Many folks dream of escaping to an island paradise for a vacation. Some folks plan for extended stays abroad as a sabbatical or mini-retirement. Then there are the digital nomads, who regularly bounce around from place to place. Extending your stay abroad often means you earn income while abroad, and that comes with tax implications.
If you are a United States citizen or permanent resident, you are taxed on your worldwide income. Even if you earn money entirely within another country, you will have federal income tax obligations in the United States. If you are considering a stint abroad, keep in mind some potential issues that may apply to your situation to avoid any surprises.
Avoiding double taxation
The idea that you are taxed on your worldwide income may seem unfair. After all, why should I pay tax in the United States if I am paying taxes in Cyprus on the same income? Fortunately, there are three ways to avoid double taxation.
The first way to avoid double taxation is the foreign tax credit. Simply put, you are eligible for a credit for taxes paid to a foreign (i.e., non-United States) nation. If your United States tax liability is $8,000, and you paid $6,000 in income taxes on that same income to Cyprus, then you will only have a net United States tax liability of the remaining $2,000 after applying the foreign tax credit. Your total worldwide tax liability is unchanged from what it would be if you had earned all that income while living in the United States.
There are certain qualifications and limitations surrounding the foreign tax credit, so please do not take this example literally. It is provided only as a general illustration of how the foreign tax credit works.
Next, you can avoid double taxation via the foreign earned income exclusion. If you have a “tax home” in a foreign country, you may be able to exclude the income you earned in that country from taxable income on your United States tax return. The requirements for the foreign earned income exclusion are more strict than the foreign tax credit. Besides having a tax home in a foreign country, you must be a “bona fide resident” for an uninterrupted period of at least an entire year or be physically present in a foreign county (or countries!) for at least 330 days during any twelve-month period.
If you qualify for the foreign earned income exclusion, you may also qualify for the foreign housing exclusion.
The one-year (or twelve-month) period need not be a calendar year. If you are in Cyprus continuously from August 22, 2024, to September 4, 2025, you satisfy the one-year requirement if you are a bona fide resident there—which is typically demonstrated by the type of immigration visa you hold—or the twelve-month period from September 2024 through August 2025 for the physical presence requirement. On your 2024 return, you could exclude the income you earned in Cyprus from August 22, 2024, through December 31, 2024. On your 2025 return, you could exclude the income you earned in Cypress from January 1, 2025, through September 4, 2025, subject to applicable income limitations.
If you have not met either the one-year residence or twelve-month presence requirement by the deadline for filing your tax return, go on extension until you qualify.
Finally, you can avoid double taxation through a tax treaty. The United States has tax treaties with dozens of countries to prevent double taxation, often by designating which country has the right to tax various types of income, when someone is a citizen of one country but lives in another. (Yes, there is one with Cyprus!)
An important point about tax treaties is that you can completely ignore them. If standard United States tax law—perhaps the foreign tax credit or the foreign earned income exclusion—yields a better result, you can simply elect to follow that approach. Applying a tax treaty is never required, but it may help you more than the foreign tax credit or foreign earned income exclusion.
Another important point here is that you may only apply one double-taxation-avoidance technique to each income item. If you own a rental property in Cyprus, you cannot claim the foreign tax credit and tax treaty benefits regarding your rental income; you must choose. However, you may apply different techniques to different types of income on the same return. If you have wage income in Cyprus in addition to your rental property, you can use the foreign earned income exclusion for your wages and the tax treaty benefits for your rental income. This allows you to identify and use the taxation method that is more advantageous for different income streams.
Additional filings
If you live abroad, you will likely have additional filing requirements. The most common one is the annual Report of Foreign Bank and Financial Accounts (more commonly known as FBAR) due by April 15. (Filers are allowed an automatic extension until October 15 if they do not meet the April 15 filing deadline.) The deadline is the same as your tax return, but the FBAR itself is filed separately from your taxes on a United States Treasury website.
You must file an FBAR if you have a “financial interest in or signature or other authority” (owner, signer, beneficiary, power of attorney, etc.) over a foreign bank or investment account and the aggregate value of all your foreign accounts exceeds $10,000 in United States dollar equivalent at any point during the year. It is perfectly legal to have accounts in the Cayman Islands or Switzerland, but you must report their existence to the United States government. The purpose of this requirement is to prevent folks from hiding money overseas to avoid paying United States tax on income related to their overseas holdings. (Interest or capital gains from overseas accounts are part of your worldwide income!) No taxes or fees are due with the annual FBAR—the taxes are part of your tax returns—but failing to file required FBARs can result in substantial penalties.
Notice that the FBAR filing requirements are based on the size of your overseas holdings, not your place of residence. FBAR filing requirements can even apply to folks who never set foot outside the United States! Anyone with overseas accounts of a certain value must file the FBAR.
On your tax return, you must indicate on Schedule B, Part III whether you have an FBAR filing requirement.
The FBAR requirements apply to entity filings, not just individual filings.
Besides indicating your FBAR status, you may also need to include Form 8858 to report a foreign branch (for certain self-employed folks) and/or Form 8938 to report overseas financial assets above a certain threshold with your United States tax return.
There are even more required filings if you own an interest in a foreign entity (whether you live in the United States or overseas).
Additional considerations
Two more considerations beyond the forms themselves are filing status and when to file.
If only one spouse is a United States citizen or permanent resident, they will probably want to file using the “married filing separately” status. (You cannot file as “single” if you are married, even if the marriage took place overseas and your spouse never sets foot in the United States.) The non-citizen spouse, without any financial connection to the United States, would not have a United States filing requirement themselves. If they try to use the “married filing jointly” status to include both spouses, they might subject the worldwide income of both spouses to United States taxation.
When to file is another consideration. The regular tax filing deadline is April 15, but folks who are living or on military duty outside the United States on April 15 have an automatic extension until June 15 to file and pay. No extension form is required; simply attach a statement to your turn explaining why you qualify. Interest on unpaid tax will apply retroactive to the regular due date, but no late-payment penalty will apply until after June 15. If you cannot file by June 15, you can request an extension until October 15.
If possible, simply request an extension by April 15 to avoid attaching the additional statement.
Nontax financial considerations
I would be remiss if I did not mention two other important nontax financial considerations regarding living outside the United States.
First, and most importantly, make sure you can easily access your money, wherever it is situated, without paying expensive ATM or credit card fees. For example, Fidelity and Schwab both offer debit cards that can be used at foreign ATMs and will reimburse fees up to certain limits. However, many foreign networks will only accept either Fidelity or Schwab, but not both, so it may be prudent to have both.
Second, make sure you register any United States holdings with a United States address if possible. Many firms will not do business, or will do minimal business only, with folks living outside the United States. You may enjoy better access to your funds if you can use a United States address.
Enjoy living abroad!
There are certainly more tax and financial implications of living aboard than can be included in one article, but these highlights will get you started thinking about your own personal situation. Be sure you have a clear plan for your overseas life, including a good budget and a solid understanding of the tax and financial implications there, so you can make the most of your adventure!
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