Can Living Abroad Offer US Tax Benefits? Options for Expats

Updated on March 3, 2024

Many expats wonder about the tax advantages of living abroad. It’s not a straightforward tax escape, there are certain opportunities for US citizens abroad.

One of the pressing questions from those planning to move or already living abroad is, "Can I save on US taxes by living overseas?" It's a nuanced topic, as moving out of the US doesn't automatically exempt American citizens from their tax obligations. The US uniquely taxes its citizens on global income, regardless of where they reside. However, living abroad can open doors to specific tax exemptions and planning opportunities not available stateside.

Here, we'll break down three primary tax planning strategies for US expats, delving deeper into each in future discussions.

1. Foreign Earned Income Exclusion

This is perhaps the most straightforward strategy for reducing US tax liability. If you meet certain criteria, you could qualify for the foreign earned income exclusion, allowing you to exclude up to $123,000 (for 2023) of foreign earned income from US taxation. Additionally, you might exclude or deduct certain foreign housing amounts. To be eligible, you must:

Be a U.S. citizen with a tax home in a foreign country.
Pass either the Bona Fide Residence Test (BFR) or the Physical Presence Test (PPT).

There’s no requirement to pay income tax in the foreign country to qualify for this. The key is meeting either the BFR or PPT requirements.

2. Utilizing Foreign Corporations

Operating through a foreign corporation can offer tax efficiencies. This method allows for potential deferral of taxation on income until it's distributed as a dividend or salary. However, it's complex, especially concerning compliance for US citizens owning foreign corporations. The penalties for missteps are steep, so professional guidance is crucial.

3. Expatriation: A Final Resort

The ultimate way to exit the US tax system is renouncing your citizenship. This step involves significant non-tax considerations and planning to avoid or minimize US exit taxes. A 'covered expatriate' — someone with a net worth of at least $2 million or meeting certain other criteria — may face an exit tax.

Living abroad offers a range of attractions beyond taxes, like career opportunities, cultural experiences, and lifestyle changes. While taxes shouldn't be the sole motivator, there are tax benefits worth exploring for US expats.