Navigating U.S. taxes as an American expat living abroad can be confusing, but it’s crucial to understand your obligations. 

The United States taxes its citizens and resident aliens on worldwide income, no matter where they live. 

This article outlines the U.S. tax system for expats covering key terms, filing requirements, common mistakes, deadlines, and practical tips to stay compliant and avoid penalties.

Overview Of The U.S. Tax System For Expats

Unlike many countries, the U.S. follows a citizenship-based taxation model. 

This means if you are a U.S. citizen or a resident alien (more on this term below), you must file U.S. tax returns and potentially pay U.S. taxes even while living abroad. 

In other words, your obligation to the IRS doesn’t end when you move overseas. You are generally required to report all income from all sources worldwide on your U.S. tax return.

To prevent double taxation (being taxed by both the U.S. and your country of residence on the same income), the tax code provides relief in the form of credits and exclusions. 

Two key provisions are the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC). 

The FEIE allows qualifying expats to exclude a certain amount of foreign earned income from U.S. tax – for example, up to $126,500 of foreign salary in tax year 2024. The Foreign Tax Credit, on the other hand, lets you offset U.S. tax with taxes paid to a foreign country. These benefits recognize that expats often pay taxes abroad, but you only get them by filing a U.S. return. Even if you owe nothing to the IRS after using exclusions or credits, you still must file to claim these benefits and meet your legal requirements.

Key Tax Terms Expats Should Know

Understanding a few basic tax terms will help make sense of your U.S. filing obligations:

• Tax Return – A tax return is the annual form or set of forms you file with the IRS to report your income, deductions, credits, and calculate any tax owed or refund due. For individual expats, this usually means filing Form 1040 (the U.S. Individual Income Tax Return) each year. In simple terms, it’s your annual report to the IRS on your finances. Even if you live abroad, if your income is above the filing threshold for your status, you need to submit a tax return to remain compliant.

• FBAR (Foreign Bank Account Report) – The FBAR is a separate reporting requirement for foreign financial accounts. If you are a U.S. person (citizen or resident) and the total value of your foreign bank accounts exceeds $10,000 at any time during the year, you must file an FBAR (officially FinCEN Form 114). This is not a tax form per se (no tax is calculated on it), but an informational report to the U.S. Treasury. The FBAR is filed online through the Treasury’s FinCEN system, not with your tax return. Even accounts that produce no income must be reported if the aggregate balance hit the $10k mark. Failing to file an FBAR when required can result in severe penalties, so it’s a crucial obligation for expats with foreign accounts.

• Resident Alien – In tax terms, a resident alien is a non-U.S. citizen who is treated as a U.S. resident for tax purposes. This generally means someone who either has a green card (Lawful Permanent Resident status) or meets the IRS substantial presence test (based on days spent in the U.S.). A resident alien’s U.S. tax responsibilities are essentially the same as those of a U.S. citizen: they must report and potentially pay U.S. tax on their worldwide income. For example, a foreign national working in the U.S. on a long-term assignment may become a resident alien and be subject to U.S. taxes on global income just like an American expat would be.

• Non-Resident Alien (NRA) – A non-resident alien is a non-U.S. citizen who does not meet the green card or substantial presence test for U.S. tax residency. NRAs are generally taxed only on their U.S.-source income (for instance, income from working in the U.S. or investment income from U.S. assets). They do not have to report worldwide income. For expats, this term comes up if, say, you’re an American married to a non-U.S. citizen – your foreign spouse is considered a non-resident alien for U.S. tax purposes (unless they choose to be treated as a resident alien by election). It’s important to know the difference, because U.S. tax rules and filing status options differ depending on whether a spouse is a resident alien or NRA.

Who Must File And What To Report As An Expat

Filing Requirements

All U.S. citizens or resident aliens must file a U.S. income tax return if their income is above certain minimum thresholds, which vary by filing status and age. These thresholds are usually equivalent to the standard deduction (for example, around $14,600 for a single filer under 65 in the 2023 tax year). 

In many cases, expats meet these filing minimums. In fact, if you’re married to a foreign spouse and file separately, you may have to file if you earned just $5 or more in income. The point is, don’t assume you’re off the hook just because your income is below the Foreign Earned Income Exclusion amount or because you owe no tax. Expats still need to file annual returns if their gross income exceeds the normal filing threshold for their situation.

Worldwide Income

When filing, you must report all forms of income from everywhere: salary from a foreign employer, freelance or business income, investment earnings, pensions, rental income, etc. The IRS expects expats to report worldwide income every year—not just U.S. source income. 

If you’ve paid taxes to a foreign government on that income, you can typically claim a Foreign Tax Credit to offset U.S. tax, and if you qualify, you can use the Foreign Earned Income Exclusion to exclude foreign wage or self-employment income up to the limit. But these benefits must be claimed on a filed return; they’re not automatic. 

Failing to report an income source – even if by accident – is a common mistake that can raise an IRS red flag, especially now that under FATCA (Foreign Account Tax Compliance Act), foreign banks report financial info of U.S. account holders to the IRS. In short, the IRS has ways to know about your foreign income, so it’s best to be transparent and report everything truthfully.

Foreign Assets And Accounts

In addition to your tax return, expats need to be aware of separate reporting requirements for foreign assets.

• FBAR – As explained, if your combined foreign account balances exceed $10,000 at any point in the year, you must file an FBAR. This includes not just bank accounts, but also foreign investment accounts, certain retirement accounts, or even accounts where you have signature authority but no ownership (for example, if you can sign on a parent’s or employer’s foreign account). The FBAR is an annual online filing due April 15 (it’s automatically extended to October 15 each year). It’s important to file the FBAR on time – there’s no tax to pay on it, but penalties for missing it can be steep.

• FATCA Form 8938 – Under FATCA, certain expats may also need to file Form 8938 (Statement of Specified Foreign Financial Assets) with their tax return. 

This form overlaps with the FBAR in some ways but has different thresholds and covers a broader range of foreign assets. 

For instance, Form 8938 requires reporting foreign financial assets (bank accounts, investment accounts, foreign stocks or bonds, foreign mutual funds, etc.) if their total value exceeds a higher threshold – for example, a married couple filing jointly and living abroad would file Form 8938 only if their foreign assets exceed $400,000 on the last day of the year or $600,000 at any time during the year (lower thresholds apply for single filers or those living in the U.S.).

The exact threshold varies by filing status and whether you reside abroad or in the U.S.. Not every expat will meet these limits, but if you do, Form 8938 is required in addition to the FBAR. Like the FBAR, failing to report assets on Form 8938 when required can lead to penalties.

In summary, most expats need to report their worldwide income on Form 1040, and if they have foreign accounts or assets, be mindful of FBAR and FATCA Form 8938 requirements. It’s wise to keep records of your foreign income (pay slips, bank statements, etc.) and the highest balances of your accounts so you can report accurately. Remember: reporting does not always mean owing tax, but not reporting can lead to big problems.

Deadlines, Extensions, And Avoiding Penalties

Tax Return Deadlines

The standard deadline for filing a U.S. individual tax return is April 15 of each year (for the prior calendar year’s income).

The good news for expats is that if you are living abroad on April 15, the IRS gives you an automatic 2-month filing extension to June 15 . 

You don’t have to file any form to get this automatic extension, but it’s a good idea to attach a statement to your return noting you were abroad and eligible for the automatic extension.

If June 15 still isn’t enough time, you can request a further extension to October 15 by filing Form 4868 before June 15 . 

In special cases (and with a proper request), expats can even get an extension to December. 

However, be careful: an extension to file is not an extension to pay any tax due. 

If you end up owing U.S. tax for the year, interest starts accruing from April 15 onward, even if you filed for an extension. 

To avoid interest and penalties, it’s best to pay an estimated amount by April 15 if you suspect you’ll owe anything, or as soon as possible.

FBAR Deadline

The FBAR follows a similar schedule – it’s due April 15 as well, but FinCEN grants an automatic extension to October 15 every year. You don’t need to file any form for that FBAR extension; it’s automatic if you miss the April deadline. Essentially, October 15 is the final due date for the FBAR. Mark your calendar and don’t forget this separate filing.

Avoiding Penalties

Missing deadlines or failing to file required forms can result in penalties. 

