Tax Consequences of Moving or Working From Abroad

You might have heard recent news about Portugal creating a new ‘digital nomad’ visa to encourage individuals to come live and work abroad in the coastal European country.  Ecuador also recently instituted a similar visa with the same intent.  If you’re thinking of moving abroad and wondering how that would affect your taxes, here are some basic considerations to keep in mind.

Note – taxation of U.S. expats is a complicated subject. This is a brief rundown of just some of the most common issues to be aware of. Of course, talk to your tax advisor before moving to get the full picture.

Foreign Bank Accounts and Assets

  • FinCEN Form 114 aka FBAR
      1. Whether or not you live or work abroad, if you possess a bank account(s) located in another country or countries, and those accounts reach a combined balance of $10,000 USD or more at any point in a year, then you must file FinCEN Form 114, also known as a Foreign Bank Account Report (FBAR). 
      2. There are other types of assets that can trigger a requirement to file the FBAR, such as foreign stock held in a foreign brokerage account, foreign mutual funds, and foreign issued life insurance or annuities with cash value.
      3. The FBAR is purely an informational form, no tax is ever due or assessed on the balance in your foreign accounts.
      4. The FBAR is relatively straightforward, and for the most part only asks basic info such as name and address of the bank, the bank account number, and the maximum balance at any point in the year (over $10,000).
      5. The FBAR is actually filed completely separately from your tax return. If you’re using an accountant to file your taxes, they’ll probably file it at the same time as your tax return. If you file your own taxes, you can file it separately through the FinCEN website.
      6. The deadline to file the FBAR is April 15th, although an automatic extension can be granted until October 15th. 
      7. While the FBAR is relatively simple, there are serious penalties for failing to file the form. If you are caught having not filed the forms, even if the failure to file was unintentional, the fines can be $10,000 per bank account! If the failure to file was intentional, the fine will be $100,000 or 50% of the balance of the account, whichever is greater. Ouch.  
      8. If you’re just finding out about the FBAR requirement now, and you think you have past-due filings that need to be made, please speak to an accountant that specializes in expat taxation and in particular the IRS’ streamlined filing compliance procedures (which allow you to get caught up without penalty, typically).
  • IRS Form 8938
    1. Unlike the FBAR, Form 8938 is issued by the IRS and is filed as part of your personal tax return.  Since it is included with your tax return, the deadline to file it is the same as your tax return.
    2. Form 8938 is much more complicated than the FBAR, and includes even more types of foreign assets than just the ones relevant to the FBAR.
    3. The filing thresholds for Form 8938 are more complicated and vary depending on whether you are filing Single/Married Filing Separately or Married Filing Jointly, in addition to whether you are living in the U.S. or abroad. For Single/MFS filers, the beginning thresholds range from $50,000 to $200,000; while for MFJ filers the beginning thresholds range from $100,000 to $400,000.
    4. Similar to the FBAR, Form 8938 is purely informational and no tax is due or assessed on your foreign assets.
    5. Also similar to the FBAR, there are serious penalties for not filing Form 8938 with your tax return. Unintentional failure to file penalties begin at $10,000 and increase from there.
    6. If you think you unwillingly failed to file Form 8938 in the past, you should reach out to an accountant that specializes in the previously mentioned procedures to help get you compliant.

Foreign Earned Income Exclusion vs Foreign Tax Credit

  • Assuming when you move abroad you will be earning income abroad, your tax filings in the U.S. will get more complicated. 
  • Many people don’t realize that even if you move abroad and never once return to step foot in the United States, as long as you maintain your U.S. citizenship, you will continue to have an obligation to file a tax return with the IRS every year (in addition to whatever the tax filing and payment obligations are in your new country). That’s also true for any of your children that are born abroad – assuming they take advantage of the opportunity to become U.S. citizens, they will have annual tax filing requirements even if they never enter the U.S. their entire lives!
  • However, there are two main tools that you can use to avoid paying tax in both your new country and the U.S.: The Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC).
  • This is an either/or situation – each year you’ll decide whether you want to use the FEIE or the FTC (assuming you meet the requirements to use either of them).
  • The FEIE allows you to exclude up to $112,000 (for 2022) of foreign earned income from your U.S. tax return. It is claimed by filing Form 2555 with your return.
  • There are two different ways through which one qualifies to claim the FEIE: The Physical Presence Test or the Bona Fide Residence Test. Each test has its own requirements and nuances, which are beyond the scope of this article. You can choose whichever test to qualify you for the FEIE for each year.
  • Unlike the FEIE, the Foreign Tax Credit (FTC) does not allow you to exclude any income from your tax return. Rather, it is a tax credit claimed based on the amount of tax you already paid to your new (foreign) country. Depending on the tax rates in your new country, the FTC may be more lucrative for you than the FEIE.
  • Whether to claim the FEIE or FTC each year is a very nuanced discussion that you should have with a tax professional that specializes in expat taxes. Each method has its unique advantages and disadvantages, which can have big impacts on your tax return.

U.S. State Residency Considerations

  • So far we’ve only discussed issues relating to your Federal tax filings with the U.S. What about obligations at the state level?
  • Assuming you’ve fully moved abroad and no longer have any sources of income or assets in a state in the U.S., then you should no longer have a filing requirement at the state level.
  • However, if you’re more of the self-employed digital nomad type, in which case you probably formed a business in a specific state in the U.S. at some point, and now you’re continuing to work for that business while moving abroad, then that state in which the business was formed may try to come after you to claim that you still have source income in that state, and therefore need to pay taxes to them.
  • You might want to consider moving your business from its current state to one of the states that do not have an income tax (Florida, Texas, Nevada, Washington, South Dakota, Wyoming, Tennessee and Alaska). This way, even if it’s determined that you still have state-sourced income, it will be sourced to a state with no income tax, so you shouldn’t have to pay anything (other than perhaps annual filing fees to maintain your business in that state).  Wyoming seems to be particularly common for these types of situations due to its business-friendly laws.

Like I mentioned previously (and as you can probably tell), taxes for expats is an extremely complicated topic. I’ve just scratched the surface here with some of the most common and important factors to consider.  If you do decide to make the leap and move abroad, be sure to talk with a qualified accountant (both in the U.S. and in the new country)!

If you liked this info and would be interested in exploring a tax savings strategy session for your business, feel free to book an appointment with us here!

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