You'd think that if you're living abroad and earning all your money from a foreign company, you wouldn't have to file a U.S. tax return or pay U.S. income taxes. Unfortunately, you'd be wrong.
Facebook co-founder Eduardo Saverin made headlines recently when he renounced his U.S. citizenship ahead of Facebook going public. The owner of 4 percent of the company, Saverin was born in Brazil and holds U.S. citizenship. But he currently lives in Singapore.
Why renounce his citizenship? According to Bloomberg, his spokesperson said, “Eduardo recently found it more practical to become a resident of Singapore, since he plans to live there for an indefinite period of time.” But the assumption is he really did it to avoid a potential tax bill in the hundreds of millions when Facebook went public.
Which brings us to today’s question: If you’re a U.S. citizen living outside the country, do you still have to pay U.S. income taxes? Here’s a recent email…
My son has been living out of the country for the last five years but is moving back to the states next month. He said he just found out he was supposed to be filing and will have to pay even though he had no income in the States. Could he be responsible to pay when there’s no income? How should he handle this? Thank you.
Before we get to Debbie’s answer, let’s take a quick trip down memory lane. The following is a 45-year-old tax protest song from a group you’ll recognize. The anger that inspired these lyrics is well-founded: When they wrote this song, these guys were in the 95 percent tax bracket – meaning after a certain point, they kept only 5 cents of every dollar they made. (Hence the first line: “Let me tell you how it will be…there’s 1 for you, 19 for me.”)
If you’d like to learn more about the history of that famous song protesting British income taxes, you can read about it here. In the meantime, let’s get to Debbie’s question. Or rather, two questions…
If you live outside the U.S., do you have to file and pay taxes?
While reading IRS rules and regs will often make your eyes cross, they’re quite clear on this issue. From this page of the IRS website:
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. Your worldwide income is subject to U.S. income tax, regardless of where you reside.
While that sounds like trouble for Debbie’s son, all is not lost. Depending on what he earned, the Foreign Earned Income Exclusion and Foreign Housing Deduction can reduce the amount of taxes he owes to zero.
For example, if he meets the requirements, the Foreign Earned Income Exclusion allows him to exclude $91,400 of foreign earnings for 2009, $91,500 for 2010, $92,900 for 2011, and $95,100 for 2012. The Foreign Housing Deduction can also reduce his taxable income.
Put these things together and many workers living abroad won’t owe Uncle Sam a dime. You can read more about all this in the thrilling page-turner, Publication 54: Tax Guide for U.S. Citizens and Resident Aliens Abroad, available free for download here.
What do you do if you haven’t filed taxes for years?
This answer is also straightforward: You simply file taxes for the years you missed. Ask any tax pro and you’ll learn failing to file taxes for years at a time isn’t rare. You can find the tax forms for the applicable years, fill them in, and file them. To get the forms, do a search at IRS.gov. For example, here’s the list of Form 1040s for dates going back to 1999.
If you didn’t owe any taxes for past years, you’re in the clear – no harm, no foul. If you did, however, you’ll be subject to interest and penalties.
If I were in Debbie’s son’s place, I’d probably hire a pro to help with all this. I’d take my time, interview several, and ask how experienced they are with this exact situation. Then I’d hire the most experienced pro at the lowest cost – and leave it to them.
This is especially true if penalties and interest are going to come into play, because a seasoned tax pro with IRS connections may be able to explain the situation and get some interest and penalties reduced or eliminated.
Bottom line? If you’re a U.S. citizen living and working overseas, Uncle Sam still may not charge you for income you earn outside the country, but he still wants to hear from you.