TurboTax / Tax Calculators & Tips / All Tax Guides / General Tax Tips / Filing Taxes While Overseas

Filing Taxes While Overseas

Updated for Tax Year 2015


American citizens could owe taxes in two countries. If you've never lived abroad for an extended period of time, you probably don't know the United States requires its citizens to continue to pay taxes back home.

Living abroad is a compelling vision for many people. For some, the attraction is a great job that happens to be in an exotic land; for others, it’s simply the romance of joining the tradition of famous expatriates such as Ernest Hemingway, Scott and Zelda Fitzgerald and Gertrude Stein.

But then, reality strikes. Among the concerns of living outside the United States -- making a living and leaving loved ones behind, for example -- are the tax issues that develop if you retain your U.S. citizenship.

If you’ve never lived abroad for an extended period of time, you probably don’t know the United States requires its citizens to continue to pay taxes back home. You are required to file taxes on foreign income even if you pay taxes in the host countries.

“We tax both citizens and residents on the basis of worldwide income,” said John Wilson, an adjunct professor of international taxation in the graduate tax program at the University of Denver.

The United States is one of a handful of countries that require this comprehensive taxation. For residents of Canada, the rules are different.

“In Canada, when you move away, you stop being a tax resident,” Wilson said. “The fact that you’re still a Canadian citizen doesn’t subject you to worldwide taxation.”

The good news is that the Internal Revenue Service offers several breaks to keep the long-distance taxes to a minimum.

"We tax both citizens and residents on the basis of worldwide income."

- John Wilson, adjunct professor of international taxation, University of Denver


Foreign earned income exclusion

One tax break for expatriates is the Foreign Earned Income Exclusion. If an American moves abroad, he or she can exclude foreign-earned income up to $100,800 as of 2015 from U.S. taxation. To qualify, that person must have lived outside the United States for 330 days in 12 consecutive months, said Wilson, a partner in the Denver law firm of Holland & Hart.

That means an expatriate making $75,000 overseas would pay no taxes, although he or she still must file IRS Form 1040 and claim the exclusion. If the expatriate makes $105,000, tax must be paid on the difference between his or her salary and $100,800, or $4,200. But if the expatriate visits the United States for more than 35 days in that period, the benefit is lost.

If there’s no government where the expatriate is living, the exclusion can’t be claimed. Wilson recalled a case in which Americans tried without success to claim the exclusion because they were living in Antarctica. The exclusion also can’t be claimed on the high seas, he said.

Foreign tax credit

Once you’ve been overseas for an extended time -- usually at least half a year, Wilson said -- you become subject to taxes in your country of residence.

If you’re also paying taxes in the United States, that would be double taxation. So the U.S. tax code allows you to take a foreign tax credit. Under this section of the tax code, you subtract the lower of the tax rates from the higher. In effect, you pay only the higher of the two tax rates, split between the two countries.

Wilson gave this example:

Say you lived and worked in London in 2015 and made $180,000 a year. You can use the Foreign Earned Income Exclusion to exclude $100,800 of that income from taxes. The remainder -- $79,200 -- is subject to U.S. and U.K. tax. Your income tax rate in the United Kingdom could be 20 percent and your American rate 30 percent. You pay the British tax, and subtract that rate from the American tax, so you pay just 10 percent of the $80,800 in American taxes.

Foreign currency gain

A tax issue that surprises some expatriates is a currency gain on which they could owe taxes, Wilson said.

For example, say you bought stock with euros when you were living abroad. Even if the stock's worth in euros remained flat, if the value of the euro versus the dollar rose significantly while you held the stock, you would end up with more dollars if you sold the stock.

So even if the stock didn't rise in market value, you made a profit in dollars when you sell the stock. You would have to list that as income on your tax form, Wilson said.

Impact on American expatriates

Not all expats have the same issues. Gail Coe, an American who has lived in Nice, France, for 13 years and works in the travel industry, can’t use the Foreign Earned Income Exclusion because she is paid through an American account. However, she does save substantially on her taxes with the foreign tax credit.

“That section (of the code) makes filing my taxes a little more complicated, but it isn’t impossible to follow,” Coe said.

Raymond, who asked that his last name not be used, worked for an international energy company in the United Kingdom from 2005 to 2010. A combination of the tax exclusions and credits and his company’s policies kept double taxation from being an issue, he said.

Although his company acknowledged that he normally would be subject to taxes both from the United States and the United Kingdom, Raymond said he was told, “I wasn’t going to be taxed twice on my income.”

The tax code provided the credits and exclusions; and his company promised him it would pay any remaining taxes to keep his tax load the same as it was when he worked in the United States. Otherwise, he said, no one would have accepted the assignment.

“As closely as they can, they try to make you whole or keep you whole so you aren’t negatively impacted by the expat assignment,” Raymond said. “For most of our daily stuff that we did, there was really no impact.”

If you file your taxes with TurboTax and have questions about your unique tax situation, you can get free personalized advice from tax professionals, including CPAs, Enrolled Agents or Tax Attorneys – live by phone or chat. Learn more about Free Tax Advice from TurboTax.