For the tax return itself, the failure-to-file penalty can be harsh (typically 5% of the unpaid tax per month late, up to 25%), and a failure-to-pay penalty (0.5% of unpaid tax per month) may apply if you don’t pay on time. Even if you can’t pay right away, always file your return (or an extension) on time to minimize penalties. 

The IRS will usually work with you on payment plans, but not filing is seen as more serious. If you owe $0 but file late, you won’t have a failure-to-pay penalty, but a late filing can still trigger a monetary penalty if you were required to file. In short, meet your deadlines – and if you can’t, get the automatic extensions available to expats and pay what you can by April 15.

For the FBAR and other information returns (like Form 8938, or forms for foreign trusts or corporations if those apply), penalties can reach into the tens of thousands of dollars, even if no tax was due, because these are primarily about reporting compliance. 

The FBAR, for example, can carry a civil penalty of up to $10,000 for non-wilful violations, and much more if the violation is found to be wilful. 

The IRS has increasingly enforced these rules, so don’t treat them lightly. 

The safest course is to file all required forms on time and fully disclose what’s required. If you realize you’ve missed something (like forgetting an FBAR in a prior year), consider seeking advice on how to correct it – the IRS has amnesty programs (such as the Streamlined Filing Compliance Procedures) to help expats catch up on late filings penalty-free if the lapses were non-wilful.

Common Tax Mistakes And Risks For Expats

Even well-intentioned expats can slip up on U.S. tax obligations. 

Here are some common mistakes and compliance risks to watch out for:

• Assuming You Don’t Need To File – A pervasive myth is that if you live abroad or your income is under the FEIE limit, you don’t have to file a U.S. return. In reality, all U.S. citizens or residents with income over the filing threshold must file annual returns, regardless of where they live. 

Thousands of expats fail to file each year, often simply because they aren’t aware they need to. Not filing is one of the biggest red flags to the IRS and can lead to problems down the line. Remember, you may not owe tax due to exclusions/credits, but you still need to file to claim those and inform the IRS of your income.

• Reporting Only U.S. Income – Some expats do file U.S. taxes but omit their foreign income, mistakenly thinking that income earned abroad isn’t taxable or doesn’t need to be reported. This is incorrect – as mentioned, the U.S. taxes worldwide income. 

If you earned money overseas (salary, business income, interest, etc.), it must be included on your U.S. return, even if it will be excluded or offset by a credit. Failing to report foreign income can not only negate your eligibility for things like the FEIE, but it also looks like you’re trying to hide money. 

With FATCA in effect since 2010, the IRS often receives information on your foreign accounts and earnings from foreign banks. In short, they likely already know about that overseas salary or bank interest, so don’t leave it off your return.

• Forgetting To File FBAR/8938 – Another frequent mistake is neglecting the FBAR or Form 8938 reporting. 

These forms can be easy to overlook because they don’t involve paying tax, and expats may not even realize they exist until after they’ve missed a deadline. Not reporting a foreign account or asset when required is a serious compliance issue. 

An expat might think, “It’s just a savings account in my country of residence – why would the U.S. care?” But the law is the law: if the thresholds are met, you must file the FBAR and/or Form 8938. 

The IRS and Treasury have cracked down on offshore account reporting in the past decade, issuing hefty penalties to some who wilfully hid assets. Most expats who miss these forms do so by accident, but it’s an expensive accident to make. Always check each year if your accounts crossed the $10k FBAR limit or if your assets require Form 8938, and err on the side of reporting if unsure.

• Missing Deadlines Or Extensions – Life abroad can be busy, and it’s easy for tax deadlines to sneak up on you – especially with different filing dates than the local taxes in your country. Many expats file late or not at all simply due to poor deadline management. 

Missing the April 15 (or June 15 automatic expat extension) deadline without filing an extension can lead to late-filing penalties that add up. Likewise, forgetting the FBAR by October 15 could draw unwanted attention. The risk here is not just fines, but also the stress of knowing you’re behind on compliance. 

Mark your calendar with U.S. tax dates, use reminders, and if needed, get professional help to ensure you meet all deadlines. It’s far easier to file on time than to explain to the IRS later why you didn’t.

• Not Using Available Tax Benefits (Or Using Them Incorrectly) – Expats have access to special tax provisions like the FEIE, Foreign Housing Exclusion, and Foreign Tax Credit. 

A common mistake is not taking advantage of these, which can lead to overpaying U.S. taxes. 

For example, if you paid foreign income taxes, you should claim the Foreign Tax Credit to reduce your U.S. tax bill – otherwise you’re paying tax twice. 

On the flip side, some expats misunderstand these rules and claim something they shouldn’t, or double-dip (for instance, excluding income with FEIE and also claiming a credit on the same income, which isn’t allowed). 

Claiming large exclusions or credits you aren’t eligible for can raise a red flag in the IRS system. 

Always ensure you meet the criteria (like the 330-day presence test for the FEIE ) and fill out the required forms (Form 2555 for the FEIE, Form 1116 for the Foreign Tax Credit) accurately. If done right, these provisions are completely legal and beneficial. 

If done wrong, they can trigger an audit or additional taxes. When in doubt, consult a tax professional to get these right.

• Overlooking Filing Status Options – Expats who are married might not realize how their choice of filing status can affect their taxes and obligations. 

For instance, if you’re married to a non-U.S. citizen (non-resident alien), you generally cannot file jointly unless you make a special election to treat your spouse as a U.S. resident for tax purposes. 

If you don’t make that election, you’ll file as Married Filing Separately – which, as noted, can mean a very low income threshold (often effectively $5) for having to file a return. 

Some expats miss out on beneficial options, like electing to file jointly with a foreign spouse (which can allow a higher standard deduction, but also means your spouse’s income is subject to U.S. tax – a complex decision). 

Make sure you understand your filing status choices and their consequences. Likewise, if you have dependent children abroad, look into claiming the Child Tax Credit or Foreign Tax Credit for any foreign taxes paid on their behalf. Misunderstanding filing status and dependency rules can be a pitfall.

• Assuming The IRS Won’t Notice – In years past, some expats took the approach of “out of sight, out of mind” regarding U.S. taxes. 

This is increasingly risky. 

Not only does FATCA enable the IRS to receive data on Americans abroad, but there’s evidence that Americans overseas are more likely to be audited than domestic taxpayers. 

The IRS knows expat taxes can be complex, and they use automated systems to flag irregularities (like unreported foreign accounts or large exclusions). 

It’s a mistake to assume you can fly under the radar indefinitely. 

If you haven’t been filing because you were unaware of the requirements, the IRS offers programs (like the Streamlined Procedure) to come clean without facing penalties. 

But if you wilfully ignore your obligations and the IRS catches up, the outcome could be much worse – including potential fines or even loss of your passport in extreme tax delinquency cases. The bottom line: take compliance seriously, because the IRS certainly does.

By being aware of these common pitfalls, you can take steps to avoid them. Most mistakes are avoidable with a bit of knowledge and careful record-keeping.

Examples Of Expat Tax Scenarios

Every expat’s situation is a little different. 

Let’s look at a few example scenarios to see how U.S. tax rules apply in practice:

Single Filer Living Abroad

Scenario: Jane is a single U.S. citizen living and working in Australia. She earns the equivalent of $80,000 per year from an Australian employer and pays Australian income taxes on that salary. 

She also has an Australian bank account that at one point held $15,000 in savings.

How U.S. Taxes Apply: Jane must file a U.S. tax return because her income ($80k) is well above the filing threshold (even if it were below, since it’s above about $13k she’d still need to file). On her U.S. return, she will report her $80k salary as income. 

To avoid double taxation, she has options: she could use the Foreign Earned Income Exclusion (FEIE) to exclude $80k (which is under the limit of around $126,500 for the year) from U.S. taxation, or she could claim a Foreign Tax Credit for the Australian taxes she paid. 

She’ll choose the method that benefits her most (often, if the foreign tax rate is higher than U.S., the tax credit works well; if the foreign tax is lower, FEIE might save more). Either way, by using these provisions, she will likely owe little to no U.S. tax – but she still files the return to report everything and claim the exclusion or credit. 

Additionally, because her Australian bank account exceeded $10,000, she needs to file an FBAR by October 15 to report that account . 

If the total value of all her foreign financial assets is below the Form 8938 threshold (which for a single filer abroad is $200k at year-end), she wouldn’t need to file Form 8938. In Jane’s case, only the bank account of $15k is relevant and that is below $200k, so no Form 8938, just the FBAR. By filing these, Jane stays compliant and avoids penalties.

