US Taxation for Americans Working Overseas While Liking in the US
A Common Inquiry: Are US citizens required to pay taxes when working overseas while also living in the US? To address this question, let's explore the tax implications for American expatriates who are working remotely or commuting between the US and nearby countries like Canada or Mexico.
Understanding US Taxation for Overseas Workers
When US citizens work overseas while maintaining a residence in the US, they face unique tax obligations. Unlike the immediate situation where one's physical presence might suggest local taxation, the Commissioner of Internal Revenue views work performed through digital means or commuting to nearby countries as still being within the US. Therefore, these individuals are subject to US tax laws just like if they were working locally.
Practical Experience
Over 20 years, the author has experienced working in 10 different countries. Annual tax filings were mandatory, much like for US-based workers. An overseas tax accountant was essential to navigate the complex tax rules and regulations. Ensuring compliance with both local and US tax laws was vital to avoid hefty fines and penalties.
Foreign Income Tax Credit
If US citizens working overseas pay taxes in the country they are based in, they can claim a foreign income tax credit on their US tax return. This credit reduces their US tax liability, effectively offsetting taxes already paid to the host country. The author, for instance, would claim this credit for taxes paid while working in countries like Finland, the United Kingdom, and Australia.
Exclusion Laws and Tax Exemption
Between 2016 and 2022, the maximum amount of income that is exempt from US taxes for individuals under Some Exclusions was $100,000. This means individuals earning $150,000 in total income would only be taxed on $50,000 under the US tax system. This provision applies to earned income, not passive income such as rental income or dividends.
Quarterly Tax Payments
Uber riders do not face a one-size-fits-all approach when it comes to taxes. Many of the author's clients in similar positions opted for quarterly tax payments. This strategy helped to manage the financial burden and avoid having a large sum due at the end of the year. Ultimately, after completing their tax returns, many received a significant portion of their quarterly payments back.
Financial Account Reporting
US citizens working or residing outside the country must comply with the Foreign Account Tax Compliance Act (FATCA) and the Foreign Bank Account Report (FBAR). These regulations mandate the reporting of foreign financial accounts to the IRS. Failing to comply can result in significant penalties, often starting at $10,000 per form per year.
Retired Tax Exclusions
For retirees living and working overseas, there is the Overseas Earned Income Tax Credit (OEITC), which can lower their tax burden. This credit, however, is subject to various limitations and requires careful planning to maximize benefits.
For most, the most pertinent piece of information is the necessity to file a tax return. Even if no taxes are owed, individuals must still report their income and accounts. Notably, this obligation applies regardless of whether they are living or working within the US or overseas.
Conclusion
In conclusion, US citizens working overseas while maintaining a residence in the US face a unique set of tax requirements. Understanding the foreign income tax credit, the overseas earned income tax credit, and compliance with FATCA and FBAR is crucial for avoiding penalties and maximizing potential tax savings. Expatriates must report their income and accounts annually, and in many cases, manage quarterly tax payments.