Relocating abroad brings new opportunities, but it also comes with ongoing US tax obligations. Since the US taxes citizens and green card holders on worldwide income, it’s essential to prepare before your move and stay compliant afterward. Proper tax planning can help you avoid penalties, reduce tax liabilities, and simplify the filing process.
Before Moving Abroad: Key Tax Steps
Relocating to another country is an exciting adventure, but it also comes with important tax considerations. As a US citizen or resident, your tax obligations don’t end when you leave the country. To avoid unexpected tax issues, it’s essential to take the right steps before your move.
1. Assess Your US Tax Residency and Filing Requirements
Even after leaving the US, you must continue filing a US tax return. The IRS requires all US citizens and residents to report worldwide income, whether earned domestically or abroad. This also applies to self-employed individuals and business owners.
2. Consider the Impact of Foreign Earned Income
If you plan to work overseas, you may qualify for the Foreign Earned Income Exclusion (FEIE), which allows you to exclude a portion of your income from US taxation. To qualify, you must meet either:
- The Physical Presence Test (living outside the US for at least 330 days in a 12-month period), or
- The Bona Fide Residence Test (establishing residency in a foreign country).
If you won’t qualify in your first year abroad, you may need to plan for additional US tax liability.
3. Evaluate Your Investments and Retirement Accounts
Foreign investments, including mutual funds and pensions, often have unique tax treatment under US law. Some can trigger Passive Foreign Investment Company (PFIC) rules, leading to high tax rates and complex reporting. Reviewing your financial portfolio before relocating can help you avoid unnecessary tax burdens.
4. Address State Tax Residency
Certain states, such as California and New York, make it difficult to terminate tax residency. If you maintain property, bank accounts, or voter registration in these states, they may still consider you a tax resident even after moving abroad. Taking steps to sever state ties can prevent future tax issues.
5. Work with a US Expat Tax Firm in Advance
A US expat tax firm can provide tailored advice based on your income, investments, and residency plans. Consulting with an expert before your move can help you structure your finances efficiently and ensure a smooth transition to your new tax situation.
After Moving Abroad: Staying Tax Compliant
Once you’ve settled into your new country, it’s important to stay on top of your US tax obligations. Understanding key tax requirements, such as foreign income reporting, tax credits, and filing deadlines, can help you avoid penalties and ensure compliance.
1. Keep Track of Filing Deadlines
Expats receive an automatic two-month filing extension until June 15, but taxes are still due by April 15 to avoid interest charges. You can also request an extension until October 15 if needed.
2. Monitor Foreign Financial Accounts
If your total foreign account balances exceed $10,000 at any time during the year, you must file a Foreign Bank Account Report (FBAR). Additionally, if your foreign financial assets surpass IRS thresholds, you may need to file Form 8938 (FATCA reporting).
3. Understand How Foreign Taxes Affect Your US Return
If you pay income tax to a foreign government, you may be eligible for the Foreign Tax Credit (FTC), which reduces US tax liability on the same income. However, different countries have varying tax rates, social security systems, and treaties that affect how taxes are applied.
4. Consider Your Business and Rental Income
If you own a business abroad, you may have additional filing obligations, such as Form 5471 (foreign corporations) or Form 8865 (foreign partnerships). Similarly, foreign rental income must be reported on your US tax return, and depreciation rules may differ from those in the US.
5. Plan for Long-Term Tax Strategies
Living abroad affects retirement planning, inheritance taxes, and exit strategies if you eventually renounce US citizenship. Regular tax planning can help you optimize your financial situation and avoid complications later on.
Planning for US taxes before and after moving abroad can save you time, money, and stress. By consulting a US expat tax firm before your move, you’ll gain valuable insight into tax-saving strategies and compliance requirements. Once abroad, staying organized and keeping up with your tax obligations will ensure a hassle-free experience. If you’re planning an international move, consider seeking professional tax guidance to help you navigate your US tax responsibilities.
