The Tax Implications of Living Outside the U.S. as a U.S. Citizen

The IRS developed Publication 54 to help guide U.S. citizens living abroad through their potential tax liabilities. Below, I have posed a series of questions about being a U.S. citizen (potentially a dual citizen) living outside the United States.

First things first, the link to the IRS publication is as follows:
https://www.irs.gov/pub/irs-pdf/p54.pdf

The questions that I am hoping to answer in this article are as follows:

1. Are U.S. citizens living abroad subject to the federal income tax?

The short answer to this question is yes. The U.S. taxes worldwide income of it's citizens regardless of the citizens reside in the United States.

2. Is there any income tax relief for U.S. citizens living abroad?

Earned Income and Housing Exclusion
Between the foreign earned income and foreign housing deduction, a U.S. resident might be eligible to exclude up to $102,100 of their foreign earnings for 2017. It is important to note that this exclusion applies to earned income only. Unearned income such as dividends, interest and capital gains are not subject to the exclusions. To claim the aforementioned tax benefits, the following requirements must be met by the taxpayer:

a) The tax home (centered around where you work) of the taxpayer must be in a foreign country;
b) The taxpayer must have foreign earned income; and
c) The taxpayer must meet one of the following criteria:

i) The taxpayer must be a U.S. citizen who is a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year;
ii) The taxpayer must be a resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year; or
iii) The taxpayer must be a U.S. citizen or resident alien who is physically present in a foreign country for at least 330 full days during any period of 12 consecutive months.

Exemptions, Deductions, and Credits
There are several deductions and exemptions for U.S. citizens living overseas for items such as charitable deductions, moving expenses and IRA contributions. For the purposes of this article, I would like to focus on the credit for foreign income taxes paid.

A tax credit is available to any individual who pays a legal and actual tax liability to a foreign government. The credit is limited to the part of a taxpayer's total U.S. tax that is in proportion to your taxable income from sources outside the United States compared to your total taxable income. The tax credit cannot exceed a taxpayer's actual foreign tax liability. A taxpayer, however, will not be subject to this restriction if they meet the following criteria:

a) The taxpayer's only foreign source income for the year is passive income;
b) The taxpayer's foreign taxes for the year that qualify for the credit are less than $300 ($600 MFJ); and
c) the taxpayer elects this procedure.

The tax credit earned in a given year can be carried back 1 year or forward 10 years if the taxpayer is unable to use the credit in the current year due to the aforementioned limit. Alternatively, a taxpayer may elect to deduct their foreign income taxes instead of claiming them as a credit.

Tax Treaties
A full discussion of the various tax treaties that might affect an individual's personal income tax situation is too broad and beyond the scope of this article. Instead, I will simply note their existence and encourage any reader to discuss the matter further with their chosen tax professional. Additionally, I have provided a link to the IRS list of tax treaties along with the benefits associated with said treaties below.

https://www.irs.gov/individuals/international-taxpayers/tax-treaty-tables

Disclaimer
Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.