- 1 Can US Citizens Living Abroad Pay Zero Income Tax?
- 2 What is Worldwide Income?
- 3 Foreign Earned Income & Foreign Tax Credits
- 4 Living Off Capital Gains with No Taxation
- 5 Treaty Election Country with no Income Tax
- 6 Expatriation
- 7 Current Year vs Prior Year Non-Compliance
- 8 Golding & Golding: About Our International Tax Law Firm
Can US Citizens Living Abroad Pay Zero Income Tax?
Unlike most other countries across the globe, the United States follows a citizenship-based taxation/worldwide income model. Individuals who qualify as US persons — which generally includes US Citizens, Lawful Permanent Residents, and Foreign Nationals who meet the Substantial Presence Test – are subject to US tax on their worldwide income. Therefore, just because a US person relocates overseas does not mean that they can automatically stop paying taxes. Whether it is because a person wants to move off the grid — or they are entering into the sunset phase of their life and seeking to reduce, if not eliminate taxes altogether — a common question US Taxpayers have is whether they can pay zero income tax by living overseas. Let’s look at five important facts about whether you can avoid US Tax by residing overseas:
What is Worldwide Income?
The United States is one of only a few countries in the world that taxes individuals on their worldwide income. Therefore, if you are a Green-Card Holder/Legal Permanent Resident then you will be taxed just as if you were a US citizen. As a result, whether or not you reside in the United States or outside of the United States, you are required to file a US tax return. Moreover, whether or not the income you earn is sourced in the United States or outside of the states, does not matter for income purposes; in other words, you are required to report all of this income under US Tax Return.
Foreign Earned Income & Foreign Tax Credits
Taxpayers who file jointly may be able to utilize certain mechanisms to reduce or eliminate their US tax liability. For example, taxpayers may qualify to use Foreign Tax Credits or apply the Foreign Earned Income Exclusion and/or Foreign Housing Exclusion. Even if a person qualifies for these exclusions or credits, they are still required to report the income but can claim the exclusion on Form 2555 or foreign tax credit on Form 1116
Living Off Capital Gains with No Taxation
One common way that some US citizens living abroad can pay zero income tax is by reducing their earned income and keeping themselves in a lower tax bracket. While the rules are subject to change, generally, taxpayers who are in lowest tax brackets do not have to pay US taxes on capital gains. Especially when the taxpayer resides in a foreign country with a lower cost of living and has amassed a significant amount of non-recognized gains – this is one strategy some taxpayers may qualify to use to pay zero income tax.
Treaty Election Country with no Income Tax
If the taxpayer resides in a forign treaty country, they may be able to qualify for treaty benefits. Depending on the specific treaty and the status of the taxpayer, they may be able to avoid income tax by making a treaty election to be taxed as a foreign person. While they are still subject to tax abroad, if they pick the right country – they may be able to legally avoid taxes altogether.
Expanding upon the paragraph above, in a situation in which a taxpayer is residing in a foreign country that may have a zero tax rate, the taxpayer may want to consider formal expatriation from the United States — in which they either renounce their US citizenship or relinquish their US green card status. There are some pitfalls to be aware of, especially if the taxpayer is a US citizen or a Long-Term Lawful Permanent Resident, but especially in a situation in which a taxpayer is able to sidestep or circumvent exit tax, this may be a strategy to consider.
Current Year vs Prior Year Non-Compliance
Once a taxpayer missed the pension tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. Contact our firm today for assistance.