As an American living abroad, do I need to file a US tax return?
If you are a U.S. citizen, the rules for filing income tax returns and paying U.S. income tax are generally the same whether you are in the United States or living abroad. Your worldwide income is subject to U.S. income tax, regardless where you live.
Taxation based on citizenship
Whereas most countries have taxation systems that are either residence-based or territorial-based, the United States has a citizen-based taxation system. Therefore, as a U.S. citizen, you are required to file a U.S. tax return and report your worldwide income, regardless where you live and regardless whether you have any U.S.-source income or not. You would be required to file a tax return if your gross income exceeds the filing threshold, which depends on your filing status ($12,950 for tax year 2022 if you’re single, but much lower if you’re self-employed or married to someone who’s not a U.S. citizen).
But what about tax treaties?
The United States has tax treaties with many foreign countries. However, many of these treaties, including the treaty with Germany, the Netherlands and many other European countries, include a clause (often referred to as a ‘saving clause’). Based on the saving clause, the United States reserves the right to tax its residents and citizens as provided under the provisions of its tax laws, notwithstanding any provisions of a tax treaty to the contrary. In other words, the Internal Revenue Code effectively overrides the provisions of a tax treaty for Americans living abroad.
Avoiding double taxation: foreign tax credits and the foreign earned income exclusion
As an American living abroad, you’ll most probably be required to pay income tax in the country where you live. Since you’re also subject to U.S. income tax on your worldwide income, this could mean you’re taxed twice on the same income. However, you are allowed to claim a credit on your U.S. tax return for the foreign income tax accrued or paid to the country where you live. If you live in a country with high tax rates, your foreign tax credit may completely offset your U.S. tax liability.
The ‘foreign earned income exclusion’ (FEIE) allows Americans living abroad to exclude $112,000 (tax year 2022) of foreign earned income from their U.S. taxable income.
Other requirements for Americans living abroad
In addition to reporting your foreign income to the IRS, as an American living abroad, you are also required to disclose your foreign accounts and other assets, if the value of those accounts and assets exceed a certain threshold. Furthermore, there may be additional reporting requirements if you own foreign rental property or if you are a shareholder or director in a foreign legal entity.
The filing requirements for U.S. taxpayers living abroad are complicated. Contact us with any questions you may have. We have offices in Switzerland, Germany and the Netherlands and specialize in U.S. tax return preparation for Americans living abroad.
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