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As an American living abroad you are obligated to report your income to the IRS as well as your country of residence. While at first glance this may seem like an enormous tax burden, keep in mind that governments offer numerous resources and programs to help ensure you don’t have to pay the full amount to both countries.
Expats who reside abroad for at least the majority of a calendar year are permitted to exclude a portion of their US income from their taxes. Exclusions are not automatic, must be claimed by filing the appropriate tax return information, applies only to earned income, excludes rental, dividend or interest income, and any other types of income not paid by your own personal efforts. To qualify for the Foreign Earned Income Exclusion you need to meet the Physical Presence Test, which establishes that you have lived outside the US for 330 days.
A tax credit reduces your tax liability to the US, and you can potentially receive a dollar for dollar against the taxes paid to a foreign country.
*Note that you cannot claim a credit for taxes paid to a foreign government that have already been excluded from US taxation.
A tax treaty codifies the objectives of reducing or eliminating double taxation of your income by both countries via reciprocal foreign tax credits. Individual treaties also address tax issues specific to the two countries involved. Additionally, for those who file their taxes annually, there is a three-year statute of limitations for IRS audits.
US CPA For Expat Tax Preparation Services
The professionals at My CPA understand the myriad of difficulties you face as a US citizen living abroad and struggling to understand which forms to file with the IRS. We will work with you over the phone, via email, or in person to ensure that all your assets are properly reported, and you don’t pay any more than is necessary.