As Trump and his billionaire cronies set about looting America, it may seem counter-intuitive to worry about paying your U.S. taxes.
In fact, you may not have to.
All over the world. These French union workers are protesting the end of the Wealth Tax, among other anti-labor measures.
Credit: Rebecca Martin
But it’s not as simple as that.
For one thing, you may want to collect social security. (Yes, social security is still protected—unlike hundreds of other programs that’ll be cut or eliminated entirely, thanks to the new tax bill.
So let’s take a look at how you, as an expat, can get what you’re due—and at your tax liabilities.
1) First, as an expat living overseas, do I have to pay U.S. taxes at all?
Yes, you do.
Yes, because as a U.S. citizen, the United States is still your tax home. (In fact, the U.S. is one of the few countries that require you to pay tax on your world-wide income.)
However, if you do earn a salary overseas, it’s not that hard to lessen your tax, or eliminate it altogether, by taking the Foreign Earned Income Exclusion. The FEIE.
To qualify for the FEIE, you must:
⇒ Stay out of the U.S. for at least 330 full days in a tax year. (To make it easier to calculate, remember that in one year, you can’t come home a minute more than 35 days.)
⇒ Do not earn wages of more than $102,100. That’s the 2017 figure (which will be adjusted up for inflation next year). Tax is due on any amount over $102,100.
⇒ Do not work for the U.S. government. If you do, no matter where you are, you owe U.S. income tax. (NB: If you’re employed overseas with an American company, you can still claim the FEIE.)
And that’s about it. You are still required to file a tax return and to report your overseas salary. For how to do that and to double-check your particular situation, please (please!) see IRS Publication 54.
2) What about state taxes? If I qualify for the FEIE, do I still have to pay state income taxes?
Nope. Most states will release you from tax liability if you can prove you’ve lived out-of-state for at least six months.
However, be warned. Four states—New Mexico, Virginia, South Carolina and Colorado—will fight to hold onto their state taxes. And they’ll make it difficult for you. So if you know you’re not coming back, make sure to get rid of your property there, your state driver’s license, your library card, any ties to the state, before you leave.
3) What if I’m self-employed? Do I have to pay U.S. taxes on that?
Yep. You’re supposed to report your self-employment income—and pay your self-employment taxes on it—even if your source of income is foreign.
Except this is where social security comes in. If you haven’t paid enough credits into the system to collect your benefits, you might want to keep paying credits via the self-employment tax.
To show you what I mean, this is the dilemma a friend is facing. She’s taught in Spain for twenty years, and all during that time hasn’t had to pay U.S. taxes. Upon retirement age, she will be eligible for a Spanish pension, but it’s not much, she says. So she’s thinking about returning to work in the U.S.
And how does the credit system work?
Normally, your social security contributions are deducted from your U.S. salary and matched by your employer. You earn one credit for every $1300 of wages (that’s the 2017 figure)—and you can earn a maximum of 4 credits a year. And to collect your minimum benefit, you need at least 40 credits. (Ten years of work.)
But if you’re short of the 40 credits, you can keep earning them through the self-employment tax.
The SE tax consists of both the employee and employer portions of Social Security and Medicare. Social security is the much larger portion… however, the combination of the two brings the entire self-employment tax up to 15.3%.
There are a few other things to think about though…
⇒ The more credits you pay in a lifetime, the larger your benefit.
⇒ The benefit is calculated on what you’ve paid into the system up to the nanosecond you turn sixty-six.
⇒ Lastly, the U.S. has entered into agreements with foreign countries to eliminate double payment of social taxes. (These agreements are referred to as Totalization Agreements.)
Theoretically, these totalization agreements mean you can choose to pay either your U.S. social security tax or your foreign country’s social tax.
Which is something i’m dealing with. At the moment, I’m working in France as a freelance teacher. Out of my earnings, I’m supposed to pay a hefty 22.5% social charge. (A similar rate is taken out of French salaries.)
Except, as far as I know, there’s no way of getting out of paying my French social charge.
So when tax time comes, I’ll include proof of my paid French social tax in my U.S. return. Thus, excusing me from paying my U.S. self-employment tax.
I’ll let you know how that works out.
4) Do I have to pay tax on investment income?
With all the publicity about the Panama Papers and Paradise Papers, this should be a question I shouldn’t have to answer. (But it’s yes, you are liable.)
Keep in mind that in many countries, banks are required to report directly or indirectly to the IRS any information on accounts held by US citizens. In my personal experience, this hasn’t happened. Except my French bank reports.
You are also required to report holdings in foreign banks of $10,000 or more—though the exact form to use depends on the amount.
As for how much tax to pay on your investment income, there are so many different kinds of investments, that it’s best to talk to a tax professional who specializes in U.S. taxes.
5) What about paying income tax to my foreign country? Do I have to do that?
On a tourist visa, no, you do not owe tax.
Otherwise, if you have any type of residency visa, you probably will have to pay some sort of tax. I can’t say much more about that here. It varies so much from country to country.
A few countries—like the Gulf States—do not have income tax at all. (But that will probably change.)
That said, I have had local taxes taken out of salaries in Russia and in Malaysia. And I’m certainly paying tax in France.
But I like what that tax pays for. Affordable, efficient public transportation. Public housing. Great retirement benefits for my French friends. And I get to enroll in the French national health care system. One of the best in the world.
It’s not totally free. I’m still doing the paperwork so I don’t know the cost yet.
But I figure that my monthly health insurance premiums in France will be about a quarter of what they’d be in the U.S.
Which is reason enough for many of us to leave America.
Okay, friends. I know this is a bare-bones introduction to expats and taxes. But it’s not that hard to manage so I hope this post will encourage you to take the leap. To live part of your life overseas.
Or, if you have any experiences to share, I’d love to hear from you.