Planning a move abroad is an exciting time, filled with logistics like packing, visas, and finding a new home. Amidst all the planning, it's easy to overlook a critical piece: your U.S. tax obligations. Many U.S. citizens and green card holders mistakenly believe that moving outside the country means they no longer have to file U.S. taxes. This is a common and potentially costly misunderstanding. The U.S. taxes its citizens and permanent residents on their worldwide income, regardless of where they live. Proper tax planning abroad before you leave is essential to ensure compliance and avoid future headaches. This leaving the U.S. tax checklist will guide you through the key steps you should take before your U.S. expat relocation.
Understand Your U.S. Tax Obligations as an Expat
The fundamental principle is that U.S. citizens and green card holders are subject to U.S. income tax on their worldwide income. This obligation doesn't disappear just because you move. While this might sound daunting, the U.S. tax system offers provisions designed to prevent double taxation, meaning you generally won't pay tax twice on the same income (once to your host country and once to the U.S.).
Key Concepts to Familiarize Yourself With:
- Worldwide Income Taxation: The U.S. requires you to report all income earned globally.
- Foreign Earned Income Exclusion (FEIE): This allows you to exclude a certain amount of your foreign earned income from U.S. taxation if you meet specific residency tests (Physical Presence Test or Bona Fide Residence Test). This is often the primary tool for reducing or eliminating U.S. income tax liability for expats. You can learn more about this in our post on What is The Foreign Earned Income Exclusion?
- Foreign Tax Credit (FTC): This allows you to claim a credit on your U.S. tax return for income taxes paid to a foreign country. The Foreign Tax Credit is often beneficial if your foreign tax rate is higher than your U.S. rate. Understanding the difference between FEIE and FTC is crucial for optimizing your U.S. expat taxes.
- Tax Treaties: The U.S. has tax treaties with many countries that can provide additional benefits or clarify tax rules for residents of those countries.
Address Your State Tax Residency
One of the most overlooked aspects of moving abroad tax planning is state tax residency. Even if you leave the U.S., some states may continue to consider you a resident for tax purposes, depending on their specific rules. This could mean you still have a state filing obligation.
Steps to Sever State Tax Ties:
- Understand Your State's Rules: Each state has different criteria for determining residency. Factors often include domicile (your true home), physical presence, voter registration, driver's license, vehicle registration, and location of bank accounts and professional licenses.
- Take Concrete Steps: To demonstrate you are no longer a resident, you should take clear actions before you leave. This might include changing your mailing address, surrendering your driver's license, registering to vote elsewhere (if applicable and allowed), and closing local bank accounts.
- Document Everything: Keep records of all actions taken to sever state ties. This documentation is crucial if the state later questions your non-residency.
Failing to properly terminate state residency can result in unexpected state tax bills and penalties years down the line.
Review Your Financial Accounts and Investments
U.S. persons have significant reporting obligations for foreign financial accounts and assets. These rules apply once you open or hold accounts abroad.
Key Reporting Requirements:
- FBAR (Report of Foreign Bank and Financial Accounts): If the aggregate value of your foreign financial accounts exceeds $10,000 at any point during the calendar year, you must file FinCEN Form 114 electronically with the Financial Crimes Enforcement Network (FinCEN). This is separate from your tax return. Learn more about FBAR Filing Requirements.
- FATCA (Foreign Account Tax Compliance Act): This requires U.S. taxpayers to report specified foreign financial assets on Form 8938 if the total value of those assets exceeds certain thresholds. FATCA also requires foreign financial institutions to report information about U.S. account holders to the IRS. Understand the difference between FBAR vs. FATCA.
Before you move, consider consolidating accounts or understanding the reporting implications of any new accounts you plan to open abroad. Non-compliance with FBAR and FATCA can lead to severe penalties.
Gather Necessary Documents
Having your financial and personal documents organized before you leave will make future tax filing much easier.
Documents to Prepare:
- Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN). If your spouse or dependents are non-U.S. persons, they may need an ITIN.
- Copies of past U.S. tax returns (at least the last three years).
- Information about your income sources (W-2s, 1099s, foreign pay stubs).
- Details of any foreign bank or financial accounts.
- Information about foreign residency (visa, lease agreements, utility bills).
Plan for Future Tax Filing
You will still need to file a U.S. tax return annually. As an expat, you automatically receive an extension to June 15th, and you can request an additional extension until October 15th. However, any tax owed is still due by the original April deadline (or June 15th if you are outside the U.S.).
Considerations for Filing from Abroad:
- Filing Status: Your marital status on December 31st determines your filing status for the entire year. If you are married to a non-U.S. citizen, you have specific options to consider.
- Choosing FEIE or FTC: You will need to determine which method is most beneficial for you based on your income and foreign taxes paid.
- State Filing: Confirm whether you have successfully severed state tax residency or if you still have a state filing obligation.
Staying organized and understanding the deadlines is key. Refer to our guide on Yearly Tax Due Dates for American Expats.
Seek Professional Guidance
U.S. tax law for expats is complex and constantly evolving. What applies to one person may not apply to another due to differences in income sources, residency status, family situation, and the tax laws of the host country.
This information is intended for general guidance only and does not constitute tax advice. Tax laws are subject to change, and individual circumstances vary. It is crucial to consult with a qualified tax professional who specializes in U.S. expat taxation to discuss your specific situation and ensure compliance.
Moving abroad is a significant life change, and getting your tax affairs in order before you go is one of the most important steps you can take for peace of mind. By understanding your obligations, addressing state tax residency, preparing for foreign account reporting, and organizing your documents, you lay a solid foundation for managing your U.S. taxes from anywhere in the world.
I specialize in helping U.S. expats navigate their tax responsibilities while maximizing their financial opportunities. From tax return preparation to strategic planning, I offer personalized guidance tailored to your unique situation. If you’d like to discuss your tax needs or explore how I can assist you, let’s schedule a consultation. Start here to book your session.
