There are many differences between the tax systems of different countries. Understanding these can help you make the most of your time in a new country and keep your finances organized.
Tax systems vary greatly and are often motivated by a variety of factors. These range from fiscal transparency to a desire for fiscal equality. Whether you’re a multinational or an individual expat, these differences can impact your overall experience in a new country.
Resident-based taxes
This system is much more common than citizenship based taxes and applies to countries like Japan, Australia, Canada, the UK, and most of the European Union. Generally, you qualify as a tax resident of a particular country if you stay in it for 183 days or more during the year. However, there are certain standards for determining tax residency, so it’s always a good idea to check the rules in the country where you plan to live before moving.
As an American expat, you’re likely to pay US taxes regardless of where you live or work, so it’s important to know your tax obligations and take advantage of any credits, deductions, or exemptions that are available to you. For example, the Foreign Earned Income Exclusion and Foreign Tax Credit can both help to significantly reduce your tax bill if you live abroad.
In addition, the IRS requires that American expatriates report their foreign income if their gross worldwide income exceeds a certain amount each year. This number, known as the Standard Deduction, is indexed to reflect inflation.
If you meet the thresholds, you must file a tax return every year even if you don’t owe any taxes to the IRS. You also must file a report of Foreign Bank Accounts (FBAR) if you have foreign accounts with more than $10,000 in them.
Depending on your tax situation, you may be able to apply for a payment plan from the IRS to cover any taxes that are due. This option is only available to taxpayers who are not able to pay their full tax obligation at the time of filing.
The foreign earned income exclusion is a popular tax break for American expatriates. This allows you to exclude all of your overseas income from your US tax liability, reducing your annual US tax bill by up to $500 per year.
It’s important to note that this exclusion is limited to a single year and cannot be applied retroactively. In order to take full advantage of this tax break, you need to be sure to apply for it in advance.
As an expatriate, you’ll want to be aware of the tax implications of renting property in a foreign country. While rental expenses are taxed at the local rate, there are many items that can be deducted from your income to reduce your overall tax liability.
Repairs and improvements on your property are deductible, but you’ll need to track them carefully to avoid an audit later on. These expenses will also be factored into calculating capital gains and losses on your foreign-earned income when you decide to sell the property.