The number of U.S. citizens who are considering or have already made the move out of the United States is at an all-time high. The reasons are as straightforward as a simpler life, but also include economic opportunities, political beliefs and disillusionment, and even love and marriage to a foreign national. There are as many unique reasons to consider life as an expatriate of the United States as there are U.S. expats. However, many mistakenly believe they will no longer have to pay U.S. taxes if they move out of the country. This is simply not the case.
If you are a citizen of the United States, you are required to report and pay taxes on all income earned anywhere in the world. It doesn’t matter if you are an expatriate or a resident in the U.S., it is your responsibility to understand your duties as a U.S. taxpayer and file a complete, accurate disclosure to the IRS (and FinCEN through an FBAR if you have qualifying offshore accounts or assets). Will you have to also file a state tax return with your former state of residence? The answer to that question will depend upon the state(s) in which you lived. It is true that most U.S. expats will not end up owing taxes to the IRS or their former state. However, this does not relieve their obligation to file appropriate tax returns.
Did you know a U.S. expatriate can lose their passport for failure to file their tax returns? There are many penalties for substantial delinquent behavior, including passport revocation, draconian fines and penalties, and even jail time for willful violators. There are also substantial behaviors that might place one’s passport at risk, such as the failure to file timely, accurate tax returns (5% on the amount owed each month until paid, maximum 25%), the failure to report all worldwide income and pay the resulting taxes (0.5% monthly penalty, up to a maximum of 25%), or a refusal or failure to file a FinCEN Form 114 / FBAR or IRS Form 8938 (up to $5,000 for each violation as well as a penalty based on the highest aggregated account balance at any point in the associated tax year).
A willful failure to file a required FBAR will result in a fine of at least $100,000 or 50% of the total aggregated balance in all your overseas accounts.
Those required to file IRS Form 8938 yet fail to do so face fines from $10,000 up to $50,000 for each year.
While the tax deadline for U.S. expatriates to file their tax returns is April 15, our expats are provided an automatic extension to June 15 to file the actual return. The extended deadline remains October 15, but make sure to pay all taxes owed for 2024 by April 15, 2025, even if you plan to take advantage of the extension(s). FinCEN Form 114, the Foreign Bank Account Report or FBAR, is due by April 15th. There is an automatic extension for a U.S. expatriate to file an FBAR to October 15th if needed.
U.S. citizens who live outside of the United States can avoid double taxation (paying taxes to their country of residence as well as the U.S.). There are separate tax treaties with many countries as well as the Foreign Earned Income Exclusion (FEIE) ($130,000; up from $126,500 in 2024), the Foreign Tax Credit (FTC), the Foreign Housing Exclusion, and even a Child Tax Credit (CTC).
Those wishing to claim the FEIE have to pass two tests: the Physical Presence Test and the Bona Fide Residency Test, which establish that they have lived outside of the United States for a specific period of time. There are also limitations surrounding those who have claimed the Foreign Earned Income Exclusion (FEIE) on past returns. The election to revoke the FEIE and change to the utilization of the Foreign Tax Credit may preclude a taxpayer from the FEIE for up to five years.
While an increasing number of Americans are electing to leave the confines of the United States to work and live abroad as U.S. expatriates, the retention of U.S. citizenship provides important protections as well as continued taxpayer responsibilities. Seek the advice and counsel of an experienced international tax attorney or expert to review your unique situation, your offshore plans, and the legal protections and tax implications of joining the growing ranks of United States expatriates.