Key Takeaway: Even if you’re a single expat who owes nothing to the IRS due to foreign exclusions/credits, you must file a return and required asset reports. This keeps you in good standing and ensures you legally claim the tax benefits available.

Married To A U.S. Citizen (Both Spouses Abroad)

Scenario: John and Alice are a married couple, both U.S. citizens, living in Australia. 

John works for an Australian company and earned $100,000; Alice is self-employed and earned $50,000. They have two kids (U.S. citizen dependents) and joint foreign bank accounts that peaked at $25,000 during the year.

How U.S. Taxes Apply: John and Alice can choose to file their U.S. taxes as Married Filing Jointly, which generally offers a higher standard deduction and other benefits. 

They will report John’s $100k and Alice’s $50k, plus any other income (if Alice’s self-employment generated any business profit, that counts too). 

Since both are abroad all year, they likely qualify for the FEIE. 

They could each exclude their foreign earned income: John could use the FEIE on his $100k and Alice on her $50k (each spouse can exclude up to the limit, around $126,500 each, so all their earned income can be excluded). 

They would file Form 2555 for each spouse to claim the exclusion. 

Alternatively, if Australia’s income tax on those earnings is higher, they might choose to use the Foreign Tax Credit instead (filing Form 1116) to offset U.S. tax with Australian tax paid. 

They’ll also get to claim their children as dependents and possibly the Child Tax Credit, just as if they lived in the U.S. (note: the refundable Additional Child Tax Credit is available to expats only if they have earned income above a certain amount and taxes paid – this gets a bit detailed, but the key is they follow mostly the same rules).

Because they have foreign bank accounts exceeding $10k combined, they must file an FBAR reporting those accounts. 

Since they file jointly, they can submit one FBAR listing both as joint owners of the accounts. 

They should also check the threshold for Form 8938: for a joint return by a couple abroad, the threshold is $400,000 at year end (or $600k at any time). Their $25k in accounts is way below that, so no Form 8938 needed.

Key Takeaway: Married American expats can file jointly and effectively double the amount of foreign income they can shield via the FEIE (each can claim it) – in this case excluding all $150k of income – but they must file to claim these benefits. They also need to report foreign accounts. Being married doesn’t reduce the FBAR or FATCA reporting duties: those still apply jointly if thresholds are met. By coordinating their filing, John and Alice can minimize U.S. tax (likely to $0 after exclusions/credits) while staying fully compliant.

Working Remotely From Overseas (Digital Nomad)

Scenario: Sara is a U.S. citizen who spent the year moving between several countries in Asia and Latin America, working remotely as a freelance graphic designer. 

She has no fixed employer – she does gig work for clients worldwide, earning about $70,000 over the year. 

She didn’t establish tax residency in any one foreign country (she was traveling), and she did not pay taxes to any foreign government on that income. 

She kept her money in a U.S. bank account and a digital wallet, with only a small foreign bank account in Thailand where she briefly stayed (balance never above $5,000).

How U.S. Taxes Apply: Sara is still fully responsible for U.S. taxes on her freelance income. 

In fact, because she didn’t pay any foreign income tax, the Foreign Tax Credit isn’t applicable (there’s no foreign tax to credit). 

However, she can use the Foreign Earned Income Exclusion if she meets one of the qualifying tests. 

Since she’s a digital nomad, the likely test is the Physical Presence Test – she must show she was outside the U.S. for at least 330 days in a 12-month period that overlaps with the tax year. 

If she meets that (which, if she only had brief visits back to the U.S., she will), she can exclude up to $126,500 of her freelance income. 

Her $70k falls under that cap, so by filing Form 2555 with her 1040, she could exclude it and owe no U.S. income tax on it. 

But importantly, because she’s self-employed, U.S. self-employment tax (Social Security/Medicare) may still apply on that $70k even if income tax is excluded. 

Unless she falls under a Totalization Agreement (agreements the U.S. has with some countries to coordinate Social Security taxes), Sara is supposed to pay self-employment tax to the U.S. (approximately 15.3% of her net self-employment income). 

Some expats overlook this – but the FEIE does not waive Social Security tax. 

If she had instead been paying into a foreign country’s social system and that country had a treaty with the U.S., she might be exempt from U.S. self-employment tax. 

It gets technical, but she should be aware of this aspect. 

From an income tax perspective though, Sara can likely eliminate U.S. income tax via the FEIE.

Since Sara’s foreign bank account never exceeded $10k, she does not need to file an FBAR in this scenario. 

And her foreign financial assets are minimal, so no Form 8938 either. Her main task is to file her U.S. tax return reporting the $70k and then excluding it with FEIE. 

If she doesn’t file, the IRS doesn’t know she qualifies for the exclusion – they might assume she owes tax on $70k and could flag her for not filing. 

By filing and using the FEIE, she stays on the right side of the law and avoids a surprise IRS notice.

Key Takeaway: Even “digital nomads” and remote workers with no fixed address abroad must file U.S. taxes. In some ways, they need to be extra careful: without a foreign tax home, the Physical Presence Test is their ticket to the FEIE. Planning travel to ensure 330+ days abroad is crucial. Also, remember U.S. self-employment tax can still bite. Always evaluate both income tax and social tax obligations when working for yourself abroad.

Practical Tips For Staying Compliant And Avoiding IRS Scrutiny

Filing U.S. taxes from abroad doesn’t have to be a nightmare. 

Here are some practical tips to ensure compliance and keep the IRS happy while you enjoy life overseas:

• Stay Organized And Keep Good Records – Maintain a file (digital or physical) with all relevant documents each year. 

This includes W-2s or 1099s from U.S. payers, but also foreign pay slips, records of foreign taxes paid, bank statements showing year-end balances (for FBAR/FATCA), and any other proof of income or deductions. 

Good records make it much easier to file accurately and defend your figures in case of any questions. 

For example, if you claim the Foreign Housing Exclusion, keep receipts of rent and utilities.

If you claim the Physical Presence Test, keep travel logs or passport stamps as evidence of your days abroad. 

Having documentation ensures you can substantiate your claims and avoid trouble if audited.

• Mind Your Dates And Plan Ahead – As mentioned, mark your calendar with the key deadlines: April 15 (tax payment due), June 15 (expat return due if not extending), October 15 (extended return due and FBAR final due). 

If you know you’ll need more time, file Form 4868 by June 15 to push to October. Set reminders a month before to gather documents or reach out to a tax preparer. 

If you’re expecting a refund, filing earlier is better; if you think you owe, at least calculate and pay by April to stop interest. 

Also, if you move frequently, consider setting up a U.S. mailing address (like a family member’s or a mail forwarding service) or ensure you update your address with the IRS, so any correspondence reaches you. Missing an IRS letter because it went to an old address can escalate an issue unnecessarily.

• Don’t Skip Reporting Requirements – Make It A Checklist Item Every Year: “Do I need to file an FBAR? Form 8938? Any other forms?”. 

If you had any non-U.S. financial accounts, total their max balances to see if you cross $10k – if yes, do the FBAR. If you owned shares in a foreign corporation, or a foreign mutual fund, or you’re the beneficiary of a foreign trust, research the forms (Form 5471 for foreign corps, Form 8621 for PFICs like foreign mutual funds, Form 3520 for trusts/gifts, etc.). 

These can be complex, but they’re important. When in doubt, consult a tax professional versed in expat issues; they can identify which extra forms apply to you. It’s much better to file an informational form that might not end up being needed than to ignore it and face a penalty. Compliance is key – the more transparent you are with the IRS, the less likely they’ll have reason to scrutinize you.

• Use Direct Deposit And Online Tools – If you expect a refund, set up direct deposit to a U.S. bank account (it’s faster and more secure, and yes, you can receive a refund while abroad). Create an account on the IRS website to access your tax transcripts and notices electronically. 

This can be helpful to track your filing history or any communications. 

The IRS also has an Interactive Tax Assistant and many online FAQs that can clarify common questions for expats. And remember, you can electronically file (e-file) your return from abroad – you don’t have to mail paper forms across the ocean. E-filing is typically faster and reduces errors.

• Leverage Tax Treaties And Professional Advice If Needed – The U.S. has tax treaties with many countries that can affect how certain income is taxed (for example, a treaty might exempt certain pension income, or clarify residency in dual-resident situations). 

