Tax Free Income

Whoo-Hoo!!
Whoo-Hoo!!

Disclaimer
First, do not confuse me with a financial adviser, accountant or tax authority in any way. For that expert, I can only suggest CFO2GOfor expats in Europe.

Now that I threw out that disclaimer, let me get you excited about this idea: tax free income.


Besides other obvious benefits to living overseas, there is a huge financial perk; especially when the time comes for you to efile your taxes for the year. For US citizens earning income outside the United States, their income (up to a certain amount) is tax free.

So, you’re skeptical on the phrase “up to a certain amount”? Are you sitting? For 2009, my salary is tax free up to $91,400. I think that’s a fairly high amount by most people’s living standards (including ours).

And the even better news? For whatever reason, the US government continues to raise this tax exclusion amount higher and higher every year, regardless whoever is in office. (That’s good evidence the IRS doesn’t mind having this policy in place.) In fact, every year, on average, the amount goes up a couple thousand dollars.

For this site, I made a quick chart showing the last 11 years:
taxfree

Another Disclaimer
This does not mean we avoid filing paperwork every year. Yes, US citizens are obligated to file the paperwork, regardless where we live. For this, you want to file the special form to declare your income is excluded from taxes: form 2555.
Some good news is, as expats, we do get an additional 2-month time extension, pushing the deadline from 15 April to 15 June. Thankfully, instructions for the form 2555 are relatively simple (certainly doesn’t require 2 months!).

So, to summarize the Good and the Bad:

Good:

  • Our first $91,000 is tax free
  • We get 2 months more time to file

Bad:

  • We must file as we always have
  • One more form to fill out, the 2555

Published by

Jeff

An American who likes to move around. I now live on the eastern Canadian seaboard. My job? A stay-at-home dad for two cute but demanding bosses. My wife? Also cute; not so demanding. My wife and I both love travel. We met in South Korea, travelled across Australia, India, Europe and beyond. We lived in Czech Republic for four years. Many stories to tell and experience to share. If you let me, I will help you travel as we do. Enjoy.

21 thoughts on “Tax Free Income”

    1. Hi Issa!
      First, thank your for your comment.

      About your question “How do I become an expat with an 11 year old son?,” my immediate thought is “Yes! With your son, too!”

      Really, in some ways it’s easier with, say an infant or toddler. A 2-year old would have no say in the matter; a baby is “just along for the ride,” right?
      But it’s not so with a much older child, and I’m sure at 11 years old, your son is basically a young man with a lot of his own ideas and activities on his own plate.

      That’s why it’s crucial to involve him from the start. From the idea stage. He may, after some time to think about it, have some very definite input on where he’d like to go.

      Get a globe. Note how far some of your recent vacations have been…and see how that same distance translates when starting from cities within Europe or Asia. Naming off a few surrounding countries can get the mind reeling with excitement.

      Together you must make your mind up, whether to become expats together or not. If you do, once decided, then you’ll instantly find new courage and strength to tackle the logistical questions of a new home, school, what new sports to play, etc…

      Finally, let me say this. Decisions are extra difficult as we’re facing them. And we may not truly appreciate the real value until much later. In the case of older kids moving around the world, this is especially true. When your son is 30, he will look back at his early life and know his experiences abroad are what set him apart from the crowd.

      I hope this helps.

      Issa — is there any particular question(s) I can help with? Maybe I should keep writing to this one? How are you in deciding?
      -Jeff

  1. Hi, this is great info – I would propose that the reason the limit goes up every year is to (try to) keep up with inflation.

  2. I hope this question makes sense.

    My family and I are British but my husband has been offered a job in Indianapolis which would obviously mean relocating. It is a good job with a very good salary but what im concerned about is that our credit rating in England hasnt always been the best and I dont want to get to America and find that we cant rent a nice home or lease a decent car even though we could afford it.

    Any advice on how the system works over there?

    1. Sarah,

      Take any concerns about your UK credit rating and throw them out the window. US creditors won’t research it unless you’re going for a major purchase, e.g. a mortgage.

      However, not having any US credit history will prove more troublesome.

