Understanding Taxes for US Citizens Working Abroad

The United States of America is one of the only countries in the world which taxes its citizens on their worldwide income, regardless of whether they are residents of the United States or not. This can create quite detrimental consequences for US citizens working outside the US. With so many US business and government agencies operating abroad, in countries or regions like the United Kingdom, Japan, South Korea, the UAE (think Dubai or Abu Dhabi), Bahrain, the wider Middle East, the EU and elsewhere, there are millions of citizens abroad who have to file taxes and report their income. So how do these citizens avoid being taxed in both the US and their current country of residence? We explain this below in our blog post.

The Foreign Earned Income Exclusion

US citizens working abroad can qualify for an automatic exclusion of a fixed amount of income from their tax return. In 2022 this amount is USD $112,000. This means that a US citizen living and working abroad can deduct up to $112,000 of their foreign salary or other business income earned during the year, from the income reported on their tax return. If they have any income left over, they will be liable to pay taxes only on the income remaining after the exclusion is applied, at the tax rate and bracket applicable to the remaining amount of income on their return.

The Foreign Tax Credit

Even after the Foreign Earned Income Exclusion is applied to a citizen’s income, the Foreign Tax Credit can be used to reduce the tax rate applicable. This will allow the tax rate charged by the US government to be reduced by the amount of foreign tax paid and applicable to the citizen’s income in their current country of residence. The intended purpose of this credit is to help citizens avoid situations where they become subject to double taxation.

Income Tax Treaties

Very often, the country of residence where the citizen is currently living or working will have an elaborate tax treaty with the United States. This treaty would have detailed provisions which may offer more benefits or deductions to the US citizen abroad as well. Therefore, it is important for the taxpayer to consult a professional on the application of any tax treaty to their individual tax return.

So When does the Citizen Abroad actually Pay Tax to the US Government?

After all exclusions, credits and treaty benefits have been exhausted, the US citizen will be liable for taxes on the income remaining. This will have to be reported on their tax return and paid to the US government accordingly. Therefore, the actual taxes collected from US citizens abroad are usually levied on those who are earning more than a 6 figure salary in US dollar terms. That being said, there are still ways to utilize tax treaties to minimize the tax burden. However, for many US citizens abroad, this is not enough, and that is why the United States is one of the few countries in the world which maintains a high annual rate of citizens who renounce their citizenship. For some, the cost of citizenship-in tax terms-is simply too much!

If you need help organizing your taxes in the United States, or if you want to learn more about the exemptions available to you as a non-resident citizen, contact us today at info@borderlesscounsel.com.

(Nothing in this post is intended to be read as legal advice).