Living abroad is an adventure many dream of, but it comes with tax responsibilities for American citizens. If you're planning to work in another country, you'll need to navigate both American and foreign tax obligations. This guide will help you understand what you need to know before booking your flight.

1. Plan in Advance

Either you’re relocating to the country of your dreams, starting a digital nomad journey or just going on a workation, planning your taxes in advance will make the difference.

Based on the countries that you plan to visit, the professional status that you will choose to perform your activity (employee, freelancer, business owner…), and the lifestyle that you aspire for, the correct tax planning will allow you to benefit from the best tax reductions and a minimal tax burden. This on top of anticipating the necessary compliance in the different countries that you will visit.

There are different solutions to plan your taxes in advance. Our personal recommendation will be to use a solution such as Heavnn, that will allow you to determine the best legal setup and tax optimization, at an affordable price.

Heavnn is a global tax management solution designed for location-independent workers. Their promise: the best remote setups and at least a 60% reduction on one’s tax burden.

2. File a US Tax Return Annually

It's a common misconception that living abroad means you automatically no longer have to pay US taxes. However, as long as you hold American citizenship, you are required to file US taxes every year.

While this may seem daunting, most expats find that various deductions, foreign tax credits, and exclusions prevent them from owing additional taxes. To ensure compliance and minimize your tax liability, consider hiring a professional accountant who specializes in international tax matters.

3. Leverage Exclusions and Tax Credits

If you're working in another country, you can benefit from the Foreign Earned Income Exclusion, which can reduce your US tax liability on foreign-earned income, up to $100,000. To qualify, you typically need to have been present in the foreign country for at least 330 days.

Additionally, you can further reduce your US taxes through the use of the Foreign Tax Credit. This credit allows you to offset taxes paid in your host country against what you owe in the US, potentially resulting in savings or credits for the following year.

4. Maximise Foreign Housing Costs Offset

In addition to the Foreign Earned Income Exclusion, you can take advantage of the Foreign Housing Exclusion to offset some of the expenses associated with living overseas. The eligibility for this exclusion may depend on your income level and your location, with exceptions for high-cost cities. To get a comprehensive list of what expenses can be excluded, consult the IRS.

5. File For an Extension to Qualify For Deductions

If you've recently moved abroad and don't meet the requirements for exclusions like the Foreign Earned Income Exclusion, you can request an extension to give you more time to qualify. The Form 2350 allows for additional extension time to sort out your tax-related paperwork.

6. Stay Informed About Tax Regulations

Before relocating to a foreign country, it's crucial to understand the tax obligations in both your home country and your new residence. Regulations like the Foreign Account Tax Compliance Act (FATCA) may require you to report all foreign assets once they exceed a specific threshold, which can vary based on factors like your filing status and place of residency.

Furthermore, foreign banks and financial institutions may be obligated to report account balances of US citizens. Failure to comply with these regulations can result in significant non-compliance charges, so it's essential to familiarize yourself with the rules.

7. Stay Organized

Filing US taxes while living abroad can be complex, but staying organized is the key to a hassle-free process. Maintain meticulous records of living, traveling, and work expenses. Create a dedicated file containing all relevant receipts, records, exclusions, and credits.

Keep detailed notes on any interactions with service providers, government agencies, or financial advisors to ensure a smooth tax filing process. Being organized throughout the year will reduce stress and help you stay on top of your tax obligations.

By following these guidelines, you can navigate the complexities of US taxes while living abroad and avoid potential charges and penalties from the IRS, allowing you to fully enjoy your time abroad.