      In Indy (Indianapolis), you will be perfectly able to rent a home. You’ll have to give some assurance that you are willing (and able) to pay. For the immediate need, I’d recommend using a copy of your husband’s job offer with noted salary. A leaser may also request to see a copy of his first pay slip.

      To build a credit history, get a local bank account. Apply for a charge/credit card. There are plenty without annual fees – ask your bank rep.

      I am certain that even leasing a car will be hassle-free once you can demonstrate your steady income.

      Indy has a decent public transportation system of buses. However, like in most of the US, use of public transport carries a low-income connotation.

      Congrats on the offer. Indy’s a real nice city, in most areas. Grown quite a bit in the last decade. (I know Indy since I grew up in Indiana.)

      -Jeff

  3. Hi Jeff,

    Quick question – Does an expat still pay taxes in the country they are living in? Say I was living in Germany as a U.S. citizen, and I was making 80,000 euro a year. I would not pay income tax back to the U.S. on that salary, but I would be paying into German taxes even if I’m a U.S. citizen – Is that assumption correct?

    1. hey Justin,

      Yes, your assumption is correct. You will pay income taxes in the country in which you earned the income. That’s the fact nearly 100% of the time.

      So, yes, if you lived in Germany and earned (only) 80,000 euros, you would pay only German income tax. The threshold for 2011 tax year is $92,900 (tax excluded up to $92,900).

      But it’s important to still file a U.S. tax return (essentially for zero taxable income). And, given you had a German bank account, you would file the relatively simple FBAR form to report a foreign bank account. It’s daunting to read, I know, but it sure beats any alternative.

      Hope that clear and good.

      -Jeff

      p.s. I recommend the small city Bonn. 🙂 I worked there for 2 months.

  4. Hello,

    I am a married disabled veteran with a 13 yr old son. My husband and son would like to eventually become permanently residents there but if I become a permanent resident I’ll loose all my veterans benefits. Can my husband and son become residents or even citizens without me having to loose the my benefits?

      1. Hello “A”

        Absolutely Not True.

        Regarding benefits and whether you’re entitled to them, the US Veterans Affairs does not care where you live or maintain residency.

        I am proof myself. I also receive (albeit a very small %) benefit from my time in service. Every month, it gets deposited in the same bank account. And that’s been for 15+ years, regardless of several changes to residency, and addresses in different countries.

        The VA even has a form available online to move your direct deposit to your new foreign bank:
        http://www.vba.va.gov/bln/21/foreign/forfaq.htm

        And there are no conditions or limitations based on whether you are a permanent resident or even become a new citizen of the country.

        I’d like to know where you heard that from, or read that. Write me an e-mail if you don’t mind at jeff@expatyourself.com

        -Jeff

        1. hey A,

          I found more info for you.

          I found some master list of VA benefits, included in which says veterans are eligible for medical benefits when either “living or travelling outside the US.”

          It’s called the “Foreign Medical Program.”

          Here’s the VA website where it came from:
          http://www.va.gov/hac/forbeneficiaries/fmp/fmp.asp

          And here’s the big list:
          http://www.veteransfinancial.com/veterans-benefits/va-health-care-benefits/

          Hope that helps.

          -Jeff

  5. Hi Jeff — I am doing research in preparation for my move with my Brazilian husband to his home country next year.

    Thanks for this website. It’s quite motivational!

    I only have one question at the moment — do you have any plan to move back to the U.S. and if so, what do you anticipate your housing situation to be?
    The reason I’m asking is because I am currently living (renting) in the SF Bay Area which is very expensive. We are thinking of buying a small condo before we leave and renting it out so we have some property whenever we need or want to return. I am nervous about abandoning all housing options and then to have to “start over” especially with some really high rent.
    Just wondering your thoughts on this.

    1. hi Chris,

      Thanks for the sweet words! 🙂

      To answer, no, we have zero plans to return to the US.

      However, we do have my parents in the US. So, because of my parents’ house, we do have a “permanent address” for the occasional reason we’d want one. The only reason that comes to mind right now is some crazily attractive (US) credit card offer dealing in frequent flyer points. But of course, things like our annual tax filing, or any utility (elec, mobile phone) or mortgage…for these we always use our actual residential address. In our case, that’s here in Canada, as it’s been for 3+ years.

