One common tax myth is the belief that you can avoid U.S. taxes by living abroad. This misconception can lead to significant compliance issues and potential penalties from the IRS. Here's what you need to know to stay compliant and avoid these pitfalls.

Origin of the Myth

• Misunderstanding of Tax Obligations: Many people assume that moving out of the U.S. exempts them from U.S. tax obligations.

• Lack of Awareness: There is often confusion about the specific rules governing the taxation of U.S. citizens and resident aliens living abroad.

Reality of U.S. Taxation for Expats

• Worldwide Income Reporting: U.S. citizens and resident aliens are required to report and pay taxes on their worldwide income, regardless of where they live.

• Foreign Earned Income Exclusion (FEIE): The FEIE allows you to exclude up to $112,000 (as of 2022, adjusted annually for inflation) of foreign earned income if you meet certain requirements.

IRS Guidelines on Taxation While Living Abroad

• Foreign Earned Income Exclusion (FEIE):

• Qualifying for FEIE: You must have foreign earned income and meet either the bona fide residence test or the physical presence test.

• Form 2555: File Form 2555 to claim the FEIE.

• Foreign Tax Credit: If you pay taxes to a foreign government, you may be eligible for a foreign tax credit to reduce your U.S. tax liability. File Form 1116 to claim this credit.

• FBAR and FATCA:

• FBAR: File FinCEN Form 114 to report foreign financial accounts if their total value exceeds $10,000 at any time during the year.

• FATCA: File Form 8938 if your foreign financial assets exceed certain thresholds.

Why the Myth Persists

• General Misconceptions: Many taxpayers believe that living abroad exempts them from all U.S. tax obligations.

• Anecdotal Advice: Misleading information and anecdotal advice from non-professional sources perpetuate the myth.

Avoiding the Pitfall

• Understand U.S. Tax Obligations: Clearly understand the IRS rules for U.S. citizens and resident aliens living abroad.

• Report Worldwide Income: Report all income, regardless of where it is earned.

• Utilize Exclusions and Credits: Take advantage of the FEIE and foreign tax credits to reduce your U.S. tax liability.

What You Need to Do

• File Required Forms: Ensure you file Form 1040, along with any applicable forms such as Form 2555, Form 1116, FinCEN Form 114, and Form 8938.

• Keep Detailed Records: Maintain accurate records of all income, taxes paid to foreign governments, and foreign financial accounts.

Consulting a Tax Professional

• Seek Professional Advice: Consulting a tax professional with expertise in expatriate tax issues can ensure you correctly report your income and claim eligible exclusions and credits.

• Accurate Records: A professional can help you maintain proper documentation and navigate the complexities of U.S. taxation while living abroad.