Filing Taxes When Leaving the United States: What You Need to Know
Picture this. You’ve packed your bags, sold your home, and left the United States for good. Life feels free and exciting. But there’s a ticking time bomb you forgot: filing your taxes. Neglecting this crucial step can lead to severe penalties, fines, and never-ending stress. The IRS doesn’t care where you are. They want their taxes, and they will come after you.
Imagine ignoring Filing Taxes When Leaving the United States (US). A year goes by, then two. Suddenly, you receive a letter from the IRS, filled with threats of penalties for not filing. That peaceful new life overseas? It’s about to become a nightmare.
You also need to know where you pay the most taxes. Americans moving to the UK are more likely to pay more tax than the US.
What Happens If You Don’t File?
If you think moving abroad means escaping US taxes, think again. The US requires you to file taxes no matter where you live. Failing to file can lead to:
– Hefty fines
– Interest on unpaid taxes
– In some cases, legal action
This applies to all US citizens and green card holders, no matter where you go.
Self-Employed Moving from New York to London
A self-employed web designer, Sarah left New York to go to London. She assumed that because she no longer lived in the US, she didn’t need to worry about taxes. A year passed, and she received a letter from the IRS. The penalties were shocking. Sarah now owed thousands in late fees for not filing her US taxes, on top of the regular tax she didn’t expect.
If Sarah had known about the rules around Filing Taxes When Leaving the United States, she could have avoided these penalties. She could have claimed the Foreign Earned Income Exclusion (FEIE) or a foreign tax credit, reducing her tax bill significantly.
An employee Moving from California to Manchester, UK
Tom, an employee at a tech firm, moved from California to Manchester, UK, for a job opportunity. He thought that since he was employed by a UK company and paying taxes there, he didn’t need to worry about US taxes anymore. However, the IRS still requires all US citizens to file, even if they live abroad.
Tom got his Unique Tax Reference (UTR), a UK tax ID. Tom filed self-assessment tax returns correctly with HMRC. He thought his job was done with filing.
Tom didn’t file his US taxes for two years, only to be hit with late penalties. If Tom had filed correctly, he could have avoided double taxation by claiming tax credits for the taxes paid in the UK.
Why You Still Have to File
The United States is one of the few countries that taxes based on citizenship, not residency. Even if you no longer live in the US, you are required to report your income and file taxes. But don’t worry, you won’t necessarily be taxed twice on the same income. You can claim deductions and credits to lower your US tax bill, but only if you file correctly.
Many people are surprised when they learn they still need to file their US taxes after moving abroad. This misunderstanding often leads to missed deadlines and penalties. Don’t let this happen to you.
How to Avoid Double Taxation
You can avoid double taxation by using these two key tools:
Foreign Earned Income Exclusion (FEIE): This allows you to exclude a portion of your foreign income from US taxes up to a specific limit.
Foreign Tax Credit: This gives you a credit for taxes you’ve already paid to a foreign country.
Filing on time and using these options can reduce or eliminate your US tax burden while living abroad.
What Forms Do You Need?
When filing taxes and leaving the United States, you’ll need to file Form 1040, just like you would if living in the US. Depending on your income and foreign assets, you may also need to file:
Form 2555: To claim the Foreign Earned Income Exclusion
Form 1116: To claim a foreign tax credit
FBAR: If you have foreign bank accounts with more than $10,000
These forms can seem confusing, but getting them right can save you money and future headaches.
The IRS Still Wants Your Money
Even if you no longer live in the US, the IRS is still interested in your income. They expect you to file; if you don’t, they will find out eventually. The penalties for not filing can grow quickly; in some cases, you may even be subject to legal action. Don’t assume you can leave your US tax obligations behind when you move.
Tips to Make Filing Easier
– Keep detailed records of your foreign income and taxes paid.
– Set reminders for US tax deadlines.
– Consult with a tax professional who specialises in expat taxes.
Filing taxes while living abroad can feel overwhelming, but it doesn’t have to be. The key is staying informed and proactive.
Q&A About US Filing
Q: Do I have to file US taxes if I don’t live there anymore?
A: US citizens must file taxes even if they live abroad. You may be able to reduce your taxes with exclusions or credits.
Q: What happens if I forget to file my US taxes after leaving the US?
A: You may face penalties, interest on unpaid taxes, and even legal action if you fail to file.
Q: Can I avoid double taxation when filing US taxes from abroad?
A: Using the Foreign Earned Income Exclusion or foreign tax credits can help you avoid being taxed twice.
Q: What forms do I need to file when living abroad?
A: At a minimum, you’ll need to file Form 1040. You may also need to file Form 2555, Form 1116, and FBAR, depending on your situation.
Q: How can I make filing taxes easier while living abroad?
A: Keep good records, stay on top of deadlines, and consider working with a tax professional specialising in expat taxes.