7 Tax Tips for Americans Working Remotely Abroad

The internet has revolutionized the way we live in numerous ways, providing us with a wealth of easily accessible information, the ability to shop and communicate globally without leaving our chairs, and, for many, the opportunity to work from anywhere in the world.

The American tax system is an anomaly, as the U.S. is the only developed country that taxes its citizens on their worldwide income wherever in the world they live. As such, U.S. citizens (including dual citizens) and green card holders working abroad remotely who earn more than U.S.$10,000 (or just $400 if they’re self-employed) still have to file a U.S. federal income tax return each year and pay U.S. taxes, no matter where in the world their income comes from.

Thankfully, the U.S. government has put measures in place to limit the amount of U.S. tax payable to its citizens working abroad, particularly if they’re paying taxes elsewhere, or if they’re earning less than $100,000 a year. As such, the majority of Americans working remotely abroad won’t have to pay any U.S. taxes; however, they’re still required to file a return and claim the exceptions that best exempt them from paying U.S. taxes depending on their individual situation.

Here are our top seven tax tips for Americans working remotely abroad:

Tax Tip 1 – Consider claiming the Foreign Earned Income Exclusion (FEIE).

The FEIE allows Americans living abroad to exclude up to around $100,000 (the figure rises slightly each year) of foreign earned income from U.S. tax. To claim the FEIE, you should file Form 2555 along with your federal return.

First, however, you have to demonstrate that you’re living abroad, using either the Physical Presence Test (which requires you to prove that you’re physically present in one or more foreign countries for at least 330 days in a 365-day period that overlaps with the tax year) or the Bona Fide Residence Test (which requires that you prove that you’re a resident in another country).

Tax Tip 2 – Consider claiming the Foreign Tax Credit.

The Foreign Tax Credit allows you to claim a dollar U.S. tax credit for every dollar of tax that you’ve paid to another country. For people who pay more income abroad than they would in the U.S., this can be advantageous, as they can claim more tax credits than the U.S. taxes due and carry the excess credits forward for future use. The Foreign Tax Credit can also be used in conjunction with the FEIE, though not on the same income. The Foreign Tax Credit is claimed using Form 1116.

Tax Tip 3 – Don’t forget FATCA.

The Foreign Account Tax Compliance Act (FATCA) compels foreign financial institutions to report U.S. account holder details as well as American tax payers living abroad with more than $200,000 of foreign assets, not including a home owned in the taxpayer’s own name, to declare their financial assets on Form 8938, which should be filed with their annual return.

Tax Tip 4 – Don’t forget FBAR.

The Foreign Bank Account Report (FBAR) meanwhile, requires that U.S. tax payers who have more than $10,000 in aggregate in foreign financial accounts (including checking, savings, pensions, and mutual accounts) declare them using FinCEN Form 114.

Tax Tip 5 – If you’re married to a foreigner, file separately.

Another tax tip is that if you’re married to a foreigner who isn’t a U.S. citizen or green card holder, tick “married, filing separately” on your income tax return to exclude your spouse’s earning from U.S. income tax liability.

Tax Tip 6 – Check that you aren’t liable for state taxes, too.

Most states with income taxes are happy to let you stop paying once you’re no longer a state resident and if you no longer receive income there. The exceptions are New Mexico, Virginia, South Carolina, and California, which ask former residents to prove that they’ll never return before exempting them.

Tax Tip 7 – If in doubt, seek help.

Filing taxes for Americans living abroad is more complex than for those living stateside, and the penalties for incorrect or incomplete filing, and particularly for not filing FBARs correctly, are harsh. As such, if you have any doubts how to file correctly, completely, and in your best interests, seek help from an expat tax specialist firm.

Disclaimer: This article provides only general information about taxes and does not constitute legal or tax advice. Consult with a legal or tax professional before you act, or refrain from acting, on any of the information from this article or on Remote.co.

Hugo Lesser is part of Bright!Tax. With clients in more than 150 countries, Bright!Tax is a leading U.S. expat tax services provider for the nine million Americans living abroad. If you have any questions regarding your tax situation, don’t hesitate to get in touch for some advice.