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U.S. Citizens & Resident Aliens Living & Working Abroad

As we have written in other spots on this site, US Citizens and resident aliens are subject to tax on their worldwide income without regard to where they live. In many cases, living in another country doesn’t generate any surprises. Employees placed on a foreign assignment are often provided professional consultation and tax services. Their tax life gets a lot more complicated when living in another country for an extended period of time.

But there are also GOTCHA cases where people had no idea they needed to file US tax returns. There are many variations of this story but a typical example is the child born to one or more parents that are US citizens and therefore obtains US citizenship. Other examples include those that are born to foreign parents but their birth occurred in the United States.

The most famous recent example is the current mayor of London, Boris Johnson. He was born in New York, has US and UK passports and holds dual citizenship. His problems revolve around the sale of his principal residence in north London. The gain on the sale of a first residence is not taxable in the UK. The US exempts only $250,000 or $500,000 of gain from tax depending on filing status. Not only could he face significant taxes due but potential criminal charges. While he has been quoted as saying he wants a divorce from US citizenship, that is another very complex issue discussed elsewhere on this website.

Imagine how many US citizens living just in the UK may have been awakened to their requirement to file a US tax return. The growing awareness of US filing requirements leads to many nights of lost sleep and worry. If you are in such a position, seek help without delay. Many cases can be resolved without penalty but if the IRS catches you first, you have lost valuable opportunities. With numerous information sharing arrangements with foreign governments, the Internal Revenue Service is seeking US citizens and residents who are not current with their filing obligations.

When it comes to filing an “expatriate” income tax return, you must first keep accurate records.

  • Where you live is a key factor – a high tax country, a low tax country or a no tax country affects the decision of whether or not to claim the Foreign Earned Income Exclusion.
  • What are your intentions for the future – have you moved your home to the foreign location (i.e. a Bona Fide Resident) or is this more of a temporary assignment? This affects your elections to claim your exclusion.
  • How much time are you able and willing to spend outside of the United States? One test is called the Physical Presence Test requiring you spend at least 330 out of a 365 period in order to qualify for the exclusion.
  • Will choosing not to claim the foreign earned income exclusion (or failing to qualify) remove your ability to claim an exemption from paying into a US health insurance plan? Will you be subjected to significant penalties for not having US health insurance?
  • People often ignore the emotional and practical issues associated with locating to a home outside the USA. There are stages to the transition period that put stress on the individual and their family. The employee must be aware of the adjustment and how to address it.
  • How will foreign currency fluctuations affect your buying power? Are there currency restrictions where you are going (i.e. Argentina)?
  • What will you do with your home in the US? Sell, rent, leave it vacant or have family members reside in the property?
  • Are you considering purchasing a new principal residence in your new location? Review our discussion on this web site titled “Owning Foreign Real Estate.”

All in all, foreign assignments or living overseas can be very exciting, richly rewarding and highly educational. Or it can be the most miserable experience of your life. Being prepared for the change offers a much greater chance that your assignment will be a success. 

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15150 Preston Rd. Suite 210 , Dallas, TX 75248
Call Us: (214) 361-1131 • Fax: (214) 253-2138