United States: Leaving The U.S. Doesn't Mean You Don't Owe Taxes To Uncle Sam

Last Updated: July 20 2016
Article by Allan Peiser

Every four years, like clockwork, Canada's population doubles as Americans flee the result of the latest presidential election. At least, that's the threat currently enjoying its latest incarnation across social media feeds around the country. However, whether you're running for the border to escape bad toupees or questionable pantsuits, your U.S. tax bill will follow you.

Yes, as many expatriates around the world have already discovered, the United States requires its citizens to pay taxes even when they live in another country. So before you sprint out of the polling station with passport in hand this November, have a look at what taxes await you on the other side of the border.

Tax Filing Obligations for U.S. Expatriates

Even when you're living outside the country, you're subject to the same filing obligations as your fellow citizens stuck back home. Tax day is still April 15th, although expatriates enjoy an automatic two-month extension. While the extension is automatic, it doesn't stop the clock on the IRS' interest calculations, so if you end up owing money but don't file until June 15th, you'll have two months' worth of interest to pay on top of your normal tax bill.

However, the filing thresholds apply to expatriates just as they do for domestic citizens, so you'll only need to file if your total income from all sources exceeds the amounts in these categories:

  • Single filers: $10,300 or $11,850 (65 or older)
  • Married with joint tax return: $20,600 or $21,850 (65 or older)
  • Married with separate tax returns: $4,000
  • Head of household filer: $13,250 or $14,800 (65 or older)
  • Widowed: $16,600 or $17,850 (65 or older)

Tax Reductions for Expatriates

Fortunately, the U.S. government wants to avoid double-taxing its citizens even when they live abroad, so there are two ways you can reduce the tax you owe to Uncle Sam when you earned your income in another country.

The first method is the Foreign Earned Income Exclusion (FEIE), which allows you to exclude a portion of your foreign-earned income from U.S. tax rates.

The FEIE threshold for the 2015 tax year is $100,800, so you'll only be taxed on any earnings above that amount. However, those earnings will still be taxed according to the tax bracket that would have applied without the exclusion. So if you had earned $105,000 in foreign income in 2015, only $4,200 of it would be taxable, but that tax would apply according to the percentage rate that applies to the original amount of $105,000.

The second method of reducing your U.S. tax obligation is to take a credit for any taxes paid to the government of the country you'd moved to. The credit is a one-to-one transfer, so the full amount of your foreign taxes would be subtracted from your U.S. tax obligation.

However, if you're taking both the FEIE and the foreign tax credit, the credit only applies to the portion of your taxes that wasn't excluded by the FEIE.

While the math will differ for each individual filer, that wrinkle means that in most cases it makes sense to simply forgo the FEIE and only claim the foreign tax credit. Often, the taxes you pay to the foreign government are equal to or greater than the amount the U.S. government would have required you to pay, so your foreign tax credit will completely cancel out your U.S. tax obligations.

Reporting Foreign Bank Accounts

The IRS is well aware that the expatriate population is fond of getting creative with its income when it comes time to report it. Accordingly, you'll be required to report your holdings in foreign bank accounts if the total amount in all accounts is equal to or greater than $10,000.

If you have more than $10,000 in your account, you'll be required to file the Foreign Bank Account Report (FBAR), the granddaddy of foreign reporting requirements that's been in effect since 1972. You'll also be required to file the FBAR if you have signature authority over bank accounts that meet or exceed $10,000. Signature authority typically applies if you have access to or responsibility for something like a business bank account, charity organization account or similar.

While the FBAR used to be the only game in town, the Foreign Account Tax Compliance Act is a more recent law that requires high earners to fill out an additional account reporting form. Form 8938 must also be reported if you're a single filer with $50,000 or more in your accounts at the end of the tax year, or if you had $75,000 or more in your accounts at any point during the year. If you're married and filing jointly, you can double those amounts to determine the threshold for Form 8938 ($100,000 or $150,000, respectively.)

Consequences for Not Filing

Just like at home, not filing taxes doesn't mean you don't owe taxes. While you might be tempted to let the tax bills stack up and worry about it later, recent changes to the law mean you'll feel the consequences in your new country, too. If you owe more than $50,000 in back taxes (including penalties, interest and fees), the IRS can and will invalidate your passport.

So while you may be forgiven for deciding that the election results mean it's time to hit the road, remember that the IRS doesn't forgive or forget. Whether you live in the United States, Canada or any other country, your birthright obligation to obey U.S. tax laws won't go away.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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