Do US taxpayers living abroad still owe taxes in the United States?


If you take a stroll down the streets of Roma Norte, a popular Mexico City neighborhood packed with bars and cafés, you’ll probably hear a mix of English and Spanish. Shorts-clad residents from the US, in particular, are everywhere: walking their Labradoodles, taking business calls, and posting IG stories. These aren’t retirees seeking a cheaper lifestyle or a milder climate for retirement; these are grinding, full-time remote workers who decided to relocate to Mexico’s bustling capital.

This year, many US globetrotters may be dealing with home taxes for the first time since moving abroad. And let me tell ya, it can get a bit confusing. Money Scoop spoke with Mark Jaeger, VP of tax operations at TaxAct, to clear up the details.

Do US remote workers living abroad still have to file US taxes?

First and foremost, Jaeger made it clear that as long as you’re a US taxpayer—and you don’t trade in that blue passport for another one—you’re still a US resident when it comes to taxes. “If you’re living in Germany, and you’re working, and you’re still a US citizen, any income that you earn while in Germany is still taxable to the United States,” he said.

Does this mean remote workers will be double-taxed?

Not necessarily. You’re typically bound to the tax laws of wherever you’re working—whether that means working in person for a company based in your new country of residence or working remotely for a US-based company. Each country has its own laws on what’s taxable, so do your research before moving.

Jaeger said the most common way to avoid this double tax is through a foreign-earned income tax exclusion (Form 2555) or foreign tax credit for unearned income (Form 1116). Just remember, you’ll have to pass the bona fide residence test (yeah, that’s the real name) or physical presence test to qualify for the exclusion…and you’ll still owe whatever’s left after the tax credit or exclusion to Uncle Sam.

But they’re only responsible for federal taxes…right?

Wrong again. As long as you’re a US taxpayer, you have a state of residence, which is wherever you were last registered. But Jaeger said there are ways to get around paying state taxes on your income.

“You may want to think about moving and establishing residency in one of those states [that does not impose income taxes] for a while, get your driver’s license, and then do the final shift to your other destination—wherever it may be outside the United States,” he said. So, consider booking that one-way ticket from Florida or New Hampshire.

What about other income and property taxes?

Income that doesn’t come from a job is classified as unearned income, and that kind of thing requires filing for a foreign tax credit instead of a tax exclusion. This includes anything earned in foreign markets, from stock dividends and returns to rental income earned on a property you own abroad. But property taxes on that beachside home you bought in Mallorca are up to local authorities.

“You’d have your taxes [wherever you are]—if there are property taxes and the like there—that you’d pay, but nothing that would impact you owing taxes on your [US] federal return,” said Jaeger. This works the other way around, too. If you left the US but still have property here, you’d have to keep up with US property taxes all the same.

Taxes while working abroad can get complicated. So always do your research! And…be mindful of what it means for a country to experience an influx of remote US workers before you traipse about the globe.

Source: Reuters

The Mexico City Post