• Voluntary Compliance And Amnesty – If you realize you’ve missed filings in past years, don’t panic. The IRS offers pathways to get back on track. The most common for expats is the Streamlined Filing Compliance Procedures, which is essentially an amnesty program for those who failed to file or report foreign assets due to non-wilful neglect. It generally requires you to file the last 3 years of tax returns and 6 years of FBARs, and the IRS will forgive the penalties. 

Taking advantage of this can wipe the slate clean. 

What you shouldn’t do is continue ignoring the issue or attempt a “quiet disclosure” (just sending in old forms without noting you’re in a program) – that can backfire. 

Show good faith by coming forward under the proper procedures. 

The IRS is usually much harsher on those who wilfully evade taxes than those who genuinely didn’t know and then corrected their mistakes.

• Be Truthful And Thorough – This may sound obvious, but always be honest on your tax forms. 

Overstating deductions, underreporting income, or hiding accounts isn’t worth the risk. 

The IRS has become quite sophisticated in detecting discrepancies. With data sharing between countries (FATCA) and improved technology, trying to outsmart the system could lead to an audit or investigation. 

Most expats who file properly and pay what’s due (or legitimately owe nothing) will not hear from the IRS aside from maybe a refund check or a confirmation. Those who cut corners, however, might invite extra scrutiny. It’s simply not worth it. 

If you make an honest mistake, that’s one thing – the IRS can be understanding – but if you intentionally omit things, the penalties can be severe if discovered. Play it safe by filing complete and accurate returns.

By following these tips and staying informed about your responsibilities, you can significantly reduce the likelihood of IRS problems. Being an expat is exciting and comes with many life changes; by handling your U.S. taxes diligently, you’ll have one less thing to worry about.

Final Thoughts

U.S. tax obligations don’t disappear when you move abroad, but with knowledge and preparation, they become just another manageable aspect of expat life. 

To recap, always remember that U.S. persons abroad must report their worldwide income and often their foreign accounts. 

Take advantage of provisions like the FEIE and Foreign Tax Credit to avoid double taxation – these exist to help you, but you must file to use them . 

Keep an eye on deadlines (utilize that automatic expat extension to June 15, but pay by April if you owe) and don’t ignore additional forms like the FBAR. 

Common mistakes like not filing or failing to report something can lead to penalties or audits, especially since the IRS has increased its focus on international compliance. 

The good news is, if you stay compliant and informed, you can avoid penalties and IRS scrutiny while fulfilling your civic duties as an American abroad.

With the United Kingdom preparing to abolish the non-domiciled (“non-dom”) tax status from April 6, 2025, many Australians are considering the tax impact of returning home. See our article Australians Living In The UK: How The New “Non-Dom Tax” Changes May Affect You.

Whether you make the decision to return home before the tax changes take place, or you remain in the UK until after the new laws impact you, when you return home it is important to manage your UK tax exit obligations.

Simple Checklist For Australians Returning From The UK

1. Confirm UK tax residency status and apply for split-year treatment (if eligible).

2. File a final UK tax return and settle any outstanding liabilities.

3. Plan capital gains tax-efficiently (consider selling non-UK assets after leaving to avoid UK CGT).

4. Transfer UK savings and close unnecessary UK bank accounts.

5. If keeping UK property, register with HMRC’s Non-Resident Landlord Scheme and  ensure that you continue to file UK tax returns as a non-resident.

6. Seek advice on Australian taxes and ensure your Australian tax return is prepared in accordance with Australian tax residence rules, including declaring worldwide income.

7. Review foreign asset disclosures and pension tax treatment with the ATO.

8. Be mindful of the 10-year UK IHT rule for former UK residents9- Use the UK-Australia Double Tax Agreement to mitigate double taxation.

The Key Differences For Australians Returning To Australia Before vs After The UK’s New Non-Dom Rules (April 6, 2025)

The timing of departure from the UK will significantly impact an Australian’s tax obligations in both the UK and Australia. The key differences arise in capital gains tax (CGT), inheritance tax (IHT), and foreign income treatment.

1. UK Capital Gains Tax (CGT) Implications On Worldwide Assets

The Key Difference for CGT purposes is that leaving before April 2025 allows Australians to sell non-UK assets CGT-free under the remittance basis. Individuals leaving after April 2025 may still owe UK CGT on global assets if they were UK residents for more than 4 years.

2. UK Inheritance Tax (IHT) Exposure

The key difference for IHT exposure is that before April 2025 a non-domiciled resident does not have their worldwide assets caught in UK IHT rules when they leave the UK. Leaving after April 2025 can expose them to UK IHT for up to 10 years if they were a UK tax resident for a decade or more.

3. UK Tax On Foreign Income And Remittances

Non-domiciled individuals who leave before April 2025 avoid retrospective taxation on foreign income and remittances. Leaving after April 2025 could mean more UK tax on past foreign income, depending on transition arrangements.

4. Remittance Of Foreign Income Into The UK

Prior to 2025 a non-domiciled resident would avoid UK taxes on foreign income if they did not bring this income into the UK.

Under the new UK tax rules all foreign income is taxable in the UK after the first four years, regardless of whether the income is brought into the UK or not. It is important to ensure that your Australian income isn’t brought into the UK prior to 6 April 2025 if you want to avoid UK taxes on that income.

After 6 April 2025 you may be exempt from paying UK taxes under the four-year exemption rule. If you are not exempt under this rule you may be able to bring previously untaxed foreign income into the UK under a reduced tax rate if a decision to designate this income for remittance into the UK is made before the end of the 2028 financial year. Foreign income earned from 6 April 2025 (other than income earned under the 4 year exemption rule) will be taxable, regardless of whether it is remitted into the UK or not.

5. UK Property And Rental Income

The rules remain similar in that UK rental income will continue to be taxable in the UK as the country of source, as well as being taxable in Australia as the country of residence. However, the CGT rules may be stricter for UK purposes for former UK residents, meaning that the key difference is that an individual returning to Australia may see better CGT outcomes if they sell their UK property before they leave. As this will depend on specific factors, it is important to obtain correct tax advice for your specific situation prior to making your move back to Australia.

 6. Australian Tax Treatment Upon Returning

Regardless of when an individual returns, Australians:

a) Will immediately become Australian tax residents and be taxed on their worldwide income for Australian tax purposes.

b) Must declare UK rental income, pension withdrawals, and foreign bank accounts.

c) May claim foreign tax credits for UK tax paid on income still sourced in the UK.

Leaving before April 2025 gives returning Australians more flexibility to clear UK tax obligations before Australian tax residency resumes.

Overview Of Tax Impact Of Australian Leaving Before Or After April 2025

Factor	Before April 6, 2025 (Old Rules)	After April 6, 2025 (New Rules)
UK CGT On Worldwide Assets	No CGT on non-UK assets	Worldwide assets taxable if UK resident 4+ years
UK Inheritance Tax (IHT)	Only applies to UK assets	Worldwide estate taxed if UK resident 10+ years
UK Tax On Foreign Income	Foreign income not taxed if remitted after leaving	Worldwide income taxable if UK resident 4+ years
Bringing Foreign Income Money Into The UK	UK tax only applies when remitted to the UK	UK tax applies on worldwide income (after the first four years) and possible UK tax on past foreign income if repatriated
Australian Tax Impact On Moving Back To Australia	Becomes tax resident immediately, but avoids UK transition issues	Still becomes tax resident of Australia, but may owe UK taxes on past foreign income

Summary

Australians who leave the UK before April 6, 2025 will avoid new UK tax burdens on foreign assets, income, and IHT. Anyone staying past April 2025 or moving to the UK after this date, may face unexpected UK tax liabilities which may continue even after leaving.

These changes mark a significant departure from the UK’s previous tax regime. Understanding these changes is important when assessing a decision around how long you plan to live in the UK, and how this may impact your current tax obligations, as well as the tax impact on your estate.

Whether you are still making your decision on living in the UK, or need to understand the tax consequences of your decision, it is important to engage an international tax specialist who can provide up to date and accurate information tailored to your specific situation.

The United Kingdom is prepared to abolish the non-domiciled (“non-dom”) tax status from April 6, 2025. This is a significant reform which will mean that all UK residents, regardless of their domicile, will be taxed on their worldwide income.

