US Tax Rules For Expatriates

Yesterday, I met with my accountant to explore the tax benefits of expatriating. This post will only be relevant to US readers, so others may one to skip this one.

Standard Disclaimer

Let me preface this entry by saying that I am not a lawyer, an accountant, nor am I trying to give advice in any way. I am simply stating what is my own understanding of the rules and regulations regarding expatriate tax status. I could be totally mistaken. You should by no means rely on what I'm posting here to prepare your tax return. I take no responsibility should you get in to trouble by relying on what I state here.

Foreign Income Exclusion

Now that we're done with the disclaimer, let's get on to the good stuff. The first and biggest benefit to expatriate tax status is an $80,000 income tax exclusion. What this means is that you get to take the first $80,000 you earn and wipe it off your return, as if you didn't earn it. Assuming we're talking 2004 numbers, that's worth $17,027 in income taxes you won't be paying. NICE!

Are there caveats, rules, and exceptions? You bet! That's way beyond the scope of this blog post, though. The best way to get yourself up to speed is to talk to an accountant who's familar with expatriate tax preparation or do what I did -- download and read Publication 54 from the IRS website. It won't be fun, but it will be informative. You owe it to yourself to be fully informed. Here's the short version:

• Your can only get the exclusion on income earned as a result of being an expatriate. Moving out of the country doesn't mean you get to exclude $80,000 of stock dividends, for example.
• You have to live outside the country for 330 days of the year or its a no-go.
• Your primary residence has to be outside the country and you have to have established local community connections in your new home.
• You're still going to owe Social Security & Medicare on the $80,000 under most circumstances.

Moving Expenses

You're also going to get to deduct moving expenses from the USA to Argentina. This means that if you ship your furniture/car/family down there, Uncle Sam will let you deduct that. I decided to sell everything in the USA and re-buy everything from scratch when I arrived. So, too bad for me. I'll still get to deduct the plane tickets, though.

Housing Exclusion

Under certain circumstances, you can deduct all or a portion of your housing costs while you are overseas. The rules regarding this are so complex that my accountant couldn't even come to a determination as to whether or not I qualify for it -- I'm in a sort-of gray area. She is writing a letter to the IRS on my behalf to obtain a ruling as to whether or not I qualify. So, I'm not really able to explain whether or not you can get this deduction, since I don't even know if I can get it. I can only say that it is available and that you might be able to get it. Check with your tax professional or the IRS.

As you can see, the possibility does exist for you to save a significant amount of money. Its a little tricky to figure out at first, but well worth the effort. I know for sure that I'll be saving at least $17,000 a year (and perhaps more) just on Federal Income Tax. We're not even talking cost-of-living savings yet. For me, that's worth 2-3 international vacations each year -- money that I would otherwise be paying to Uncle Sam.