      In your case, if you really do intend on returning to the US, and you want to take advantage of low house prices, then I can see how buying now and renting it out may seem a good idea. However, consider how likely you’ll change between now and when you return. Your tastes in house, your preference in what state, even kids or not?… all could be different in a few years, right?

      Also, consider that renters will NOT treat your house as you would treat your future home. And, if you decided to use that address as a permanent address, then you’re talking about some significant/important papers coming to …your renters. Better always have a great relationship with trustworthy renters to have such mail arriving at their house!

      So, if you’re asking me if this is a good strategy, I’d say no. Best to use a family address, or use a rented mailbox service for keeping a permanent US address.

      Hope that helps.

      Cheers,
      -Jeff

  6. Thanks Jeff! I am planning to use my parents’ address here as well. Your response is appreciated. Will be returning to your website. Chris

  7. I’m an ex-pat from the US living in Canada having FINALLY gotten my permanent residency on a family sponsorship in March of 2014. I live east of Dartmouth too, by the ocean…how sweet it is! Okay, my question is this. I draw social security and state retirement from the U.S. (which of course is deposited into my US bank accoutns) and I also work FOR the state of Missouri while I’m here via computer, a part time job maybe netting me 10K a year with no taxes taken out since I am a subcontractor. I have been here since March 31, 2014. I realize I will have to file both Canadian and US taxes and will have to get a tax man or woman who is savvy about this. Any advice you can give me? For some reason, I feel that I must be breaking the law somehow….

    1. Hey there.
      First – congratulations on (finally) getting your PR status. How long did it take you? Took me about 2 years (there’s a post about the final interview on here; seems common to be about 18-22 months from application to interview).

      So, I e-mailed you back as well. My short answer is: you’re right about having to file in both countries. And it’s complicated. Way more so than when living in the US.
      Now, because I am not a financial planner or a finance consultant, I have to be careful suggesting what exact actions you need to take, or else I can get my blog into trouble.
      I don’t have personal experience about drawing SS and state retirement, but I can share with you offline about your filing obligations and the best people here who can help you professionally.

      Take care and thank you for the comment!
      -Jeff

  8. Hi Jeff, I’ve been reading your blog and wanted to get your thoughts on a potential move for my husband and I from the US to Toronto. This is a great job opportunity for me and I may only be in Canada for a couple of years but I am concerned about the increased cost of living in Canada, losing my BCBS insurance coverage in the US and becoming an expat overall. Aren’t the Canadian income tax rates higher than the US?
    Thanks,
    Lydia

    1. Hi Lydia,

      Thanks for your comment. Sorry for replying a few days late. You pose some great questions, but before I can answer them I need to ask a few more questions.
      Is the TO (Toronto) position from your current employer, as in they are relocating you? If so, are you consider a temporary expat worker, continuing your current salary in $US? If yes to both, then your situation is very different from say, a new job/employer, being paid in Canadian $ for TO’s cost-of-living.

      Maybe you could e-mail me directly, if you don’t feel comfortable with more detail in a comment.

      Looking forward to helping a fellow American come to Canada,
      -Jeff

  9. Hi Jeff,

    I am an ExPat contractor working exclusively in Afghanistan. I arrived in August, 2016 and will remain overseas working until August, 2017 (I meet the criteria for the 330 day federal exclusion rule). I permanent residence is in Ohio. My question is two fold: 1) Am I obligated to pay any Ohio personal income tax for 2016 if I ONLY worked in Afghanistan during 2016? and 2) if I did have to pay income tax in 2016, would Ohio have something similar to the federal 330 day exclusion rule, wherein I would be able to not be assessed Ohio tax since I was outside the country for a period in excess of 330 day?

  10. Hi Jeff!
    What do you think about an American living in France (for over 330 days a year), who works as a freelance editor/writer for US organizations (and is paid in US dollars via direct deposit to US bank). If I am living in another country for well over the 330 days per year mark, do you think this would qualify for the no-income tax benefit? Also, since I am not in France on a work Visa, and therefore do not make money here (it’s all US based) i am not paying income taxes here either, although I believe that i may be required to do that if i am here for a few years. Thanks for any thoughts!!

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