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A Quick Guide to U.S. Taxes for Travelers Abroad

If there’s one positive thing that came out of the pandemic, it’s that we collectively learned we didn’t have to be tied to one place to work. Anyone can work from almost anywhere. All you need is a desk, a power outlet, and a decent internet connection.

While remote working has been around for a while, it wasn’t an option for most people. Now, many Americans have packed their bags to work remotely abroad. You can now mix business and pleasure for as long as you want.

Some countries have even capitalized on this new trend. With tourism all but evaporated, scenic countries such as Barbados and Bermuda have offered special programs to attract foreign remote workers. People can work and live the island life for up to 12 months.

There are many reasons why you should consider remote work living abroad. You get to live in your dream destination, enjoy a better quality of life, and even lower your living costs. But just because you’re working remotely from another country doesn’t mean you’re exempt from paying U.S. taxes.

Here’s everything you need to know about taxes for U.S. travelers abroad.

What is a perpetual traveler?

The U.S. State Department estimates that over 9 million American citizens and permanent residents living overseas. Some have decided to put down roots in a different country, while others are classified as perpetual travelers. Knowing the difference should help clarify your tax situation.

A perpetual traveler is a person who is not a tax resident of another country. They never stay in one place for too long, which means they cannot satisfy the usual requirements for tax residency.

To be classified as a perpetual traveler, however, you can only spend 35 days within a 12-month period inside the United States. Stay any longer and you lose all the tax benefits of working remotely abroad. There are no ifs or buts: either you qualify or you don’t.

That means you’re if you’re only abroad for 329 days, one day short of the requirement, your tax status remains the same.

Do I need to file a U.S. federal tax return?

According to the U.S. tax code, all American citizens and permanent citizens (also known as Green Card holders) have to file a federal tax return every year, even if they live and work outside the United States.

The Internal Revenue Service (IRS) taxes your worldwide income. So even if you work remotely from another country or are paid in a different currency, you’re still on the hook for federal income taxes. The rules for filing your tax return are generally the same whether you live in the U.S. or abroad.

Many expats take advantage of tax deductions and exclusions to reduce their tax liability. But the circumstances may be different for perpetual travelers. Many U.S. travelers abroad consult expert tax professionals to clarify their tax situation.

Do I need to file state taxes?

Things get a little murkier when it comes to state tax requirements. Because each state has its separate tax code, there’s no straightforward way to determine your state tax liability.

For instance, some states don’t collect an income tax, while others require residents to file a yearly state income tax return, even if they are living abroad.

If you plan to work abroad for an extended period, you can establish residence in a state with no income tax to eliminate your state tax liability. It helps to do your research or to work with a tax professional if you intend to maintain residency in a particular state while working abroad. 

What benefits can I claim?

If you plan on living and working abroad for an extended period of time, you need to understand how the Foreign Earned Income Exclusion (FEIE) works.

U.S. citizens and permanent residents who are based abroad for at least 330 days in a 365-day period are eligible to claim this benefit. For 2021, you can exclude $108,700 of earned income. That means you don’t have to pay tax if your income falls under that threshold. You still need to file a federal tax return and declare all income, however.

It’s important to note that the FEIE only applies to your earned income or income derived from a job or self-employment. It doesn’t apply to capital gains, interest, dividends, pensions, alimony, and annuities.

You may also be eligible for a foreign tax credit if you’ve paid income taxes to a foreign country. That way, you won’t be taxed twice on the same income.

According to the IRS, you cannot take a foreign tax credit on income excluded under FEIE. However, you can take a foreign tax credit on earned income that exceeds the FEIE threshold ($107,600 for 2020, and $108,700 for 2021).

Don’t leave without a plan

Packing your bags and moving to an island paradise might sound like a dream. But you can’t just leave the country without a proper plan in place. If you’re not sure about your next step, talk to a tax expert. At TFX (Taxes for Expats), you will find all the help you will need.

Veronica Rhodes from TFX

TFX is a women-owned tax firm that offers all U.S. tax services — for both American citizens and non-citizens with U.S. tax filing requirements. From straightforward expat tax preparation to complex cases involving multiple factors — we’ve handled it all for over 25 years.

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