Filing Your Taxes While Living Abroad
American citizen are legally obligated to file and pay taxes while abroad.
Do I File Taxes If I Leave The US?
One of the interesting aspects of being an American citizen is that you are legally obligated to pay American income taxes not just on income earned in the United States, but anywhere on the planet. America is so far the only major nation that has this, some would say dubious, distinction.
Our experts look forward to discussing all options you have to make the right decision for your specific needs! Contact us today to arrange for a consultation.Most Americans are not aware of this legal reality, simply because they are not affected by this in any way shape or form. But if you are one of the thousands of American nationals who have been contracted to work abroad for a multinational company or do most of your business dealings outside American soil, this is something you would need to understand properly, lest you accidentally get into legal trouble with Uncle Sam.
With the constant changing of tax laws, it can get quite a bit confusing complying with not just American tax laws, but also the tax laws of the jurisdiction you are working or doing business in.
The IRS has released tax brackets for the 2023 tax year that have upper limits 7% higher than the brackets for 2022 returns. If your income isn’t keeping up with inflation, the increases in the brackets make it less likely you’ll pay higher tax rates.
You can use the tax brackets to determine how much you can expect to pay in taxes each year. Here are the tax brackets for the 2022 and 2023 tax years, plus instructions on how to calculate your income tax based on the top bracket that applies to you.
Here are a few steps that you should follow when filing taxes for multiple jurisdictions.
Filing Your Local Taxes
The first step to filing your taxes is settling those levied by the local jurisdiction you are operating in. It is important to make sure what the tax laws are in that jurisdiction and which ones apply to you. Some countries and dependencies have different tax structures for local citizens and foreign nationals, with citizens usually enjoying lower tax rates.
This is especially true in certain parts of the world such as the Persian Gulf. Many of these oil states have virtually no taxes levied on their citizens but have a modest tax structure for expatriates to adhere to. In cases such as this, it is important to make sure you know which structure applies to your specific situation and what deductions you might qualify for.
Once you have your local obligations all figured out, you will then be able to properly determine the legally appropriate way to file your taxes in your local jurisdiction. Most countries that have expatriate hotspots tend to have an online option for people to file their taxes.
Although many jurisdictions have an English language option, some places might insist that you file in the local official language. If you are not proficient in that local language, you would need to hire a translator or just hire a local tax accountant to file the taxes for you.
Once you have made sure all your local taxes have been settled, you can then proceed with your American taxes. Basically, your American taxes will be the prevailing tax rate of your total global income minus whatever the amount you paid in taxes at your local jurisdiction.
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The best way to go about this is to simply figure out what your tax burden would have been if you were in the United States. The federal tax code has become quite complex due to the myriad of deductions and exemptions not to mention loopholes that have developed over the past few decades.
As such, it is advised that you proceed with great caution when determining what you owe in taxes stateside. Most people end up employing the services of a qualified tax accountant to file their taxes and determine what they are legally obligated to contribute.
Once you have determined what your federal obligations are, you will need to determine what you owe in state and local taxes. This is where most people end up stumbling because many people, even quite a few expatriates, are not aware that you need to fulfill state and local tax obligations on top of your federal responsibilities, even when making money abroad.
Now, state and local taxes can vary greatly from place to place. Therefore, it is important that you determine where you are resident in so that you are sure of how much your tax obligations are and to whom it is owed to. It is advised that you have the question of your residency in the United States thoroughly answered before you start any commercial adventures abroad, lest your operations get derailed for something as mundane as wrongly filing your taxes.
But once, you have your total stateside tax bill calculated, it is simply a matter of subtracting that with the amount you paid in local taxes, and the difference will be what you owe to Uncle Sam. This way, you will be able to make sure that you remain a law-abiding citizen and stay away from trouble.
Making Sure You Are On The Right Side Of The Law
The issue of filing taxes is a tedious one for many of us. Regardless about our personal opinions on taxes, it is nonetheless something we hope to get done right whenever the season comes around. The last thing anyone wants is an annoying audit notice from the IRS because we didn’t do one little thing that we were supposed to do.
Ultimately, filing our taxes in a prompt manner is something we all need to do. It is a fact of life that every adult needs to know how to navigate in order to stay on the right side of the law. As much as we would love to be doing something else with our time, it is far more preferable to spend a little time filing your taxes properly than to spend a lot of time caught up in legal tussles with the authorities.
Here are some other interesting articles for you:
Guide to Foreign Tax Credit, Foreign Tax Treaties and Foreign Housing Exclusion
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