8 Tips for American Taxpayer Living Abroad

If you thought filing a tax return every year as an American citizen was overwhelming, then you may be astounded to learn how difficult paying taxes are for a U.S. citizen living abroad. All American citizens are required to pay their taxes, regardless of whether they are living and/or working outside the country. There are several provisions in the U.S. tax code to make paying taxes from across the globe a little easier, but the process of calculating your tax liability can be time consuming and confusing even for a trained tax preparer.

1. The IRS Still Wants your Money
You may be surprised to learn that even through you may move out of the country, and work abroad, you are still required to pay taxes. Every year you will need to file a tax return claiming your worldwide income, even if you have already paid taxes on the income in the country you are living in. This applies to both earned income (such as wages or self employment income) and unearned income (such as capital gains, interest and dividends, etc).

2. Foreign Earned Income Exclusion
If you have been earning income while living abroad for more than a year, then you may qualify for the foreign earned income and foreign housing exclusions and the foreign housing deduction. It would allow you to exclude up to $91,400 of foreign income for the 2009 tax year. The requirements depend on which country you are residing in, how many days you have been living there, and your worldwide income. This credit can be especially beneficial to taxpayers who might be subject to double taxation (those who have to pay taxes to both the U.S. government and their local tax authority). You can use the foreign income exclusion form (IRS Form 2555) to claim this deduction, but be sure you speak with a tax professional specializing in foreign income before sending off your return.

3. Foreign Tax Treaties
Fortunately, the United States has made tax treaties with several foreign countries to make paying taxes less difficult for some Americans living abroad. These treaties allow qualifying taxpayers to pay a reduced tax rate. Some are even allowed to be exempt from reporting foreign income. However, do not get too excited just yet. Not every foreign country has made an agreement with the U.S. government, so be sure to check out IRS Publication 901, and speak to a qualified expert before you begin taking advantage of treaty related tax benefits.

4. Expatriation
The official term for an American who has given up their citizenship to live in another country is an expatriate. U.S. tax law asserts that after an American renounces citizenship, the once-citizen in question will still need to pay expatriation taxes for 10 years. This results in nearly a decade of ties to a country they no longer live or work in whatsoever, and can get very complicated if the citizen passes away during the expiration period, which will result in estate taxes. If you are permanently moving to a foreign country and want to give up your U.S. citizenship then it is highly recommended that you speak a tax lawyer to discuss expiration and the associated tax laws.

5. Social Security and Medicare
U.S. social security and Medicare taxes will generally not apply to money earned while working as an employee outside of the country. However, there are a few exceptions to this rule.

6. VAT and Import Taxes
If you are living and/or working in Europe, you may be subject to the dreaded Value Added Tax, or VAT. Just like other foreign taxes, you will probably be able to deduct them from your worldwide income, but do not make the mistake of trying to avoid them altogether. As a resident of a country with a VAT, you will be required to comply. Additionally, if you are self-employed and sell items to foreign countries then you might be subject to import taxes. These may or may not be deducted from your U.S. tax liability, so make sure you do the proper research before you send off too many products.

7. Citizenship and the UBS Debacle
For some, the United State's new approach to offshore banking has become a reason to reevaluate their citizenship. Since private banking accounts have become a tradition in some foreign countries, many U.S citizens living overseas have held offshore bank accounts for years without considering the possible tax consequences. With all of the recent developments in the UBS cases and other tax shelter cases, there has been a sudden spike in U.S citizens abroad renouncing their citizenship.

8. Legal Foreign Financial Accounts
Although using offshore bank accounts to hide income is illegal, there is nothing wrong with being a citizen who lives overseas with a foreign bank account. Just make sure you take the proper steps to notify the IRS about it, and report all income from generated from you investments. You can use IRS Form TD F 90-22.1, which can be downloaded at IRS.gov.

The Tax Lady Roni Deutch and her law firm Roni Deutch, A Professional Tax Corporation have been helping taxpayers across the nation find IRS tax relief for over seventeen years. The firm has experienced tax lawyers who can fight IRS tax liens on your behalf.