Current Tax Rules In The UK For Non-Domiciled Individuals

Under the current tax rules Australians who live in the UK are taxed according to their domicile status and the nature of their income. An Australian who is not domiciled in the UK may make a claim to be taxed on foreign income on a remittance basis, meaning you are only taxed on any UK-source income and gains plus any foreign income remitted to the UK.

They are also able to return home to Australia without worrying about any ongoing impact of UK taxes for anything other than assets that remain in the UK.

How The UK Tax Rules Are Changing

There are a number of key aspects of the proposed changes which could have a significant impact on Australians in the UK. These include:

1. Abolition Of The Remittance Basis

Under the new system, individuals will be taxed on their worldwide income, similar to the way that Australian residents are taxed on their worldwide income. This means that while living in the UK you will need to include any income that you earn from Australian investments or income sources in other countries, even if you don’t bring that money into the UK.

2. Introduction Of A Four-Year Foreign Income And Gains Regime

On the positive side, new arrivals to the UK, who have not been UK tax residents in the previous ten consecutive years, will benefit from a new four-year period during which they receive 100% relief on foreign income and gains. This relief applies irrespective of whether the income is remitted to the UK. This effectively allows individuals to live in the UK for 4 years without having to worry about the consequences of bringing in their overseas income, and may make it more appealing for Australians to live in the UK on a short term basis that does not exceed this four year period. 

3. Imposing Inheritance Tax (IHT) Even After Departure From The UK

The domicile-based system for IHT will be replaced with a residence-based system. In addition, expats who return to Australia after the new rules are in place may be exposed to IHT for up to 10 years after leaving the UK. This makes estate planning more complex for any Australians living in or returning from the UK.

4. Capital Gains (CGT) On Worldwide Capital Gains

Australians who previously benefited from the remittance basis will now face UK CGT on all gains from worldwide assets, even if those gains are not brought into the UK.

Transitional Rules

There are a number of transitional rules that will help ease UK residents into the new tax system.

Individuals who have previously been non-domiciled and used the remittance basis of taxation will have the option to value their foreign capital assets as of April 5, 2017. This creates a new capital base value to avoid CGT applications on the increase of value up to that date.

Current non-dom individuals will also have access to a transitional discounted tax rates on their previously unremitted foreign income and gains until the 2028 tax year.

Practical Steps To Take If You Stay In The UK After April 6, 2025

Australians who are currently non-domiciled residents of the UK, who decide to stay in the UK, should take practical steps to minimise their UK tax exposure and optimise their financial position. Key actions include:

1. Revaluing assets held outside the UK prior to April 2017 for CGT purposes.
2. Selling assets before April 2025 if advantageous.
3. Utilising transitional tax reliefs by obtaining the right advice from a tax specialist.
4. Maximising the four-year tax exemption (if eligible).
5. Reviewing investment strategies, retirement planning and estate planning strategies to factor in the new tax consequences of remaining in the UK.
6. When assessing the timing of potentially returning to Australia, consider the impact of Inheritance taxes if you live in the UK for 10 years or more.
7. Keep clear records and obtain up to date tax advice to mitigate tax consequences.

It is important to engage an international tax specialist to complete a personalised assessment for tax planning in your specific situation.

Revalue Australian (And Other Foreign) Assets

You should obtain formal or independent valuations for properties, shares, and other investments as of 6 April 2017.

The UK is offering a one-time rebasing relief, allowing individuals who previously used the remittance basis to revalue their foreign assets to April 6, 2017, for Capital Gains Tax (CGT) purposes. This means only gains accrued after April 6, 2017, will be subject to UK CGT when the asset is sold. This relief is not applicable if you were deemed to be domiciled at some point between 6 April 2017 and the introduction of the new tax laws on 6 April 2025.

Plan Asset Sales Before April 2025

If you are planning to sell Australian assets:

a) Consider if there is an overall benefit in selling these assets before April 6, 2025 to avoid UK CGT.

b) If selling after April 2025, use the rebasing relief to reduce taxable gains.

c) Review whether holding assets via a trust or corporate structure might help in specific cases. If so, it may be possible to sell individually owned assets to a corporate structure that you control prior to April 6 2025.

After April 2025, all worldwide capital gains (including on Australian assets) will be taxed in the UK unless you are living in the UK for less than 4 years.

Use Transitional Tax Discounts

Take advantage of any transitional rules where possible.

a)    If receiving Australian rental income, dividends, or business profits, consider bringing forward earnings to take advantage of this discount.

b) If withdrawing funds from an Australian trust or investment portfolio, consider timing withdrawals within this period.

For tax relief that is based on timing and access to transitional rules it is important to obtain correct and up to date tax information from the relevant tax specialist.

Consider How To Utilise The Four-Year Foreign Income And Gains Exemption For New Arrivals

If you have not been a UK resident in the previous 10 years then you can utilise the new four-year foreign income exemption.

a) New and recent arrivals in the UK should utilise this period of exemption to plan and structure income sources for optimal tax outcomes.

b) Where you have control over timing of income, consider triggering capital gains or significant foreign income events within the four-year exemption period.

Notably, under the new rules the four-year exemption applies regardless of whether the funds are brought into the UK. This means that any Australians who were not UK tax residents in the previous 10 years will not be taxed on foreign income or gains for their first four years in the UK. This gives Australians a good opportunity to live in the UK on a short-term basis without being impacted by the new rules.

Review Australian Superannuation And Pension Taxation

Engage a tax specialist to complete tax planning strategies for your retirement and review any current and upcoming lump sum or pension income.

a) Obtain long term advice on tax planning strategies that take into consideration the way the new rules will impact any UK tax on lump sum withdrawals or pension income from Australian super funds.

b) If applicable, time superannuation withdrawals strategically before tax rates increase.

c) Consider the types of investment income you are currently earning from Australia. Understanding the tax consequences of these changes gives you the opportunity to assess optimising your ongoing investment and income strategies.

With the tax rules changing, it is important to understand how this could impact your long-term and immediate investment and retirement plans so you can make informed decisions about your finances.

Plan For UK Inheritance Tax (IHT) On Worldwide Assets

The UK imposes an inheritance tax (IHT). Under the new rules IHT will apply to worldwide assets.

a) Consider trusts or corporate structures to protect assets from UK IHT.

b) Review wills and estate planning to align with both UK and Australian tax laws.

c) If planning to leave the UK, remember IHT exposure may continue for 10 years after departure.

Under the new rules, individuals who have been a UK tax resident for 10+ years will be subject to IHT on worldwide assets. This includes Australian property, shares, and businesses. It is therefore important to revise your inheritance strategies if you will be a long term UK tax resident. You should also consider the impact of IHT when assessing timing for making a move back to Australia, as you may be able to avoid IHT by making an earlier move.

Maximise Double Tax Relief And Tax Credits

Talk to an international tax specialist to ensure you have appropriate, current and up to date tax planning strategies in place that consider the new rules. With the UK taxing worldwide income it will be more important to utilise double taxation relief provisions to minimise your tax exposure.

a) Keep detailed tax records to claim foreign tax credits efficiently.

b) Engage an international tax advisor to structure investments efficiently.

The UK-Australia DTA can mitigate double taxation, but relief must be claimed properly as certain income types (e.g., rental income) may still be taxable in both countries.

In Summary 

The new rules will have a significant impact on Australians living in the UK, both while they are living in the UK, and when they return home. For more about the tax implications of returning to Australia under the new rules see our article Australians Living In The UK: Returning To Australia Under The New Non-Dom UK Rules.

While the new rules may reduce the tax impact of residing in the UK for a period of less than four years, long-term residents will now be liable for UK taxes on their worldwide income. This is a significant departure from the current income remittance rules and will mean any Australian currently residing in the UK should seek tax advice regarding their worldwide assets and investments. 

The current remittance basis tax regime will be replaced by a residence based regime from 6 April 2025.

Foreign Income And Gains

Existing non domiciled individuals who have been resident in the UK for less than 4 years will be able to take advantage of the new scheme which provides for tax free foreign income and gains for up to the first four years of residence.

Longer term UK residents (greater than four years) will have to pay tax on all foreign income and gains from 6 April 2025.  However, transitional arrangements will mean that:

• For the 2025/26 tax year they will only pay UK tax on 50% of their foreign income arising in that year;
• Foreign income and gains arising before 6 April 2025 will be able to be remitted to the UK in the 2025/26 and 2026/27 tax years at a temporary 12% tax rate;
• Foreign assets will be able to be re-based to 5 April 2019 value for disposals after 6 April 2025
• Foreign income and gains arising on non-resident settlor interested trusts will not be taxed unless the income and or gains are paid to UK residents.

