As a US citizen living abroad, you probably find yourself filing taxes every year, shares Brian Colombana. It can put a big dent in your side. Besides, the need to stay on top of the ever-changing US tax law landscape and pay legal fees, among others, may be exhausting. Add to this, paying out substantial failure-to-file penalties if you are late filing. Remember that this isn’t all about taxes as you also have to pay for things like rent and groceries every day. The trick is finding a way to simplify this process, so it doesn’t become stressful.
Many ex-pats assume that a US tax treaty will keep them from owing US tax without realizing that having a treaty in place is not blanket protection. People often forget when considering this option that it only covers a limited number of situations, and the ex-pat might face additional US taxes in other money-related circumstances, explains Brian Colombana. More precisely, when it comes to citizens living abroad, you will have to pay a double tax when filing annual tax returns. For example, if you earn USD 100,000 in taxable income as a US citizen living in Canada, you would pay 50% of the money to the Canadian government and 35% to the government in the US.
So, let’s dig into some scenarios beyond your salary where you may be liable to pay taxes in your home country despite living far away.
The proceeds from your property selling
If you have gained on your residence in a foreign country that is not tax-free in the US, you may have to pay a tax based on how long you possessed it. There are some terms and conditions. For example, you may find an exemption of up to USD 250,000 on a total gain after holding your principal residence for two years or longer. After three years, it can be USD 500,000 US. However, the issue arises when you live in Canada, Australia, and others where real estate is soaring. Brian Colombana informs you may have to pay thousands of dollars to the US government if you don’t leave your citizenship before the sale.
Capital gains from the Passive Foreign Investment Companies (PFICs)
Mutual funds sell shares that are not always taxable in the same manner as stocks. Some international investors choose to invest in mutual funds instead of stocks or ETFs to avoid double taxation issues. However, non-US mutual funds and ETFs fall under “passive foreign investment companies.” The IRS treats non-US mutual fund income differently when determining tax liability regardless of living within the US or abroad. Purchasing non-US mutual funds may result in additional filing requirements and necessitate you to pay extra taxes on the profit gained within your country of residence.