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Do ex-pats need to pay income taxes?

| Sep 10, 2020 | International Tax Law

All U.S. citizens and resident aliens must pay federal income taxes. It generally does not matter where they lived when earning their income. It applies even if the citizen did not receive a Form W-2 or Form 1099.

Taxable sources of income include earned and unearned income. Earned income includes wages, salaries, commissions, bonuses, tips, or net earnings from self-employment. Unearned income includes alimony, stock dividends, bond interest, and savings accounts interest. It is just a matter of the amount of their tax obligation.

Ways of lowering tax obligation

Those who live outside the United States for the tax year can exclude some earned income up to $107,600 in 2020 under what is called a foreign earned income exclusion from your return. The reason for this is that the citizen already paid taxes in the country where they work. To qualify, the taxpayer must meet three requirements:

  • The worker must work in a foreign country (their tax home) regardless of where the family home is located.
  • The worker’s income is foreign earned.
  • The worker must either live there for the entire tax year or be a resident alien if the foreign country has an income tax treaty with the United States.
  • The qualifying taxpayer spent at least 330 full days in that country over a consecutive 12-month period.

Foreign Tax Credit

They may also earn a Foreign Tax Credit, which reduces the amount of tax obligation because the worker pays income tax withholdings in the country where they are employed. This includes income or investment income from a foreign source.

Issues are complex

It is obviously much more complicated than filing a Form 1099, and it is easy to make mistakes. Those who misinterpreted the laws or got bad advice from a financial advisor may find themselves a target of the IRS. Cases like this can involve tens of thousands of dollars, so it is best to work with an experienced tax attorney who can help the client resolve it.