Overseas Workdays Relief

Non-UK domiciled individuals are currently able to claim tax relief for earnings from duties overseas for up to three years of UK residence – subject to not remitting the funds to the UK.

The Government is to consult on reforming the current regime.  However, it has been confirmed that the basic relief will remain, but the restriction on remittance will be removed.  This will be a welcome simplification for many.

Inheritance Tax

The Government will consult on changes to the inheritance tax regime in light of removing domicile and changing to a residence based regime.

However, to provide certainty, they have confirmed that the treatment of non-UK assets settled into a trust by a non-UK domiciled settlor prior to April 2025 will not change. 

Summary

It is clear that the Government’s intention is to encourage capital inflows into the UK rather than provide disincentives to do so.

However, many long term non domiciled UK residents will be significantly impacted from 6 April 2025 – although the 50% restriction on income and gains subject to tax for that year will be a welcome relief.

Less clear is the position around inheritance tax.  We would welcome clarification in this regard at the earliest opportunity.

Richard Feakins, Director of CST London, recently contributed to an article on the Australian Financial Review – UK’s new tax slug could force expat Aussies home – read Richard’s contribution here.

When you live and work solely in one country, tax residency is straightforward. However, if you are living away from your home country or living between multiple countries, then determining tax residency is complicated.

One of the difficulties in determining tax residency is that the laws applied to residency differ in each country. This means you may simultaneously meet the residency requirements in multiple countries within a given tax period. Alternatively, if you live a particularly transitory life, it may be difficult to identify primary residency.

Note that tax residency is different to citizenship or visa residency. This article discusses what you need to know about tax residency.

Why Residency Matters

As each country has their own rules for taxation, it is important to know which country has taxation rights over you as an individual resident. This is why residency is such a foundational concept.

Being a tax resident of multiple countries has potential implications on how your worldwide income is taxed. Generally, your country of residence has primary taxing rights over your income. It also raises double taxation concerns, with competing tax jurisdictions aiming to potentially tax the same income. As countries sometimes tax the same income, a dual tax resident could face significant tax consequences. For this reason, tax treaties between countries exist to help resolve conflicting taxation rights, including determining tax residency.

As this can be a particularly complex issue it is important to ensure that you consult with qualified tax professionals who are familiar with the tax laws of each country. The following information provides a general overview of the potential tax consequences of being a tax resident in multiple countries.

Taxation Rights

Once residency is determined, your country of residence will have the primary taxing rights. Income that is taxable from other sources will be taxed as income earned by a non-resident.

Double Tax Agreements (DTAs) between countries cover a range of factors to help mitigate double taxation issues, including who has primary taxing rights of specific types of income and can include limitations on the taxing rights of the country where the taxpayer is a non-resident.

For countries that tax on a territorial basis, the country of residence might only legislate taxation over income derived from the country of residence, or foreign income that is remitted into the country.

However, countries that tax on a worldwide basis assess all income earned by the individual, regardless of the source of income.

In either case, DTAs, and other tax relief provisions help alleviate the impact of being taxed in multiple countries. This typically means that when you pay foreign tax on foreign sourced income, your country of residence will count this tax towards the tax they assess on this income.

Tax Residency

As each country has its own rules for determining residency, your first step is working out whether you are a resident in each country that you are connected to. To give an example of how this works we consider the tax residency rules of Australia, Singapore, the USA and the UK.

Tax Residency In Australia

How Residency Is Determined

There are a number of tests used to determine residency in Australia, which are essentially designed to determine whether Australia is your home. This means that you are an Australian tax resident if you reside in Australia, or intend to reside in Australia for a significant period of time, and you have a permanent home there.

If you are an Australian permanent resident who is living and working overseas on a temporary basis, you may still be considered a tax resident of  Australia. If you have not established a permanent place of abode outside Australia, then your Australian tax residency will continue. A permanent place of abode is a place where you live and consider your home. This means you may still be considered an Australian tax resident even if you are not physically present in Australia for a given tax year. Individuals who are not Australian citizens may also remain Australian tax residents if they travel overseas for short periods of time, while maintaining their home in Australia.

In an income tax year where you become or cease being a resident you will be considered a part-year tax resident.

Income Taxes as a Resident

Australian tax residents are assessed on worldwide income. This includes all forms of income including capital gains.

Tax Residency In Singapore

How Residency Is Determined

In Singapore you are a tax resident when you are physically present in Singapore for at least 183 days in a calendar year.

Income Taxes as a Resident

Singapore tax residents are typically only required to pay tax on Singapore sourced income, or foreign income that is brought into Singapore. Singapore does not tax capital gains.

Tax Residency In The USA

How Residency Is Determined

In the USA, all US citizens and dual citizens are required to lodge a tax return to declare their worldwide income, regardless of their tax residency.

Non-citizens are tax residents if they hold a Green Card that legally allows permanent residency.

Tax residency is determined by a physical presence test. This test requires physical presence in the USA for at least 31 days in the relevant calendar year, after being present for a specific number of days totalling at least 183 days over the preceding two years.

Income Taxes as a Resident

Both citizens and tax residents of the USA are taxed on their worldwide income. Citizens are taxed on worldwide income even if they no longer reside in the US and do not meet the residency test. There are some foreign earning exclusions for individuals who meet specific requirements.

Tax Residency In The UK

How Residency Is Determined

In the UK you are a tax resident under the Statutory Residence Test. This test considers a range of factors including the number of days you are present in the UK, your connections to the country, and other relevant criteria.

The UK has an automatic overseas test. This means if you spend less than 16 days in the UK (or less than 46 days if you have not been a UK resident for the previous 3 tax years), or you are working abroad full-time and spend less than 91 days in the UK, then you are a non-resident.

There are three automatic resident tests:

1. You are present in the UK for at least 183 days.
2. Your only home is in the UK for at least 91 days in a row, and you visited or stayed for at least 30 days in the tax year.
3.  You worked full time in the UK for any period of 365 days and at least one of those days falls in the tax year you’re checking.

Where you do not meet either automatic test the “sufficient ties test” will determine if you are a resident. This test considers your UK connections, including family, accommodation, work, and physical presence, over a number of years.

Income Taxes as a Resident

UK tax residents are taxed on their worldwide income. However, non-UK sourced income may be exempt from UK taxation in certain circumstances.

Dual Residency

As can be seen from the various residency tests of just these four countries, there is variety in how residency is determined and the tax implications this could lead to. Given the variation in tests, you could easily be considered a resident of multiple countries over a single tax year.

When an individual is a tax resident in multiple countries the next step is to determine if there are tie breaker rules contained in a DTA. These rules provide guidance on determining an individual’s primary place of residence.

Residency Tie Breaker Rules

Most countries adopt the Mutual Agreement Procedure, specifically Article 4 of the OECD Model Tax Convention, to resolve dual residence situations. Accordingly, there is a fairly standard set of tie breaker rules across various DTAs. These tiebreaker rules are outlined as follows:

1. Permanent Home – Where you have a permanent home in one country but not the other, you will be a resident of the country where your home is located.
2. Centre of Vital Interests – The country in which you have closer personal and economic connections will be your country of residence. This may include family and personal ties, social and economic activities such as work and club memberships, and where you keep your main assets.
3. Habitual Above – Where neither of the previous tests assist, the country where you regularly abide or reside in will be your country of residence.
4. Nationality – Where none of the previous tests assist you will be a resident of the country in which you are a national.

In most cases an individual will be able to determine their residence using one of these tie breaker rules.

When it comes to Australia, Singapore, the USA and the UK, most of these countries adopt comprehensive DTAs between one another, in which Article 4 of the OECD Model Tax Convention is essentially utilised. This includes the DTAs between the following countries:

• Australia and Singapore
• Australia and the USA
• Australia and the UK
• Singapore and the UK       
• The UK and the USA

Notably, there is no DTA between Singapore and the USA. This means that dual residents of Singapore and the USA will need to rely on the taxation rules and access to tax relief options in each country in order to avoid double taxation.

Dual Tax Residents

In very rare cases an individual may have sufficient ties to multiple countries in which they are either not a citizen, or in which they hold dual citizenship, leading to a situation whereby they may not be able to effectively use tie breaker residency rules to accurately determine their country of residence. This creates a complex situation wherein no country has clear priority for determining tax residency and a decision regarding residency is subjective.

