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What do I need to know about taxes if I live abroad?

On Behalf of | Apr 15, 2022 | International Tax Law |

The Internal Revenue Service (IRS) is looking for high wealth taxpayers who are not meeting their tax obligations. There are many different legal tools to help reduce one’s tax bill. Even when used wisely these tax saving strategies can catch the eye of the IRS. As a result, audits are even more prevalent.

There are a number of things that can lead to increased scrutiny, such as living abroad, frequently visiting family abroad and immigrant status. Those who chose to live abroad are not alone. The state department currently estimates that 9 million Americans are residing outside of the United States. People make this move for many different reasons. Some wish to be closer to family and others to explore new areas and cultures.

Whatever the reason for the move, many forget one important thing: they may still owe Uncle Sam a tax bill.

The IRS requires all US Persons to report income earned worldwide. As a result the IRS will generally expect tax filings from United States citizens and residence aliens regardless of where they call home.

Which tax forms do I need to file if I live abroad?

There are different forms, and the requirements vary depending on your circumstances. The following is not exhaustive, but some of the forms can include Form 1040, US Individual Income Tax Return, Form 2555, Foreign Earned Income (FEI), and Form 1116, Foreign Tax Credit (FTC).

Those with qualifying foreign financial accounts may also need to file a Report of Foreign Bank and Financial Accounts (FBAR) while those who serve as an officer, director or shareholder for certain foreign corporations will also need to file a Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations.

It is important to note that the IRS is keeping a watch on cryptocurrency transactions. Tax forms now include an area for the taxpayer to report these transactions.

How can I reduce my tax bill?

There are tools that can help to reduce the tax bill when living abroad. One example is the use of foreign tax credits. Form 1116 Foreign Tax Credit allows for those living abroad to get credit for taxes paid to foreign countries. Another option is the Foreign Earned Income Exclusion.

What if I forgot to file?

The IRS can move forward with sanctions and harsh penalties. The federal government has various amnesty programs available for those who wish to proactively come into compliance with applicable tax laws. Participation in these programs can reduce the risk of these sanctions and penalties.

Those who are the subject of an audit also have options. An attorney experienced in this niche area of tax law can review the situation and work to preserve your rights and explore legal remedies throughout the process.