Consider that, just as there are doubtlessly benefits to living abroad, these benefits do not necessarily extend to a delimitation on your taxable assets; there is a difference between being an ‘expat’ in the idiomatic sense and being an expatriate in the technical sense—and it matters when it comes to tax for expats.
Have You Made the Move?
If you consider yourself an individual living and earning abroad and are worried about tax for expats, chances are that you didn’t make that move within the last two weeks; or perhaps you find yourself midway on the path to going through with such a move. If you have made a foreign relocation from the United States in the last week or so, or if you plan to move soon, then you can rest easy for another year because the deadline to file your tax return as an individual living abroad has just passed (on 15th June to be exact, if you filed for the automatic extension period; if you did not file for the automatic extension period, then you would not need to have submitted taxes as a foreign national or foreign resident alien living abroad in the first place). Going through this process, just as one would on home soil, can be a tedious one, even if one can forecast it a year in advance. But forecast the process one ought to, given that if you are a US citizen living in a foreign country, or what is (somewhat clinically) called a resident alien—a green-card holder—you are still beholden to the US government to pay taxes. This includes, ironically—or perhaps fittingly—enough, members of the US military working and living overseas.
Expat or Expatriate?
Be aware that if you are identified as belonging to either of the afore-mentioned categories, you are held accountable to pay income, estate, and gift tax. Now, these are the official governmental categories for taxable persons, and they divert crucially from the common vernacular. For example, most people who retain their American citizenship or residence yet live abroad are typically referred to as expats—of course an abbreviation for expatriate. Expatriate literally means, out of or away from one’s homeland (that being America, in this case); confusingly, the ex- prefix does not, in this case, mean former; yet more confusingly, an expatriate is not simply one who happens to reside away from their homeland, their nation of citizenship, or their permanent residence. In this sense, there is still a tax for expats. In contrast, an expatriate, as defined by the US government with respect to tax purposes, is one who has renounced their US citizenship or residence, and all of its concomitant benefits, in order to adopt a state of either statelessness or alternative citizenship.
Therefore, one who is truly an expat is one who does not need to worry about tax for expats since they won’t pay US taxes. Renouncing one’s citizenship, however, is often just as tedious as paying taxes, and one can benefit from consulting with specialists in international taxation or US accounting. The process of renouncing citizenship is a bureaucratic one, and failure in the pursuit of proper planning can lead to dire realities for the expatriate and their family: for example, when it comes to heirs claiming inheritance, or the individual being subjected to an exit tax given certain conditions of past non-compliance (tax returns in arrears), or if the individual’s annual income is above a certain threshold. Before moving, consider seeking advice on topics such as foreign earned income exclusion, foreign tax credits, and Social Security.
Esquire Group, a boutique international tax advisory firm specializing in tax consulting, tax planning and compliance and helping corporate and individual taxpayers with Offshore Voluntary Disclosure Program, asset protection, and tax consulting for US expats. To learn more about us, visit www.EsquireGroup.com/about.