Physical Address

304 North Cardinal St.
Dorchester Center, MA 02124

Retiring Abroad? What Expats Need to Know About Taxes | Retirement

Key Takeaways:

  • The United States is one of only two countries in the world that taxes its citizens’ global income.
  • Annual tax returns for expats are due on June 15, but payments must be made by April 15.
  • Other countries vary widely in how they may tax an expat’s work or retirement income, if at all.
  • The federal government offers some tax breaks for expats, but they may not always transfer to state tax forms.

Living or retiring abroad can be exciting, but it isn’t necessarily easy. You’ll need to navigate visa and residency requirements, find housing and maybe learn another language before moving. And once you’re there, that’s not the end of the challenges.

Expats must also understand their tax obligations as U.S. citizens as well as what their host country might require.

Here are some of the things every expat should know about taxes.

  • U.S. citizens living abroad still need to file an annual tax return with the IRS.
  • Tax returns aren’t due until June 15 for expats.
  • You may have to file a tax return in your country of residence.
  • Some countries may tax retirement income.
  • The foreign tax credit is intended to avoid double taxation.
  • The foreign earned income exclusion and foreign housing exclusion can reduce U.S. taxes.
  • States have their own tax rules.
  • Talk to an experienced tax professional before moving.

U.S. Citizens Living Abroad Must File an Annual Tax Return With the IRS

Leaving the country doesn’t mean the end of annual tax filings for American expats.

“The U.S. is one of the few countries that requires citizens living abroad to file taxes,” says Mike Wallace, CEO of Greenback Expat Tax Services, which specializes in tax preparation services for U.S. expats.

While most countries only tax income earned within their borders, the United States taxes the worldwide income of its citizens. That makes it one of only two countries in the world with a citizenship-based taxation system. The other country is Eritrea in East Africa.

Tax Returns Aren’t Due Until June 15 for Expats

While expats must file an annual tax return, they get an extra two months to do so. The tax deadline for U.S. citizens living and working abroad is June 15 of each year. Like U.S.-based taxpayers, they can also request an extension if they need more time to complete their return.

However, tax payments are still due by April 15, Wallace says. Failure to pay what you owe could result in tax penalties and interest charges.

You May Have to File a Tax Return in Your Country of Residence

Since most countries have residence-based tax systems, U.S. expats may also have to file a return in the country where they live.

“Most countries only have a short period of exclusion,” says Miklos Ringbauer, a certified public accountant and founder of MiklosCPA, which counts expats among its clients. In other words, you may not have to live in a country long before you are required to file taxes there.

Spain, for example, considers someone to be a tax resident if they spend more than 183 days in a calendar year in the country.

Some Countries May Tax Retirement Income

It isn’t just earned income that a foreign country may tax. If you retire overseas and receive money from investments and retirement accounts, that too may be subject to tax, depending on the nation’s laws.

However, some governments offer tax incentives to attract foreign expats and retirees.

Belize, for instance, has a Qualified Retirement Program, which is available to expats who are at least 40, have citizenship in a qualifying country and have a retirement income of at least $2,000 per month. Those who qualify don’t have to pay any taxes on income received from a source outside of Belize, such as Social Security or a U.S. pension.

Panama, Costa Rica and the Philippines are other countries that have favorable tax laws for U.S. expats and won’t tax retirement income.

The Foreign Tax Credit Is Intended to Avoid Double Taxation

The combination of the U.S. citizenship-based tax system and other countries’ residence-based systems isn’t ideal for expats.

“It does result in double taxation,” Wallace says. But the U.S. does have ways to compensate, he adds.

Chief among those is the foreign tax credit which can be applied to your U.S. tax liability. This is a dollar-for-dollar credit that is calculated based on a formula that takes into account your foreign income and your U.S. income for the year. If you are unable to use all your credit in one tax year, it can be carried back to the previous year or carried forward for up to 10 years.

The Foreign Earned Income Exclusion and Foreign Housing Exclusion

Expats also have two other options to reduce their U.S. taxes: the foreign earned income exclusion and the foreign housing exclusion.

The foreign earned income exclusion allows you to exclude income earned in a foreign country from your U.S. tax return. For the 2023 tax year, up to $120,000 in eligible foreign income could be excluded on a U.S. return. The foreign housing exclusion allows money spent on eligible and reasonable housing in a foreign country, up to a limit, to be deducted from U.S. federal taxes.

For both these tax incentives, you’ll need to be either a bona fide resident of the foreign country or have a physical presence in a country or countries for at least 330 days during 12 consecutive months.

You can’t use both the foreign tax credit and the exclusion together so carefully consider your tax rate in both countries to determine which option is best.

States Have Their Own Tax Rules

Understanding federal tax obligations is only half the battle for expats. If they are still maintaining a home in the U.S., they also need to be aware of their state tax liability.

While many states will honor federal credits and deductions, that isn’t always the case. For example, California doesn’t recognize the foreign earned income exclusion. That means if you have a home in California but work in another country, you could be taxed twice for more than six figures of income.

For that reason, if you plan to maintain a U.S. residence while living overseas, be smart about where you choose as your home base.

Talk to an Experienced Tax Professional Before Moving

Expats shouldn’t wait until they have established residency in another country to talk to an accountant.

“Before they buy their plane ticket and leave the country, do appropriate tax planning,” Ringbauer says.

Not only will this help you select a tax-friendly country, but it will also avoid expensive mistakes, according to Ringbauer. Opening a foreign brokerage account, buying an overseas rental property or earning self-employment income in another country could all trigger special tax situations.

Avoid a surprise bill by checking in with a professional before you decide to live or retire in paradise.

Sarah Goldberg
Sarah Goldberg

Sarah is a seasoned financial market expert with a decade of experience. She's known for her analytical skills, attention to detail, and ability to communicate complex financial concepts. She holds a Bachelor's degree in Finance, is a licensed financial advisor, and enjoys reading and traveling in her free time.

Articles: 821