No one can deny that they have fantasized about abandoning the 9-to-5 grind in favor of a nomadic lifestyle. Although the allure of a carefree life appears to be irresistible, there is one aspect of reality that should not be overlooked—living outside the US and paying taxes

In spite of the fact that every situation is different, the following are some general rules you should keep in mind concerning taxes, work, and travel, to avoid getting into trouble with the Internal Revenue Service (IRS) while you’re living on the road.

Be Aware of What Your Tax Obligations Are

Before planning a trip, travelers should think about their current tax situation in the United States and how it will change if they move abroad. All American citizens are required to file a tax return in the United States, regardless of where they live and work or for how long they have been away from the country in question.

When it comes to filing your taxes, there is one important decision you must make. Taxpayers in the United States can either claim a credit for taxes paid in a foreign country or claim an exemption from U.S. taxation on foreign income. In order to reduce the impact of double taxation from both the United States and a foreign country, the foreign tax credit is used. Taxes paid on your earnings in another country are being claimed as a tax credit.

The foreign earned income exclusion, on the other hand, allows you to deduct up to $107,600 in earnings from your taxable income in the United States for the 2020 tax year under certain conditions. In most cases, you cannot claim both the credit and the exclusion at the same time. Choosing which option is best for you will be determined by your individual circumstances, which will include the length of time you will be away from home.

Know What the Rules Surround the Foreign Credit or Exclusion Are

Because the regulations for taking advantage of the credit or exclusion are complicated, consult a tax professional as you plan your extended trip. To be eligible for the foreign earned income exclusion, for example, travelers must complete a number of requirements, including a “physical presence test.” You can claim a credit for foreign taxes paid, but U.S. citizens must spend at least 330 days of the tax year outside the country to claim the foreign income exclusion. You won’t obtain the significant tax benefits of a more permanent transfer if you’re searching for a six-month sabbatical from life in the United States.

Do US Citizens Living Abroad Need to File State Taxes?

Even if you live abroad, several states require filing taxes while overseas unless you have stated that you have formally transferred your residency to another state or nation.

In most cases, you must pay taxes to your state of residence on all of your earnings. Working with a tax specialist who can guide you with applicable laws is a smart idea if you keep an address in a particular state despite traveling full-time (and hence residency).

If I Work Overseas Do I Pay Taxes?

Yes, if you meet the filing thresholds, which are normally identical to the standard deduction for your filing status, you must pay taxes on overseas income. You might be wondering why Americans pay taxes on income earned outside the country. Taxation in the United States is based on citizenship rather than residence. That means that if you’re a U.S. citizen, you have a tax duty regardless of where you live.

Even if you’re paid by a foreign employer in another country, your expat tax filing obligations remain the same. In addition to federal income taxes, certain Americans residing overseas must also file state taxes, depending on their previous state of residency. Taxable foreign-earned income includes:

·  Wages

·  Interest

·  Dividends

·  Rental Income

How much taxes do I pay if I work overseas? Foreign income is taxed at the same marginal rate as income earned within the United States in the US tax code. This implies that if your total income in 2020 – regardless of where it was earned (and in what currency) – exceeds any of the following minimum levels, you as an American living abroad or a Green Card holder will be required to submit a US federal tax return this year:

·  For citizens filing as Single: $12,400

·  For citizens filing as Married Filing Jointly: $24,800

·  For citizens filing as Married Filing Separately: $5

·  For citizens filing as Self-Employed: $400

·  For the head of household: $18,650

You can rest easy if you’re a U.S. citizen living overseas who has never submitted a tax return. The IRS included a safeguard for honest expats who were unaware that they were required to file. With Streamlined Filing Compliance Procedures, you can get caught up without incurring penalties. To be eligible, you must:

·  Have lived in a foreign country for at least 330 days during one of the last three years

·  Confirm it was a genuine mistake you failed to file your U.S. tax return and FBAR

·  Foreign account compliance

Foreign Account Compliance

You must file a report of Foreign Bank and Financial Accounts, or FBAR, with the Treasury Department’s Financial Crimes Enforcement Network if you have an interest in or signatory authority over at least one account outside the United States, and the overall value of the foreign accounts surpassed $10,000 at any time during the year.

Additionally, Americans who file an FBAR may be required to file Form 8938 with the IRS. A statement of specified foreign assets is what this is called. It will depend on where they live and whether their foreign asset holdings meet a certain threshold if they are needed to complete the form.