Moving Money Overseas? Tax Information For U.S. Expats

There are a lot of reasons for U.S. citizens to move money or other assets overseas. In many cases, there are clear advantages to moving overseas completely. But there are clear tax obligations for American citizens. 

But before you or your money leave the USA, there are a few tax and legal consequences you need to be aware of. Remember: If you're an American citizen, it doesn't matter where you go in the world. You can't outrun the taxman.

Tax Reporting Obligations for U.S. Citizens

If you (or your money) are moving overseas, there will be lots of tax forms to be filed annually. The bureaucracy is a thick fog that conceals many rocks for you to dash your financial ship against. The government will beat you down with forms, so file carefully and stay on top of your paperwork.

If you're a U.S citizen, Uncle Sam wants to know about your foreign assets, investments and bank accounts. In fact, Uncle Sam says that you have two legal obligations. Let's review them.

Obligation #1: Disclose Foreign Bank Accounts and Assets

First, if you’re a U.S. citizen, you need to declare all foreign bank accounts if they total more than $10,000 (all foreign accounts are combined to reach the $10,000 threshold) and you must report any foreign asset (e.g. foreign stock, company ownership, etc.) whose value is $50,000 or greater.

The form required to be filed annually to disclose foreign bank accounts in excess of $10,000 is known as FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR). The form filed annually to disclose foreign assets with a value in excess of $50,000, is IRS Form 8938, Statement of Specified Financial Assets. The first obligation U.S. citizens have to their home country is the disclosure of foreign bank accounts and foreign assets.

Obligation #2: Pay Your Federal Income Taxes On Foreign Income

As a U.S. citizen, you are required to pay U.S. federal income tax on the foreign income you receive. The U.S. taxes its citizens on income no matter whether it was earned in the U.S. or abroad. That's one of several reasons our GNP is so high.

So, even if you make money outside the U.S., as a U.S. citizen, Uncle Sam says that you are still required to pay federal tax on that income. If you paid foreign income taxes to the country where the income was derived and if that country has a tax treaty with the U.S., then you’ll typically receive a credit in the U.S. for the foreign taxes paid, which reduces the amount of federal taxes owed in the U.S. You can look online for a current list of countries who have a tax treaty with the U.S.

Some U.S. citizens presume that if they leave the U.S. that they are no longer subject to federal income tax in the U.S. But this is not the case. Uncle Sam wants your (his) money. Failure to comply could result in a nasty tax dispute. And who has the time or energy for that?

Even if you relocate to a foreign country and no longer earn income from the U.S. you are still subject to U.S. tax your foreign income (and potential state income tax depending on your state of residence).  There's one last question on this topic some rebels or activists in the crowd may be wondering about.

Can I Avoid Paying Taxes While Living Abroad?

The only way to keep Uncle Sam out of your pockets, (AKA the tax jurisdiction of the United States), is to renounce your U.S. citizenship. However, this is a costly and expensive process with numerous tax repercussions.

Here's a common example that demonstrates how the disclosure and income tax reporting requirements work:
Say you have a bank account in Luxembourg with a balance of $99,999. That account generates income of $10,000 this year. Let's say that the $10,000 in income resulted in taxes owed to Luxembourg of $1000 and that you reported and paid the tax to Luxembourg.

In addition to compliance with Luxembourg law, you would need to file FinCEN Form 114 (FBAR) to disclose the foreign bank account. The FBAR form filing is due by June 30 for the prior year’s accounts. You would also need to file IRS Form 8938, since the account was at or over $50,000. Form 8938 is due with the filing of your federal tax return.

In addition to the two disclosure forms that are filed in the U.S., the $10,000 of income from your Luxembourg account must be reported as taxable income on your income tax return (form 1040).

The $1000 paid in tax to Luxembourg will be credited to you as the tax owed to Uncle Sam because Uncle Sam and Luxembourg have a tax treaty.

Conclusion

All U.S. citizens are subject to federal income tax regardless of where they live or do business. Even if you no longer earn income in the U.S., Uncle Sam wants his money. Even if you renounce your citizenship (which is expensive and has a whole host of tax repercussions), Uncle Sam can and will get his money.

(On a related note, see Why Ordinary People Set Up Offshore Bank Accounts).

You are required to pay federal income tax on foreign income you receive. This means the U.S. taxes the income that you earn, even if you earn every penny abroad. If you pay taxes in the country where you are earning income and there is a tax treaty with the US, you’ll receive a credit in the U.S. for foreign taxes paid.

These are just the basics; there are many special rules and numerous exceptions to the filings you read about here. If you plan on leaving the U.S. or moving assets outside the U.S., you should seek out experienced professionals to assist you with U.S. tax reporting obligations.

Color inside the lines of the law, and you can avoid paying a hefty cost.