5 Essential Tax Tips for American Travelers Abroad

Americans sure love to travel. Over 45 million Americans traveled abroad in 2019 – some of them for business, others for pleasure. And while the pandemic has dampened those numbers, the need to experience the sights and sounds of the world remains.

Whether you’re traveling for business or pleasure, here’s a quick tax guide to get you started.

Can I work remotely from another country?

Yes! A few have even decided to make the most of the ongoing situation to travel the world. 

In an effort to boost flagging visitor numbers, some countries such as Estonia and Bermuda have offered special visas for Americans who want to temporarily work abroad. Since many companies have allowed their employees to work from home for the foreseeable future, the idea is to attract people who might want to continue working in an exotic destination.

It sounds like the perfect solution for people who don’t want to spend their time cooped up in their homes or apartments. They get to live in a foreign country while keeping their old jobs. But traveling and working abroad comes with responsibilities, chief of which is your taxes.

What is my tax situation?

Your tax situation depends on where you stay, and the length of time you spend abroad. It is estimated that over 10 million Americans live abroad long-term. Some of them stay in one place, while others jump from country to country.

But what does this mean for you?

If you spend a total of 330 days abroad during a 12-month period, you meet the Physical Presence Test. Meeting this test is crucial if you want to avail yourself of the many tax benefits available to American expats and travelers.

It’s important that you keep track of your time spent abroad. Even coming up a day short of the 330-day requirement means you forfeit any expat tax benefits that will help you reduce your tax liability.

Your length of stay could also determine your tax residency in that country. This means that you would be subject to that country’s tax laws. It’s important that you do your research ahead of time before making any big decisions.

Do I pay U.S. taxes if I work overseas?

Yes. The United States is one of the few countries in the world to adopt a citizenship-based tax system. This means that American citizens and permanent residents (also known as Green Card holders) have to pay U.S. taxes and file a federal tax return, even if they are based overseas.

Your worldwide income is also taxed by the IRS. Let’s say you decided to open a small side business during your stay abroad, while still keeping your day job for a U.S.-based company. Even if you don’t live in the United States and the business is based in a foreign country, both sources of income are subject to U.S. tax laws.

How do I reduce my tax liability?

Living and working abroad, while exciting, also comes with a lot of challenges. You have to navigate two different tax systems, which could lead to double taxation. It’s important that you understand all the benefits available to you if you want to minimize your tax liability. 

Foreign Earned Income Exclusion

One of the biggest tax benefits available to expats is the Foreign Earned Income Exclusion (FEIE).

The FEIE allows expat taxpayers to exclude a certain amount of foreign earnings from federal income tax. For the tax year 2021, the FEIE threshold is $108,700. You still need to file a federal tax return even if your income doesn’t exceed the threshold and you have no tax liabilities.

To claim the FEIE, the taxpayer must meet the Physical Presence Test.

Foreign Tax Credit

Another tax benefit you need to know is the foreign tax credit. Expats who have paid income tax to a foreign government can claim a dollar-for-dollar credit to reduce their U.S. tax bill. 

Let’s say you’ve paid $1,000 of income tax to a foreign government. You can take a tax credit to reduce your U.S. tax bill by the same amount.

Once you have claimed the FEIE, you cannot take a tax credit for taxes on excluded income. You can, however, take a tax credit on foreign-earned income that exceeds the FEIE threshold.

How to file an expat tax return?

It’s important that you straighten out your finances before deciding to move abroad. Moving to a foreign country without a proper plan can lead to issues with your tax return. You can always talk to tax experts, such as those at TFX, if you need help clarifying your tax situation.

This post was written by Veronica Rhodes of TFX. TFX is a women-owned tax firm that offers all U.S. tax services — for both American citizens and non-citizens with U.S. tax filing requirements. From straightforward expat tax preparation to complex cases involving multiple factors — we’ve handled it all for over 25 years.