Dodging the Value-Added Tax

The value-added tax, or VAT, is similar to the American sales tax, although it often is much larger because an increment is added at each stage of production or distribution of the product or service. The tax can be as high as 25 percent of the pre-tax price, according to a story in “USA Today.”

If you’re living in a country such as Great Britain or France, which have VATs, you pay it routinely, just as a foreign citizen living in the United States would pay a sales tax, said John Wilson, an adjunct professor of international taxation in the graduate tax program at the University of Denver.

On the other hand, if you’re a tourist, or an expatriate about to leave the country, you can apply to have the VAT removed or refunded. Refunds are allowed only on “significant” purchases, Wilson said. Most countries set minimum values for refunds.

Get every deduction you deserve

TurboTax Deluxe searches more than 350 tax deductions and credits so you get your maximum refund, guaranteed.

For only $54.99$34.99*
Start for Free

The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.

* Important Offer Details and Disclosures
  • Try for Free/Pay When You File: TurboTax online and mobile pricing is based on your tax situation and varies by product. Actual prices are determined at the time of print or efile and are subject to change without notice. Special discount offers may not be valid for mobile in-app purchases.
  • TurboTax CD/Download products: Price includes tax preparation and printing of federal tax returns and free federal efile of up to 5 federal tax returns. Additional fees apply for efiling state returns. E-file fees do not apply to New York state returns. Prices subject to change without notice.
  • TurboTax Mobile: Actual prices are determined at the time of print or efile and are subject to change without notice. Come back here before you file to confirm that the price has not changed, especially if it's been a while since you downloaded this app.
  • Anytime, anywhere: Internet access required; standard message and data rates apply to download and use mobile app features and content. TurboTax mobile app devices supported include Android 4.1 and above, iOS 8 on iPhone 4s and above, and iPad 2.
  • Fastest refund possible: Fastest tax refund with efile and direct deposit; tax refund timeframes will vary.
  • Pay for TurboTax out of your federal refund: A $34.99 Refund Processing Service fee applies to this payment method. Prices are subject to change without notice.
  • About our TurboTax Product Experts: Customer service and product support (phone or chat) vary by time of year. Phone support not included with Free Edition.
  • About our credentialed tax experts: Live tax advice service is available for your toughest tax questions; fees may apply. Service, experience levels, hours of operation and availability vary, and are subject to restriction and change without notice. Click here for full terms and conditions. Not available for TurboTax Business customers.
  • Get up to 10% on top of your federal refund: Amazon.com Gift Card offer is for federal refunds only. Limits apply ($2000 per e-card, maximum $10,000 per customer). Offer available only for TurboTax Online (except Federal Free Edition) or CD/download versions sold and shipped, or downloaded directly from Intuit or Amazon. Except as required by law, Amazon.com Gift Cards cannot be canceled, transferred for value or redeemed for cash.

    Amazon.com is not a sponsor of this promotion. Except as required by law, Amazon.com Gift Cards ('GCs') cannot be transferred for value or redeemed for cash. GCs may be used only for purchases of eligible goods at Amazon.com or certain of its affiliated websites. For complete terms and conditions, see www.amazon.com/gc-legal. GCs are issued by ACI Gift Cards, Inc., a Washington corporation. All Amazon ®, ™ & © are IP of Amazon.com or its affiliates. No expiration date or service fees.
  • #1 best-selling tax software: Based on aggregated sales data for all tax year 2013 TurboTax products.
  • 4.8 out of 5 stars: Average based on customer ratings on TurboTax.com for TurboTax Online and CD/download products tax year 2014, as of January 2015.
  • Most Popular: TurboTax Deluxe is our most popular product among TurboTax Online users with more complex tax situations.
  • TurboTax CD/Download priority phone support: Priority phone support for TurboTax CD/Download Premier and Home & Business is accessible exclusively via the TurboTax.com Help Center.
  • Benefit Assist: After you file, TurboTax automatically shows you a full list of government benefits you may qualify for, like Food Stamps or reduced phone & utilities. Plus, we help you apply, saving you time and making it easier than ever to get more money! Estimate based on calculation of Benefit Assist users from tax year 2013 and published reports of average benefit and savings amounts from federal and state programs. Actual amounts and qualifications based on your individual situation; some individuals will not qualify. Feature may not be available for all customers.
  • Simplified State Experience: New, simplified state tax preparation available for most filers.
  • Eligibility for $25 cash back for returning Deluxe customers: Customers who have completed their 2013 taxes in TurboTax Deluxe (CD or download), and have completed their 2014 taxes in either TurboTax Premier or TurboTax Home & Business (CD or download), and apply here before 11:59PM PDT April 20, 2015, are eligible for $25 back. 2014 TurboTax Advantage users are ineligible for this offer. Terms and conditions are subject to change without notice.
  • $0 Upgrade Offer: Valid for customers who filed their 2013 taxes with TurboTax Deluxe (CD or download), completed prior year data transfer this year, and encounter an upgrade to either 2014 TurboTax Premier or 2014 TurboTax Home & Business (CD or download). Valid February 6, 2015 through April 20, 2015. TurboTax Advantage users are ineligible for this offer. This offer may not be combined with our $25 cash back offer. Terms and conditions are subject to change without notice.