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How Do U.S. Citizens Living Abroad Get Taxed?

By Daniel B. Kline - Apr 14, 2017 at 6:06AM

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Moving away from the country doesn't give you a pass from the IRS.

Even if you live overseas, Uncle Sam wants his cut of your income.

Americans who live outside the country must still file taxes with the Internal Revenue Service (IRS). It's not quite as simple as that -- very little involving the IRS ever is -- but the agency spells out its basic policies on its website:

"If you are a U.S. citizen or resident alien, the rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same whether you are in the United States or abroad. Your worldwide income is subject to U.S. income tax, regardless of where you reside."

United States citizens or resident aliens living overseas and military personnel living outside the country on the date their return would normally be due (April 18 in 2017) do get an automatic two-month tax extension. That, however, is not an extension on paying your taxes, only on filing the forms with the IRS. If you owe money and take the extra two months to pay, you will owe interest on it as well.

A red light is seen in from of a sign for the Internal Revenue Service.

Even f you live outside the United States, you still have to pay your taxes. Image source: Getty Images.

It's not all bad news

It may seem unfair to be unable to take advantage of all the things your taxes pay for when you live outside the country and still have to report to the IRS. However, there are some extra deductions offered to Americans living abroad. In most cases, for example, you'll be able to claim a tax credit on any taxes paid to the country or U.S. territory you're living in. In general, you can only claim income, war profits, and excess-profits taxes as a tax credit.

You can see a full list of what qualifies for the foreign-taxes credit, but know that in general, a tax credit is better than a deduction because it reduces your tax liability, whereas deductions reduce only your taxable income.

In addition there is also a Foreign Earned Income Exclusion that can exempt many Americans living abroad from having to pay any U.S. taxes. The IRS explains that exclusion on its website.

If you are a U.S. citizen or a resident alien of the United States and you live abroad, you are taxed on your worldwide income. However, you may qualify to exclude from income up to an amount of your foreign earnings that is adjusted annually for inflation.

The annual limit for 2016 is $101,300. Claiming this benefit involves using Form 2555 and there are some specific requirements. You have to be a resident of the foreign country for a a full tax year and you must actually be present in the country for at least 330 days out of a 12-month period.

You cannot take the tax credit and the tax exclusion on the same earnings. That means that many taxpayers should run both scenarios to see which benefits them the most. The results can be very different depending upon the tax rates in the country where you are living and your income.

It's also worth noting that these are not the only two ways for Americans living abroad to reduce their tax burden. There are also scenarios where you can "exclude from income the value of meals and lodging provided to you by your employer," according to the IRS, which the agency details here.

How do you pay?

Overseas taxpayers fill out the same forms any American citizen or resident alien does. And like people who live domestically, they're obligated to report their income in U.S. dollars even if they're paid partly or in full in another currency. The IRS has a formula for how to do that as well:

"Taxpayers generally use the yearly average exchange rate to report foreign-earned income that was received regularly throughout the year. However, if you had foreign transactions on specific days, you may also use the exchange rates for those days."

Once you've figured out what you owe or what you may get back as a refund, there are a few options for filing your taxes. You can file electronically with a company that handles tax returns filed by Americans living outside the U.S., or you can use the IRS's free-file system if you have an adjusted gross income below $64,000. In addition, you can simply mail your taxes to the IRS the old-fashioned way, by sending them to Department of the Treasury, Internal Revenue Service Center, Austin, TX 73301-0215, USA.

There is no escaping taxes

As an American living outside the country, you may find it tempting to skip paying your taxes, especially if you never plan on returning. That's not advisable, for a number of reasons.

First, tax avoidance is a crime, with penalties ranging from fines to jail time. Perhaps more importantly, not paying your taxes can in some cases allow the government to suspend your passport. That makes traveling anywhere a problem, if not impossible. So if you're American, whether as a citizen or a resident alien, whether you live in Texas or Turkey, Florida or Finland, everyone has to pay the IRS. 

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