Three Tax Benefits of Living Abroad for U.S. Citizens

Tax benefits of living abroad

The press is increasingly reporting tales of expatriates who are relinquishing their US citizenship in a bid to avoid onerous tax reporting requirements and liabilities. However, it is a little-known fact that living abroad can actually allow US citizens an opportunity to benefit from some tax breaks that mean that they can significantly reduce their tax bills. Here are four tax benefits to living abroad as a U.S. citizen.


1) Foreign Income Exclusion

While the U.S. is indeed one of the few countries in the world to operate a double-taxation system, which means that expatriates living overseas are expected to pay tax on their income to the U.S. government, despite the fact that they earned the money abroad. However, while this does increase many expat’s tax bills, the American government does treat income differently according to where in the world you live and there is a foreign earned income exclusion that allows expats to enjoy some payments that are exempt from U.S. taxes. In order to qualify for an exclusion you need to be resident in a foreign country for the entire tax year or present in a foreign country for at least 330 days within 12 consecutive months. If this is the case, you may qualify to exclude from income up to an amount of your foreign earnings that is now adjusted for inflation ($91,400 for 2009, $91,500 for 2010, $92,900 for 2011, $95,100 for 2012).

More Information: Foreign Earned Income Exclusion


2) Foreign Tax Credit

While you will be subject to the double-taxation system, the U.S. government does allow you to subtract any tax liability that you have in your host country from your U.S. tax liability. This entails that you only pay tax up to a certain limit and that you do not get taxed on the same income twice. If the tax rate in operation in your host country is higher than the U.S. tax rate then you won’t need to pay any income tax in the states. However, you will be still expected to complete a tax return.

More Information: What Foreign Taxes Apply for the Tax Credit


3) Social Security and Medicare Savings

When you are living abroad as an expatriate you may not be expected to contribute to U.S. Social Security and Medicare Systems. It is important to note that you will be required to make payments if you work for a U.S. company or the U.S. government. Furthermore, if you are living in a country with which the U.S. government operates a “totalization” agreement, you will be expected to make social security payments. The U.S. has a totalization agreement in place with 24 different countries.

More Information: Social Security and Working AbroadTotalization