Expats are individuals who choose to live and work in a foreign country to experience a new culture, expand their career opportunities, or seek adventure. Expats are usually highly skilled professionals who are employed by companies, universities, governments, and non-governmental organizations. Living as an expat can offer many benefits, including higher compensation, relocation assistance, and housing allowance. However, it can also be emotionally challenging and require adaptation to a new culture and work environment. Retiring abroad is also a popular choice for adventurous souls looking for a change of scenery. While the prospect of an exciting and fulfilling retirement overseas is worth considering, expats must navigate the complexities of taxes, long-stay visas, and cultural differences when settling into their new homes.
What does it mean to be an expatriate?
An expatriate, or simply an expat, is someone who decides to live and work in a foreign country, often for a temporary period, to experience a new culture, expand their career opportunities, or seek adventure. However, an expat can also be someone who has renounced their citizenship in their home country and adopted a new one. Whether you’re a seasoned traveler or embarking on your first adventure, living abroad as an expatriate offers different opportunities and challenges.
Expatriates: a quick overview
An expatriate is usually a highly skilled professional who leaves their home country to work abroad, either independently or at the request of their employer. Companies, universities, governments, and non-governmental organizations all employ expats. For example, if you work for a company with offices in Silicon Valley and Toronto, and your employer sends you to the Toronto office for an extended period, you would be considered an expat.
Expats are usually paid more than they would be in their home country and more than local employees. But that’s not all; businesses often offer expats extra perks such as relocation assistance and housing allowance. So, it’s not just about the money; there are considerations with different lifestyles, experiences, and opportunities for professional growth.
Living as an expat can also be an emotionally challenging experience, involving separation from loved ones and the need to adapt to a new culture and work environment. This is why companies often offer higher compensation and benefits to these migrant workers, to help ease the transition and make the experience more rewarding.
Some special considerations with retiring abroad
As retirement approaches, many people consider moving abroad to enjoy their golden years. The idea of lower living costs, warm weather, and beach access is enticing to many, leading to a growing trend of retirees choosing to spend their retirement overseas. However, making the move is not without its challenges. Retirees must navigate the complexities of taxes, long-stay visas, and cultural differences when settling into their new homes. Despite the obstacles, the prospect of an exciting and fulfilling retirement abroad is worth considering for adventurous souls looking for a change of scenery.
Popular retirement destinations include countries in Central America, the Caribbean, and parts of Asia.
Are you a retiree considering becoming an expat? One important decision you’ll need to make is whether to pursue permanent residency or dual citizenship in your new country. Keep in mind, however, that neither option will exempt you from filing U.S. taxes every year. It’s a frustrating reality, but as a U.S. citizen, you’re required to pay taxes on your income no matter where you live.
You may also have to file taxes in your new country of residence, although double taxation is often minimized through treaties. So before you make a decision, do your research and consider taking a trip to your potential new home to test the waters.
What is the foreign earned income exclusion
Being an American expat comes with its own unique set of challenges, especially when it comes to taxes. American citizens are taxed on their income regardless of where they earn it, which can lead to double taxation. However, the US tax code has provisions to help reduce this financial burden. For instance, expats can use foreign taxes paid as a tax credit in the US to offset their tax liability.
Another option is the Foreign Earned Income Exclusion (FEIE), which allows expats to exclude a certain amount of their foreign income from their US tax returns. The amount is indexed to inflation and for 2022, it was $112,000. For 2023, it was $120,000. So, if an expat earns $180,000 tax-free in a foreign country in 2022, they will only owe US federal income tax on $68,000. It’s important for expats to understand these options and to to avoid overpaying taxes while living and working abroad.
Expats and the foreign tax credit
Reporting rental income or investment income is mandatory for American expats as the Foreign Earned Income Exclusion (FEIE) does not cover these types of income. This means that any income received from interest or capital gains through investments must be reported to the IRS. To avoid double taxation on capital gains, the Foreign Tax Credit (FTC) can be utilized.
The FTC allows expats to claim a credit against taxes paid to a foreign country, matching dollar for dollar. If an expat pays 10% tax on investment income to their foreign country, they would only have to pay 5% tax to the U.S. government.
However, if no tax is paid to the foreign country, the full 15% tax would be owed to the IRS. It is important to note that if the expat paid more tax to the foreign government than what is owed to the U.S. government, the FTC does not guarantee a refund. Any unused credit can be carried forward to future tax years, which can help reduce U.S. tax bills in the long run. Expats should be aware of the workings of the FTC and utilize it to minimize their tax liabilities.
Dealing with taxes as an expat
If you’re planning to renounce your citizenship in your home country and move to another, you should be aware that you’ll be considered an expatriate for tax purposes. This means that you’ll be subject to an exit tax, known as the expatriation tax. This tax is designed to ensure that individuals who renounce their citizenship don’t leave the country without paying their fair share of taxes. The expatriation tax can be complex, so it’s essential to seek expert advice before making any decisions.
