United States is one of only two countries that imposes tax burden on the basis of citizenship. This means that US expats are liable to pay US taxes on worldwide income earned over the course of the tax year.
US Citizens living abroad are liable for filing tax returns and pay US taxes no matter where they live at that time. In other words they are subject to the same rules pertaining to income taxation as people living stateside.
In the US tax system, foreign income is taxed at the same marginal rate as any income earned inside the country. This means that if you are a American green card holder living abroad you will need to file a US federal tax return on your total income irrespective of where the income was earned.
So even if you have not lived in America at any point during the year and have earned all of your income in a foreign territory, you still have to file a tax return. Furthermore, you will also be required to file a state tax return depending on where you lived prior to moving abroad.
However, one vital point that arises for US citizens living abroad regarding this US tax structure is that in this system the individual could be theoretically double taxed on their income earned, both in their country of current residence and the US.
To avoid the double taxation, US tax code contains provisions called the foreign earned income exclusion, Foreign tax credit, Foreign housing exclusion and treaty exclusion. When it comes to the tax filing of US citizens living abroad, there are more aspects that one will need to report apart from their earned income. It is also required that the individual discloses the foreign accounts and asset that cross a certain value threshold. Even the retirement contributions of the US expats in foreign retirement accounts might be taxable.
US income for expats normally includes investment or rental income. If you receive Form 1099 abroad, that means the IRS has a record of your income earned. Foreign income for American expats normally includes their expat salary meaning, income earned as an employee abroad.
The income filing threshold is usually based on the standard deduction of each tax filing status. However, the expat has to be very careful while filing US tax return and the most common US expat filing mistakes are when the taxpayers do not include Form 2555 or Form 1116 in their expat filling or when they do not claim the additional child tax credit, or when they do not file an extension after June 15th or when they do not file an FBAR with your tax return.
For a US citizen abroad, tax bill normally happens when expats have US sourced income which is over the standard deduction, thus subject to US income tax and do not pay enough foreign income tax on unearned foreign income on capital gains of foreign property sold etc that is subject to US taxation.
Most expats do not pay US expat taxes because of foreign earned income and foreign tax credit benefits. However, expats still need to file taxes annually if their gross worldwide income crosses the filing threshold.
