Should I Pay Taxes If I Am Outside the US

If you are a US citizen living outside the US, you may believe that you have nothing to do with the IRS, especially if you have a job and earn income in your country of residence. You even likely pay income taxes in your country of residence. However, the US is the only developed nation which bases income taxes on citizenship rather than residence. This means that even if you live outside the US for an extended period of time (or for any period of time) you must still file income tax returns and you may need to pay taxes as well.

The issue recently came to the forefront when Facebook co-founder Eduardo Saverin decided to renounce his US citizenship. He lives in Singapore currently, and some speculated that Saverin made the decision in order to avoid paying US income taxes while he lives abroad. In fact, for US citizens living abroad the only way to avoid filing income tax returns with the IRS is to renounce citizenship.

The good news is that tax credits and the Foreign Earned Income Exclusion and Foreign Housing Deduction can mean that even if you live abroad you may not end up owing income taxes in the US. While you still need to file a US income tax return if you are a US citizen living outside the US, you may be earning income in another country and paying income tax in another country. This usually means that the taxes you pay in your country of residence will end up being the only taxes you owe. In fact, with stimulus spending you may even be able to get a refund when you file your income taxes in the US.

If you already have been living abroad and have failed to file income tax returns, you can file several income tax returns at once to get up to date. If you did not owe any money in taxes, this will end your obligation. If you do end up owing money, there may be penalties and interest on the amount owing. In these situations, it may be best to speak with a tax professional who is experienced with these types of cases.

In addition to filing income tax returns, US citizens abroad who have bank accounts, investment accounts and other accounts open in financial institutions outside the US may need to file the U.S. Department of the Treasury TD F 90-22.1 (Report on Foreign Bank and Financial Accounts). This form shows the US how much money you have in accounts outside the US. Failure to file this form can lead to substantial penalties and even jail time.