The Internal Revenue Service (IRS) has created provisions for expatriation tax, which applies to both U.S. citizens who renounce their citizenship and long-term residents who end their U.S. residency for tax purposes. However, this tax only applies if the primary reason behind the action is to avoid paying U.S. taxes. If you fall under either category and are subject to the expatriation tax, it means that you have:
- A net worth of $2 million or more on the date of expatriation or residency termination.
- An average annual net income tax liability of over $178,000 for the five years leading up to the expatriation date if it was in 2022 (or $190,000 if the date is in 2023).
- Failed to certify five years of U.S. tax compliance for the five years before the expatriation or residency termination date.
What are the pros and cons of becoming an expatriate
Being an expat can come with many benefits, such as exciting adventures and exploring new cultures. Plus, depending on where you move, you may enjoy a lower cost of living or be closer to loved ones living abroad.
But there are some important things to keep in mind, especially when it comes to taxes. If you plan on maintaining your American citizenship, you’ll still need to file tax returns annually and may have to pay taxes to the US government, even on income earned in your new country.
When considering living and working abroad, there are some potential challenges to keep in mind. Being far away from loved ones can be tough, and differences in time zones may make it challenging to stay in touch. Adjusting to a new culture and language can also be a difficult process. You may find that some products or comforts you enjoy are not readily available in your new home. Finally, it’s important to remember that not all countries have the same level of political and economic stability as the United States, so it’s important to research and consider the potential risks before making a move.
Here is a list of the benefits and the drawbacks to consider before becoming an expat
- Experience a new climate, culture, and way of life that can broaden your horizons and create lifelong memories.
- You may also find that your cost of living is lower, allowing you to stretch your budget further.
- Some countries offer affordable healthcare options.
- One potential issue is the risk of double taxation, which means you may have to pay taxes to both your new country and the United States.
- Being far away from friends and family can also be tough, as it may be difficult to find a good time to chat or visit due to time zone differences.
- Adjusting to a new language, culture, and political climate can be challenging, and you may find that some products or items you’re used to having at home are unavailable in your new location.
- Securing the proper visa can be a complicated process that requires time and patience.
How can Americans become expats?
When an American citizen decides to relocate to another country with the intention of living there for an extended period, they become an expat.
Which country has the most expats?
Saudi Arabia has the largest number of expats, followed by the United Arab Emirates and the U.S. The expat community accounts for 98.4% of Saudi Arabia’s total immigration population. Poland, Portugal, and Sweden have the smallest expat populations. Qatar has the highest percentage of expats compared to its total population, with a whopping 70.9%.
Understanding expat taxes
If you’re an American living abroad, it’s important to know that you still have to file tax returns with the U.S. government, even if you’re paying taxes in your country of residence. However, there are some international tax treaties in place that can help you avoid double taxation.
These agreements ensure that you’re not taxed twice on the same income, saving you money and avoiding any headaches.
Finding expat communities
Moving to a foreign country can be overwhelming, but finding a community of fellow expats can make the transition smoother. Expat communities are groups of people who share a common national origin, often with their own schools and shops. English-speaking expats may find themselves in “Anglo” communities in many countries. These communities can provide a sense of comfort and familiarity for those who may be feeling homesick or are struggling to adapt to a new culture.
- Expatriates, or simply “expats,” are individuals who leave their home country to reside in a foreign country, either temporarily or permanently.
- With the lure of high-paying jobs, a different culture, or a change of scenery, many people opt to become expats.
- Some expats may choose to leave their home country for a specific period of time for work reasons, while others may choose to completely renounce their citizenship in favor of becoming a citizen of another country.
- Retiring abroad is also an increasingly popular choice for many people seeking a new adventure in their golden years.
- The IRS may impose an expatriation tax on individuals who renounce their citizenship, usually based on the value of their property or income in the United States.
- It’s important to consult a tax professional before taking any major steps towards expatriation.
View Article Sources
- U.S. Department of State. (2022). Federal Benefits and Obligations Abroad
- Internal Revenue Service. (2022). Foreign Tax Credit. https://www.irs.gov/individuals/international-taxpayers/foreign-tax-credit
- zkudlarek, B., & Kostova, T. (2014). Understanding dual identities of expatriate academics: The relevance of self-categorization theory. Journal of World Business, 49(2), 323-333.
- Yip, P. S., & Adler, N. J. (2019). Expatriate management: A review and directions for future research. Journal of World Business, 54(5), 100984.
Allan Du is a personal finance writer passionate about helping people take control of their finances. Allan strives to present readers with the right knowledge and tools, so they can make informed decisions about their money and build wealth. When he is not writing about finance, Allan enjoys pursuing his other interests, including powerlifting, kickboxing, and investing. He is an active follower of economic and political trends, always keeping watch on the latest developments that could impact the financial world.