Paying taxes after you've retired overseas can be complicated. The bottom line for most Americans who have chosen to retire in another country is that you must still pay federal income taxes to the Internal Revenue Service (IRS). You'll be required to file an income tax return so long as you retain your U.S. citizenship.
"If you are a U.S. citizen or resident alien, the rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same whether you are in the United States or abroad," the IRS states on its U.S. Citizens and Resident Aliens Abroad website. "Your worldwide income is subject to U.S. income tax, regardless of where you reside."
But there are ways of lowering the taxes you owe and avoiding double taxation by paying a tax on the same income to both your country of residence and to the U.S.
- You’re required to pay federal taxes even if you live overseas as long as you're a U.S. citizen.
- You may be required to file additional forms with the Treasury Department and IRS if you have financial accounts in your country of residence, have physically transported more than $10,000 of money or financial instruments into or out of the U.S., or you own certain foreign financial assets.
- Check with the country you’re living in to find out whether you must file a tax form there.
- You may be able to lower your total tax payments due to a treaty between the U.S. and the country where you are living.
- The foreign earned income exclusion, foreign housing exclusion, and foreign housing deduction may provide tax relief.
How Do I File a Tax Return While Overseas?
Just as with citizens living in the U.S., you won't be required to file a return if you didn't earn a certain amount of gross income from all sources in any country during the tax year. These limits vary according to your age, filing status, and whether you lived with your spouse. The limits for the 2021 tax year are outlined in this table.
|Filing Status||Age or Other Circumstance||Minimum Gross Income Amount That Requires You to File|
|Single||65 or older||$14,250|
|Head of household||Under 65||$18,800|
|Head of household||65 or older||$20,500|
|Qualifying widow(er)||Under 65||$25,100|
|Qualifying widow(er)||65 or older||$26,450|
|Married filing jointly||Not living with spouse at end of year||$5|
|Married filing jointly||One spouse is 65 or older||$26,450|
|Married filing jointly||Both spouses are 65 or older||$27,800|
|Married filing separately||Not applicable||$5|
You must convert your income earned in a foreign currency into U.S. dollars. All figures on your return must be in dollars.
You must file a tax return if your net earnings from self-employment were $400 or more, regardless of the total amount of your gross income.
You're automatically allowed to file two months past the usual U.S. filing deadline if your main place of business is outside the U.S. and Puerto Rico, or if you're in the military and are on duty outside the U.S. and Puerto Rico. But you'll have to pay interest on any tax owed starting with the usual filing deadline.
Mail the return to the IRS office in Austin, Texas if you're not e-filing your return and aren't including a payment. Mail it to the post office box in Charlotte, North Carolina if you are including a payment.
The State Department may revoke or not renew your passport if you're delinquent on your taxes.
Are There Any Other Forms I Need to Complete?
You're required by the Bank Secrecy Act to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts, with the U.S. Treasury Department if you had bank, securities, or other financial accounts with a total of more than $10,000 of assets. You don't have to complete the form if your assets were with a U.S. military banking facility operated by a financial institution, or if the combined assets in the accounts were $10,000 or less during the entire year.
You must file FinCEN Form 105, Report of International Transportation of Currency or Monetary Instruments, if you physically transported, mailed, shipped, or caused to be physically transported, mailed, or shipped, currency or other monetary instruments totaling more than $10,000 at one time into or out of the U.S. You may also have to complete Form 105 if you physically received currency or monetary instruments in that amount at one time.
You're required to file Form 8938, Statement of Specified Foreign Financial Assets, to report the ownership of certain foreign financial assets if their total value exceeds the reporting threshold. These assets may include any financial account maintained by a foreign financial institution, stock, securities, or any other interest in a foreign entity. They may include any financial instrument or contract with an issuer or counterparty that is not a U.S. person.
Does It Matter Which Country I Am Living In?
Research online or consult a tax professional to determine whether you must file two tax returns, one in your country of residence and one with the IRS. Some countries base their tax rules on residency instead of citizenship, so the country where you've chosen to live can make a big difference in how you're taxed.
The U.S. has treaties with many countries that enable U.S. citizens to pay a lower tax rate to the government of these countries on income they earned there. The treaties may also help you avoid being doubly taxed.
Some countries may require you to certify that you filed an income tax return for the U.S. You should fill out Form 8802, Application for United States Residency Certification, in this case to request a certification from the IRS.
Some states don't recognize foreign tax treaties, so the state where you lived prior to moving overseas may expect you to continue filing a state return. You may want to consult with a tax professional in that state to determine what, if any, taxes you will owe.
What Is the Foreign Earned Income Exclusion?
The foreign earned income exclusion may permit you to reduce the amount of your taxable income with the IRS. The foreign housing exclusion and foreign housing deduction are additional ways to get tax relief. One of the following circumstances must apply in order for you to claim these exclusions or the deduction:
- You're a U.S. citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year.
- You're a U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year.
- You're a U.S. citizen or a U.S. resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.
The maximum amount of foreign earned income you may exclude is adjusted for inflation. It was $107,600 in 2020, and $108,700 in 2021. It increases to $112,000 in 2022.
You can use the IRS's Interactive Tax Assistant to help you determine whether some or all of your income is eligible for the exclusion.
You can't exclude the following types of income from your taxable income:
- Pay received as a military or civilian employee of the U.S. government or any of its agencies
- Pay for services conducted in international waters or airspace
- Payments received after the end of the tax year following the year in which the services that earned the income were performed
- Pay otherwise excludable from income, such as the value of meals and lodging furnished for the convenience of your employer on their premises (and, in the case of lodging, as a condition of employment)
- Pension or annuity payments, including Social Security benefits
Pension payments, withdrawals from 401(k) and traditional individual retirement accounts (IRAs), and Social Security benefits are all taxable when you're living abroad. As much as 85% of your Social Security benefits may be taxed, depending on your income.
The foreign housing exclusion potentially applies to those who have an employer, while the foreign housing deduction is for those who are self-employed. The exclusion or deduction is for reasonable expenses actually paid or incurred for housing in a foreign country.
Your foreign housing amount is the total of your foreign housing expenses for the year minus the base housing amount. The base housing amount is 16% of the maximum foreign income exclusion amount divided by 365 (or 366 in a leap year), then multiplied by the number of days in your qualifying period that fall within the tax year.
Use Form 2555 to figure out your foreign earned income exclusion and your housing exclusion or deduction.