This situation could theoretically lead to an individual being subject to taxes being assessed on their worldwide income in multiple tax jurisdictions. The Mutual Agreement Procedure contained in some DTAs enables a taxpayer to request the competent authority in one country to engage with their counterparts in another country to resolve double taxation.

Managing Dual Tax Residency

In summary, determining residency is an important factor because it determines which tax jurisdiction has primary taxation rights.

DTAs exist to help mitigate the risk of double taxation by providing tie breaker rules in determining residency and placing restrictions or limitations on taxation rights over certain types of income, as well as providing tax relief through the recognition of foreign tax credits.

Where no DTA exists, or where an individual’s residency cannot be determined, other provisions are required to mitigate the impact of double taxation. 

Tax residency can be a very complex area and it is recommended you seek specialist international tax advice for your particular situation. 

Many private clients heading to abroad may already have a trust in their home country or a 3^rd Country.

Historically trusts have been attractive vehicles because they offer people the potential of protecting their wealth from external attacks, but it can also help lower the burden of taxation on a family group.

For those who do not have a trust as yet but who are considering establishing a trust, a great deal of thought and planning needs to go into it.

We make sure our clients understand the four golden rules of setting up a trust:

1. Ensure the bank or financial advisory firm managing your money does not own the trustee company that will be the trustee of your trust. This prevents a conflict of interest.
2. Understand how you can unwind the trust arrangement.
3. Recognise that long-term solutions require tax contingency planning before you sign on the dotted line. As your residency can change, so can your tax position.
4. Make sure you understand how you can access trust income and/or capital to pay taxes that may become due on the gains of the trust.

Before delving into some further issues associated with trust management, I will cover just a few central points about how trusts work for those who may not have worked with trusts.

How Trusts Work

A trust is an arrangement whereby a trustee has a fiduciary obligation to deal with property over which they have control for the benefit of one or more beneficiaries who are able to enforce such an obligation.

Beneficiaries may be individuals, corporations, or indeed other trusts (such as a charitable trust).

All trusts have a trust deed. 

At a high level, this is a document that outlines the rules that the trustee must follow in relation to the property they control.

Common objectives for utilising trusts are to protect assets and ensure that beneficiaries are deable to benefit financially from the trust in a manner that suits the family group and in accordance with the wishes of the settlor of the trust.

The discretionary trust is the most common trust used by business owners and investors. 

They are generally set up to hold family and/or business assets for the benefit of providing asset protection and tax-planning benefits for family members.

The Trust Deed: Its Importance

The trust deed is the most important document of a trust as it establishes and defines terms and conditions upon which the trust must be operated and managed.

More specifically, the trust deed sets out the beneficiaries of the trust, as well as the end date of the trust and the conditions upon which the trustee holds the property for the beneficiaries.

Actions undertaken outside the provisions set out in the trust deed can be deemed by a court of appropriate jurisdiction to be null and void. 

The implications of an action being null, and void can reach further than the act simply being treated as if it did not occur.

An invalid act of a trustee can result in unwanted taxation implications for the trustee, and a breach of the trustee’s duties can lead to personal liability for damages or alternatively unwanted consequences for beneficiaries.

The best approach in dealing with trust management and planning is to treat every trust deed as unique and therefore refer to the provisions in the deed prior to taking any action.

How Are Trusts Taxed?

While a trust is regarded as a taxpayer in some countries (e.g., Australia), in other countries this is not the case. 

In some countries, the beneficiary is taxed on gains accruing in the trust; in others, it is the original settlor who suffers the tax burden.

Changing Residency With a Trust

One aspect of trust management and planning to get right when you have a trust is to ensure that assets are not unwittingly ‘exported’ into certain tax jurisdictions when you change your tax residency status.

If you want to set up a trust, then before you move to a particular country it is important to understand how a trust determines its residency status under the laws of that country.

In Australia, a trust is regarded as a tax resident of Australia if one of the trustees is a tax resident of Australia. 

However, in other jurisdictions, the concept of central management and control of the trust is used to determine the residency status of the trust.

It is important to work through all the residency aspects likely to impact your trust when you move around with an existing trust.

The key point to note is that it can be a useful exercise to transfer assets from an individual to a trust prior to changing residency and heading overseas. 

However, like most things, this strategy has its pros and cons.

Trusts Heading Overseas: Residency Determination

In the Australian context, where an individual trustee of an Australian trust changes residence, then, often, the trust will also change its residence.

In these cases, you need to make sure that when the trustee changes its residence, the tax consequences are identified.

Before you depart you need to consider whether it is beneficial to you and your family for the trust to stay a resident in your home country where it was established or if it makes sense for the trust to move with you to your new country.

If the immediate and ongoing tax consequences of keeping the trust in its particular form are not advantageous to you then we can discuss alternative strategies with you.

Such strategies may include replacing the trustee of the trust with a company that is domiciled in the jurisdiction to which you are moving and make the trust subject to the laws of that jurisdiction. 

In other situations, it may be more appropriate for a replacement trustee to be appointed in a third jurisdiction and have the trust reside in a 3^rd country.

The purpose of the discussion here is to highlight the fact that planning for a departing trust is very important.

Our approach to this area is to recognise that trusts are long-term family vehicles, and just because a client may move to a new country, it does not mean that they should have to wind up their trust and forgo all the benefits that it has provided them.

Given our international tax and trust knowledge, we will be able to help our client make important decisions such as this.

Trusts Arriving Abroad

Moving around the world while being in control of trusts is complicated and should not be done lightly.

Arriving in another country with a trust and no plan is a recipe for disaster.

Where a new individual client has changed their residence and they are the trustee of a foreign trust, it is clear that this trust is also likely to become a resident of the arrival country.

In other cases, even if the client ceases being the trustee before they change their residence specific jurisdictions tax income on ‘pre-migration transfer of assets’ to foreign trusts. 

It is also likely that the trust deed may need a review as some of its definitions and terms may have no meaning in the new country the trust is being exported to.

Even if the trust is residing in a 3^rd country, a review of the trust deed from the perspective of the laws of the new country is warranted.

Other concepts, which might be recognised abroad, such as ‘community title’, might be used in the trust deed, but these concepts might have no application in the arrival country.

The arriving trust may still have reporting obligations in the country in which it was established. 

It may also be the case that there are foreign protectors or other people who have an ongoing role in the management of the trust.

You should consider how they are affected in terms of reporting based on the country you are moving to.

This is particularly important if the arriving trust has a business or significant assets.

Often, the cost base of trust assets must be understood on the day the trust first enters a new country.

Usually this will be the market value of the assets on the day of the trust’s arrival, but not always.

While your move abroad is an exciting time for most people and full of challenges and new opportunities, considering the tax issues of how your trust would be affected by your move is essential.

Similar to the need for you to plan your departing tax issues on the way out of your home country there is a major need to plan what your tax profile will be when you arrive in your new country. 

Sometimes, however, it is easy to assume that arriving in another country has no tax consequences and that can make things difficult.

A recent client example springs to mind.

David Smith (not his real name), an expat relocating from Singapore to the US (upon his retirement), decided to access his Australian superannuation fund.

What a mistake that was.

In Australia, pension payments for those over 60 years of age are tax free.

This is, however, not the case in the US.

David had worked out that he and his wife could afford to live in the US the way they envisaged, based on paying no US federal or state tax.

They were quite shocked when we told them that the US would tax David’s Australian-sourced pension stream.

It was not a great conversation.

Key Items To Consider

Set out below are some of the key things you need to consider ahead of your arrival:

• Complying with the requirements of more than one tax jurisdiction (are tax credits available for any foreign tax paid?)

• Accounting for a new tax and legal system (are you moving to a country that has a civil law regime or a common law regime?)

• Understanding the tax issues associated with moving to the arrival country (does the country you are moving to have a general anti avoidance regime that targets tax planning?)

• Considering how foreign assets are accounted for (is foreign income exempt or is it non-taxable there is a big difference between the two)

• Locating other professional service providers to work with (do not assume your foreign tax advisor has international tax experience as this is often not the case)

How Will Your Assets Be Treated?

In some jurisdictions the moment you arrive in the country you are treated as having bought all your foreign assets at the market value of the date you became a tax resident.

