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US Expat Tax Advice: Do I Have to Pay US Taxes as an Expat?

Posted in: Everything Expat, Expats Everywhere, Living in Ecuador

So you moved abroad. And then it hits you: “Do I have to pay U.S. taxes as an expat?”

US Expat Tax Advice

In this post, you’ll learn about your tax obligations as a U.S. expat. This post is by Olivier Wagner, a Certified Public Accountant, U.S. immigrant and expat. See full bio at end of post.

US Expat Tax Advice: Do I Have to Pay US Taxes as an Expat?

Just because you’ve physically left the United States doesn’t mean you’ve broken up with the IRS! America is one of only two countries in the world that keeps taxing their citizens no matter where they live or work.

The already complex process of filing your taxes gets even worse when you aren’t physically present. This leads quite a few people to wonder if they should even bother filing at all. After all, what’s the worst thing that could happen if you aren’t on your own soil? Right?

Many American expats have always been non-compliant with their taxes. They have spent their whole adult lives outside the U.S. Others figure that since they won’t be within U.S. borders, it would be impossible or impractical for the government to take any collection measures. 

Citizenship-based taxation dates back to the civil war, and in many cases such assumptions were correct. At the time, the IRS had little enforcement power outside the U.S. But as FATCA is now a reality, and all your personal information is digitized, this assumption is becoming less and less valid.

Furthermore, the greater a person’s income, assets, or foreign activities (such as having foreign corporations or foreign bank accounts), the more likely a person is to be noticed and the more they will have to lose.

Both foreign corporations and foreign bank accounts come with filing requirements and potentially severe penalties for not meeting them.

You’ll learn all about these in the coming chapters. Before you decide to take this route, it’s a good idea to fully understand the consequences you might encounter if you fail to file for long enough to get caught.

The first thing to understand is that anything you owe the U.S. that you don’t pay while living overseas is subject to 3.25% interest. Though imprisonment is unlikely, you could face growing fines. Nonpayment of taxes can hurt both your finances and travel plans.

Getting Caught Up With Your US Taxes

How do expatriates become compliant with the U.S. tax system? The 1040 isn’t the only form you need to file. Many activities that seem benign can trigger specific filing requirements, and you may have to file other forms as well.

Read book by the author: U.S. Taxes for Worldly Americans

The rules are the same for Americans living in the US, but Americans living abroad are much more likely to have participated in these “foreign” activities. They can bring about hefty fines (up to $10,000) if they’re not turned in on time.

Depending on your situation, you may also need to know about Form 5471, Form 3520, and Form 8621.

  1. Form 5471 must be filed if you own more than 50% of the stock of a foreign corporation (or in some cases just 10%). Constructive ownership rules apply. So, for reporting purposes, you could be considered to be owning shares which are actually owned by a related party such as a spouse or a corporation you also own.
  2. Form 3520 is pertinent if you are the grantor or “substantial owner” of a foreign trust. While the word “trust” brings up the idea of wealthy families, the U.S. tax rules see products such as the Canadian RESP (similar to a U.S. 529 plan) or foreign retirement plans (similar to a 401(k)) as foreign trusts.
  3. Form 8621 is for people who own stock in a Passive Foreign Investment Company (PFIC). In many cases, foreign mutual funds would also be classified as PFIC.

My Tax Advice for US Expats

US Taxes for Worldly Americans Olivier Wagner

My advice to everyone who does not already file is simple: you have a lot more to lose by not filing than by getting caught up with your taxes.

You may not have to face the consequences of it today or tomorrow, but the longer you go without paying your legal dues, the more likely it is that it will eventually come back to bite you (and the worse the bite will be when it happens).

Most people owe a lot less than they think they do, and getting compliant can be a much easier process than they assume.

There are many options for going from tax non-compliance to compliance.

While many people today rely on the IRS’ standard interview process to file yearly, I hope to show you that it pays to go over everything with a fine-tooth comb and take advantage of every policy at your disposal when you file.

Tax preparation software like TurboTax can certainly be useful for organizing your information, but one should always review the actual forms before filing. It’s a lot to keep in mind, but drastically easier once you know what you are dealing with or have a professional who knows the unique territory you are traversing.

More reading: US Taxes for Expats: 3 Things to Know Before Retiring in Ecuador

Olivier Wagner US expat tax advice

About the Author

Certified Public Accountant, U.S. immigrant, expat, and perpetual traveler Olivier Wagner preaches the philosophy of being a worldly American.

In his new book, U.S. Taxes for Worldly Americans, he uses his expertise to show you how to use 100% legal strategies (beyond traditionally maligned “tax havens”) to keep your income and assets safe from the IRS.

Your Turn

Have a question about your expat tax obligations? Or maybe a tip or resource? Join us in the comments!

More reading: Expat tax and residency issues from a Canadian perspective

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Meet the Author

Bryan Haines is co-editor of GringosAbroad - Ecuador's largest blog for expats and travelers. He is a travel blogger and content marketer. He is also co-founder of ClickLikeThis (GoPro tutorial blog) and Storyteller Travel.

5 comments… add one
  • Alicia Aug 12, 2017, 5:29 pm

    What if I’m an Ecuadorian, living in the US for more than 30 years, nationalized US citizen, thinking of living in Ecuador, maybe retiring there while creating a passive income publishing ebooks while living in both countries, back and forth or alternatively?

  • Toni Parks Apr 17, 2017, 3:58 pm

    @Anthony Diaz – I seem to remember hearing that number is $90,000.

  • Anthony Diaz Feb 12, 2017, 12:46 pm

    What amount of income generated outside the country is exempt from U.S. income tax? What about Social Security and other non-income tax levies?

  • George McKay Feb 12, 2017, 8:01 am

    Unless your engaged in the privilege of having a federal job or are a civil servant the income tax may not apply to you.

  • Jesse Bayer Feb 12, 2017, 7:18 am

    Olivier, we’d love to have you on our podcast to chat about taxes as it relates to foreign income etc and of course give you a chance to plug your book. Shoot me an email if interested.

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