An expatriate refers to an individual residing in a country different from his or her country of citizenship, usually temporarily and for the purpose of work. An expatriate can also be someone who once relinquished citizenship in their home country to become another country’s citizen.
A Little More on What is Expatriate
An expatriate refers to a migrant with professionalism or someone skilled in his or her profession. The worker assumes a position outside his or her home country, be it independently or as a work assignment planned by the employer which can be a university, company, government, or non-governmental organization. Supposing your employer sends you to work for a long period in its Toronto branch from its Silicon Valley branch, you will be termed an expatriate or “expat” upon your arrival in Toronto.
Expats often earn more than their usual home pay and more than local employees. Besides the salary, there are times when businesses give their expat employees benefits like housing allowance and relocation assistance. Living as an expatriate can be an exciting experience, thus presenting an opportunity to advance in career and get global business exposure. On the other hand, it can be difficult dealing with the emotional change with respect to separation from family and friends, while getting used to a foreign culture and work environment. Thus, the reason behind the greater compensation offered to the migrant workers.
Foreign Earned Income Exclusion
For Americans who work abroad as expats, abiding by the U.S. income tax regulations is an additional issue and financial burden because the United States taxes its citizens on all income earned overseas. However, in order to avoid double taxation on the income of expats, the United States tax code includes provisions that assist in reducing the tax liability. Taxes that are paid in a foreign country can be utilized as a tax credit in the United States, which when applied against the tax bill of the expat, lessens it. The Foreign Earned Income Exclusion (FEIE), for instance, permits expats to exclude from their tax returns a specific amount of their income that is indexed to inflation. The amount for 2018 is $104,100. An expatriate who earns, for instance, $180,000, from working in a tax-free foreign country would only have to pay the U.S. federal income tax on $180,000 – $104,100 = $75,900.
The FEIE doesn’t apply to investment income or rental income, thus, any income derived from either interest or capital gains from investments would need to be reported to the IRS. The Foreign Tax Credit (FTC) is a provision which ensures that expatriates aren’t taxed twice on their capital gains. For instance, assume an expatriate falls in the United States’ 35% income tax bracket. This implies that he will be taxed 15% for his long-term capital gain on any investment. Since the FTC gives a dollar for dollar credit against taxes paid to an international country, supposing the expatriate paid a tax rate of 10% to the country where he works, then he would have only need to pay a 5% tax to the United States. Also, if he doesn’t pay tax to the international country, he would owe the United States government the total 15% tax. If the income tax paid to an international government surpasses the credit amount (because the rate of foreign tax surpassed the U.S. rate), the expatriate would forfeit that amount. The credit, on the other hand, can be conveyed into the future.
Someone who already renounced their home country’s citizenship and migrates to another is also termed an expatriate for the purpose of tax and is mandated to pay an exit tax, also referred to as expatriation tax.
According to the Internal Revenue Service (IRS), the provisions of expatriation tax apply to U.S. citizens who already renounced their citizenship, as well as, long-term residents who already terminated their residency mainly because of tax, if one of the major reasons of the action is U.S. tax evasion. This emigration tax applies to people who:
- Possessing a net worth of at least $2 million on the expatriation date or date of residency termination
- Have an average annual net income tax liability which is greater than $162,000 (as of 2017) during the 5 years which would end before the date of residency termination or expatriation.
- Don’t (or can’t) authorize five years of U.S. tax compliance for the 5 years before the date of residency termination or expatriation.