Do you know that if you’re an American citizen or permanent resident who works in a foreign country, you may have to pay taxes on your earnings? Yes, this is true even if you are working outside of the United States and filing
Form 1040 (U.S. Individual Income Tax Return). There are certain situations where you’ll have to pay taxes on your income earned while abroad. Here’s what those situations are:
When you are abroad, you need to file your income tax return.
If you are a citizen or resident alien of the United States, you must file an income tax return. If your income is less than the exemption amount, you do not have to file a return. However, if your income exceeds the exemption amount and/or some of your deductions total more than $400 (for example, charitable contributions), then you must file a return. It does not matter where in the world you are working as long as this rule applies to you.
If one were to leave their job and travel abroad for an extended period of time (over 183 days) it would be wise for them to consider filing for what’s called an “expatriation election” with their employer before leaving so that they don’t have to worry about paying taxes upon returning home from their trip overseas.
Failing to do so may result in penalties and fines.
Failing to do so may result in penalties and fines.
If an individual fails to file taxes, the IRS may impose a penalty of 5% of the tax owed for each month or partial month during which the failure continues, up to a maximum of 25%. The maximum penalty for non-willful violations is $1,000.
If you fail to pay your taxes when due, there may be additional civil penalties:
- A late payment penalty of 0.5% per month (or partial month) on any unpaid taxes from the due date until paid in full;
- Interest accruing on any unpaid balance amount at 1/2%.
If you are staying abroad for a long period of time, you may need to file taxes in that country as well.
You may have to pay taxes in the country you are working in, even if you are earning an income abroad. In this case, your employer should withhold a certain amount of tax and send it on to the government. You will then be able to claim this tax as a deduction on your US tax return when you file back home.
However, if you are self-employed or own a business that is based overseas (such as an Etsy store), then it’s likely that you will have to pay income taxes directly to that foreign country’s government instead of the US Internal Revenue Service (IRS).
Your salary earned while working in a foreign country is neither taxable in the US, assuming that it is taxed by the foreign country.
If you are a citizen of the US and working in a foreign country, then the salary earned while working in that country is not taxable in the US, assuming that it is taxed by the foreign country of your residents.
The main reason for this is that both countries have signed an agreement called Double Taxation Avoidance Agreement (DTAA) with each other. Under this agreement, only one of them can tax your income based on certain
While filing your taxes, deduct any taxes paid to or deducted from your salary by the government of the foreign country from their taxable income.
While filing your taxes, deduct any taxes paid to or deducted from your salary by the government of the foreign country from their taxable income. If you are not sure about the amount of tax paid to or deducted from your salary by the government of the foreign country and want to claim it as a deduction, contact your employer and ask for this information. This is because IRS does not allow any deduction for travel expenses or housing costs incurred while working abroad.
Conclusion
We hope this blog post helped you understand that American citizens working abroad do have to pay income tax on the income they earned from the foreign country. If you have any questions, please feel free to reach out to a CPA who specializes in working abroad income tax, they can answer your questions and help file your taxes.
