Can living overseas mean you owe less to the IRS?
In short: Yes.
But you need to be careful. Simply moving outside the United States does not remove your obligation to pay U.S. taxes.
U.S. citizens must file a return with the IRS every year, regardless of where in the world they reside.
But living overseas can substantially reduce your U.S. tax bill…
There are three main tax advantages available to Americans overseas.
Here’s a summary:
1. Foreign Earned Income Exclusion (FEIE)
This is one of the most well known and most commonly used expat tax advantages.
With the FEIE, you can exclude up to $120,000 of your income for 2023 from U.S. taxation (that figure rises to $126,500 for your 2024 income).
The income must be earned outside the United States, and your tax home must be outside the States too.
What does it mean that your “tax home” is outside the States?
You need to meet either the “physical presence test” or the “bona fide residence test.”
To meet the “physical presence test,” you must be physically outside the States for at least 330 days in a 12-month period.
To satisfy the “bona fide residence test,” you must reside in a foreign country for an entire tax year—January 1 to December 31. This does not mean you can’t visit the States, however.
2. Foreign Housing Exclusion (FHE)
If you’re a U.S. expat, earning overseas, the Foreign Housing Exclusion (FHE) allows you to exclude thousands in foreign housing expenses from your U.S. taxes.
For the 2023 tax year (filed this year), the housing exclusion amount ranges from $19,200 to $36,000, depending on where you live. The IRS issues an annual notice identifying countries, and locations within those countries, where housing costs are high relative to those in the States—allowing for a larger exclusion.
The FHE can include rent, housing provided in kind by an employer, utilities, insurance, occupancy taxes, household repairs, residential parking, and more.
3. Foreign Tax Credit (FTC)
This third common expat tax advantage could be the most powerful.
With the Foreign Tax Credit, you receive a U.S. tax credit for every dollar you pay in tax to a foreign government.
The foreign tax credit may suit people who don’t qualify for the FEIE, or Americans who are tax resident in countries with a higher tax rate than the States.
If you pay more abroad than you would have in the United States, you can carry the excess taxes paid as a credit for 10 years.
One big advantage of the FTC is that it can apply to so-called unearned income, such as dividends, interest, and royalties.
Exactly how you employ the strategies I’ve mentioned will depend on your particular circumstances… The best use of the rules for one person may not be the best use for another.
But here’s the key point: The amount of tax you owe often depends entirely on your knowledge of IRS rules and how to use them to your advantage.
Depending on which strategy you employ, you could fill out your tax return in completely different ways—each entirely legal, but each resulting in a different amount owed to the taxman.
Stay diversified,
Lief Simon
Editor, Offshore Living Letter
