Double Taxation
An Expat’s Guide To Double Taxation
It is not uncommon for expats to owe taxes to their home country and the country where they are currently living and making money. In cases where more than one country taxes the same income, this is called double taxation. The United States in particular is one of the only countries in the world that taxes citizens no matter where they earn their income. This makes tax treaties, or double tax agreements, especially important to those who would otherwise face double taxation.
Can two countries tax the same income?
While many countries have treaties or laws in place to prevent double taxation of the same income, two countries can and do tax the same income, and US citizens are not excluded from the potential of double taxation. To determine if you may be subject to double taxation, you need to examine the tax laws of the country you are moving from, the country you are moving to, and any treaties or agreements between the two. No matter where you are moving from or to, it likely is possible to reduce or even eliminate the amount of income subject to tax twice.
What are double tax agreements?
In cases where two different countries tax the same income, they may come to a tax agreement or tax treaty so the income in question is only taxed once. There are two different tax treaty models, the Organization for Economic Co-operation and Development (OECD) model and the United Nations model. The OECD model is more favorable for the home country of the taxpayer rather than the country where the income is earned. The UN model gives more taxing rights to the country where the income is earned instead of the home country.
Double tax agreements may not eliminate double taxation entirely, but at least mitigate the income that is subject to tax twice. There are two different methods of collecting tax on income that would otherwise be taxed twice when two countries have a tax treaty. The exemption from taxation method requires the home country to collect tax and pass it on to the country where the income is earned. The foreign tax credit method is used by countries like the US and other countries that tax income no matter where it is earned. Under this method, the home country allows credits against tax liability when paying foreign taxes.
What countries does the US have tax treaties with?
The IRS maintains a list of countries the United States has income tax treaties with, including information about each treaty. If you are a US citizen living in a country on this list, you may be taxed at a reduced rate or exempt from taxes on certain types of income you receive while living in a foreign country. Tax treaties vary from country to country, so it’s important to look at the agreement specific to the country you are living in.
How to avoid double taxation as a US citizen
There are ways to avoid double taxation as a US citizen even if there is not a tax treaty in place between the US and your country of residence. The foreign earned income exclusion may apply if you are a US citizen or resident alien living abroad, typically for an entire tax year or at least 330 full days of any period of 12 consecutive months. The foreign earned income exclusion for 2024 is $126,500. Together, two spouses may be able to exclude as much as $253,000 in 2024.
The foreign tax credit may be available if you paid or accrued taxes to a foreign country and are responsible for US taxes on the same income. Foreign tax credits can eliminate some or even all of your US tax liability, and excess credit may be carried forward or backward to minimize tax liability outside of the current year. This was created for the purpose of reducing the amount of double taxation Americans living and working abroad are subject to.
Will I owe taxes to my home country for income earned in the US?
Income is generally only taxed where it is earned and where you live. The US is one of only a handful of countries that tax income based on citizenship, regardless of where you live and work. This means if you are living and working in the US, chances are you won’t owe taxes on that income to your home country. However, some countries collect what are called exit or departure taxes when giving up your tax residency. Some exit taxes only apply to high net worth individuals and most target unrealized capital gains. If the country you are moving from imposes an exit tax (such countries include Canada, Spain, France, Germany, Australia, and others), make sure you know how that will impact your finances.
Moving to a new country is difficult, and an entirely new set of tax laws are always difficult to grasp. If you are moving from the US, one of the only countries that taxes citizens regardless of where their income is earned, you could be in for a bad surprise if you don’t do your homework about how to reduce or eliminate the amount of income subject to double taxation. Fortunately the US has agreements with many countries and offers foreign earned income exclusions and foreign tax credits to those that qualify.
Struggling to figure everything out yourself? As a fiduciary advisor that moved to a different country myself, I love working with clients of all different backgrounds to create the life they want to live. I know first-hand just how difficult adjusting your finances to a new country can be. Feel free to reach out if you are looking for help or want to learn more about how I work with global clients.