owe No Domestic Taxes

The U.S. has multiple mechanisms in place to ensure most American expats never pay any taxes back home. The main methods expats can use to offset their income include:

• Foreign Earned Income Exclusion
• Foreign Tax Credit
• Foreign Housing Exclusion

Remember that the taxpayer’s expat status must be official with the Foreign Housing Exclusion. In other words, regular travel or shorter periods spent in a country will not qualify them for this exclusion.

Comply with FBAR

Expats must file a Report of Foreign Bank and Financial Accounts (FBAR) every year if they have more than $10,000 in bank accounts outside the U.S. Up to 50% of the total balance of all offshore bank accounts may be levied by the IRS if an expat fails to file an FBAR.

Although the IRS focuses on high-balance accounts, it’s best not to take the risk. The presence of FBAR is designed to prevent tax evasion.

Consider Renouncing Citizenship

U.S. citizenship comes with more tax obligations than any other. Expats who can obtain European, Canadian, or Oceania citizenship may want to consider renouncing U.S. citizenship if their tax burdens become too much.

Remember, this is a big decision, and it is typically only worthwhile for expats with extremely high salaries and permanently settled elsewhere.

File an Extension to Qualify for Credits/Deductions/Exclusions

Need more time to qualify for the various tax offsetting measures aimed at expats?

Expats who move abroad during the second part of the year may feel like their domestic and international tax obligations could come back to bite them.

File Form 2350 to get a filing extension and more time to qualify.

Foreign Earned Income is Not Automatically Excluded

Many expats assume that due to the FEIE, they owe nothing in taxes. Hiring an international tax associate will quickly reveal that this is far from the case.

Expats must apply for any exclusions on their international income every year, or their income will be taxed at standard U.S. income rates.

The Benefits of Using an International Tax Advisor

Why should expats invest in an international tax associate when filing their taxes?

• International tax law is complicated. Rules are open to interpretation, so hire a professional to clarify matters.
• Ensure that every tax deduction, exclusion, and credit goes toward minimizing your tax burden.
• International tax planning can reduce an expat’s tax burden to $0.
• Avoid significant financial and legal penalties for noncompliance.
• Create an international tax setup that minimizes tax.

Conclusion

Global tax services empower expats and international companies to reduce their taxes and ensure compliance with a highly confusing international tax system. The accountants at Porte Brown are experts in international tax rules and regulations. When you work with us, you’ll get a tailored tax plan that suits your needs and goals. Learn more about filing U.S. taxes overseas and get in touch with Porte Brown today.