This means that a ‘cost base’ has been established for your foreign assets.

Then when you sell those assets in future – a gain or loss can be worked out in relation to those assets. Australia is one such jurisdiction that treats your assets this way.

Other jurisdictions such as the US – do not give you this ‘step up’ in value.

This is a serious problem as you can end up paying a lot of tax to the Internal Revenue Service – based on the original cost of your assets which may have been many years ago.

This is grossly unfair, as most of any gain will have happened while you were a US non-resident – particularly if you sell the asset shortly after you arrive in the US (you may want to sell foreign assets to buy a house in the US for example!)

Your arrival must be carefully planned as the ramifications of an ill-prepared arrival can be costly. 

If you undertake a proper tax planning exercise before you leave, then the thrill of arriving in your new country is not shaken up by the bad news of unintended tax issues. 

Moving abroad is one of the most challenging things that many of us will do.

My move to Singapore in March 2004 was a completely foreign experience in so many respects. There are so many logistical challenges to deal with that often tax planning is left until you arrive.

This of course is way too late.

This article covers some issues to address ahead of time.

Exit Taxes

An example of an issue that frequently arises is the issue of ‘exit tax’; that is, the act of leaving one country may trigger the deemed sale of all your assets held in your home country. 

Hence, it pays to know if the country you are leaving has an ‘exit tax’ as this can have quite serious consequences for you.

Tax Elections

It is also worth considering whether you can exercise any ‘tax elections’ as to how you may be able to obtain concessional tax treatment as you depart your home country.

For example, in Australia, one of the things to consider depending upon the particular asset, is whether you choose to be treated for tax purposes as ‘retaining some of your assets’.

Though you may move abroad, that does not mean that all your assets need to go with you.

Lodging an election to retain some of your assets for tax purposes in your home country, may give you a bit more flexibility as to the tax treatment available when you decide to sell them.

Creating a Trust in a 3rd Country

For a number of reasons, including tax planning, asset protection and risk mitigation, many people wish to hold their assets in a third country, through some type of trust.

Part of the planning you may choose to do before your move to a new country, is considering whether you should establish a pre migration trust in a 3rd country before you move to the country where you will work.

Often this will lead to a better tax outcome than ‘taking all your assets’ with you.

Many countries do not have tax regimes which tax foreign trusts, and therefore, income accumulating therein is not taxable in the country of your tax residence.

Tax Regime For Expats

In the planning phase of where you might go to work overseas, one important consideration is to consider whether the country you are moving to has a ‘concessional’ or ‘modified’ tax regime for expats.

Some countries, have particularly favourable tax regimes for expats.

As an example, some concessional tax regimes e.g., Japan, Belgium, Korea to name a few, may only tax expats on income arising in their country during the first five years of the expat’s tax residence in the country. 

These transitional rules are generally designed to provide an incentive to work in their country.

Other countries, such as the US, tax expats living in the US on passive income accruing in their home country structures.

Unique Residency Status

Another factor for you to consider when planning your move abroad, is the type of residency that you, the ‘departing expat’, will be taking up in your new country.

In some countries, there are unique residency statuses that can have different tax implications for you. 

An example of this includes the ‘temporary resident’ status in Australia.

This type of residence status imposes a different tax outcome as compared to general residence, and they can provide some additional flexibility in your tax position upon arrival.

Restructuring Your Existing Company or Trusts

It is vital to understand how your existing tax structures may have to be ‘restructured’ before you leave the country.

In some cases, a restructure may only involve changes to the office holders of a company or trustee of a trust.

For example, the residency of the trustee determines the residency status of a trust in Australia. 

If the intention is to keep the trust a tax resident of Australia, then this may be achieved simply with the resignation of the current trustee (the departing expat) and the appointment of another individual who will remain in Australia.

In other cases, it may be possible to issue or transfer shares to a family member to ensure that the company you have in your home country is not caught by the controlled foreign corporation rules when you arrive in your new country.

Most expats moving overseas will have some form of pension or superannuation plan.

In my experience changing one’s tax residence does not of itself impact how that pension plan is treated in most jurisdictions. However, some particular complex jurisdictions, like the United States of America, have egregious tax laws that often cause unintended consequences for arriving expatriates.

A US Example

One of my clients moving to the US was adversely affected by the international tax rules of the US with respect to foreign pensions. My client, Peter, had built up a sizeable superannuation (pension fund) balance in Australia. It was the product of 30 years working in the film and entertainment business. Over the previous ten years, Peter had been a senior executive working for a chain of movie theatres in Singapore. As such, international tax had not crossed his mind much. Peter and his wife, Helen, had grandchildren living in Santa Monica. They were keen to retire and enjoy the good life in a new location. Peter had calculated that he would be able to fund his future Santa Monica lifestyle through a combination of personal savings and by accessing his Australian pension. Everything was set.

Pension payments in Australia were tax free, so Peter thought that Uncle Sam would also not tax them. Unfortunately, that was not the case. In the US, such income streams are taxable if you are a US tax resident. We stopped Peter sending his pension to the US in the nick of time. We collapsed Peter’s Australian pension and enabled Peter to take his capital to the US and invest it in the US tax efficiently. Disaster averted.

This case study highlights why, in order to enjoy your pension, you must consider the impact of foreign tax laws when you are changing jurisdiction

Countries have different rules

In delivering service to clients, we consider the impact of any overseas move on their home country pension. The underlying motivation for establishing a pension fund is typically based on a desire to save funds for retirement so that there is no reliance on government pensions. 

Thus, it means that having the maximum amount available in the pension plan that is not eroded by taxation, is a primary objective. It is folly to think that a tax-advantaged regime in one country with respect to pension funds will axiomatically apply in another country. That is rarely the case.

Moving your Pension Plan

We have extensive knowledge of the taxation issues relevant to pensions and superannuation. 

This enables us to assist clients with compliance and planning in relation to this important area of their lives. When expats leave their home country to move abroad, there are many aspects of tax that need to be considered prior to departure and pension fund planning is often a priority.

For those expats that have their pension fund in the UK, it may actually be worthwhile moving their pension with them. There are particular rules to address this. A Qualifying Recognised Overseas Pension Scheme (QROPS) is an overseas pension scheme that meets certain requirements set by Her Majesty’s Revenue and Customs (HMRC). A QROPS can receive transfers of UK pension benefits without incurring an unauthorised payment and scheme sanction charge.

In Australia, for example, pension funds are only considered to be complying under the governing legislation if they remain within the Australian tax jurisdiction. This means, that the trustee must remain an Australian resident. Therefore, in the case of an expat, relocation can inadvertently trigger a tax liability. Steps need to be taken prior to departure.

Complying in multiple countries

Similarly, many expats arrive in a new country with their home country pension fund in place.  Therefore, they must adhere to the rules in their home country and their arrival country in relation to this pension fund. One of the specialist skills we possess is in advising clients how foreign pension plans will be treated as they move around the globe. We can assist clients on QROPS and other similar regimes.

Moving abroad is an exciting time for most people. If you undertake proper planning with respect to your pension plan before you leave, then the thrill of arriving in your new country is not shaken up by the bad news that you have created unintended tax issues by leaving your home country in an unplanned way.

Australia does not have an inheritance tax. When a person dies, the estate, or person who inherits the assets does not have to consider any special inheritance tax on the money or assets that are taking ownership of. While a beneficiary may be required to pay taxes from Superannuation death benefit payments, or capital gains on the sale of assets that have been inherited if those assets are sold, there is no specific tax levied on the value of inherited assets. 

However, there are many countries that do have inheritance taxes, including the United Kingdom. 

This means that when an Australian inherits money or assets from abroad, they may find themselves subject to an unfamiliar “inheritance tax”.

What is inheritance tax?

In a similar vein, estate taxes are levied on the value that is paid out of a deceased’s estate. The estate is required to pay these taxes, rather than the beneficiary. This means that the beneficiary receives the net assets after the estate has paid any required.

In some countries these taxes are referred to as “death duty”.

The laws around inheritance taxes vary between tax jurisdictions. There may be different tax rates, different inclusions on what type of assets are taxed and different types of exemptions or limits.

Some countries like the United Kingdom levy inheritance taxes where assets are transferred to trusts and for this reason many British expats should seek inheritance tax advice before establishing a trust in Australia.

When would an Australian resident be required to pay Inheritance taxes?

As an Australian resident you are not subject to inheritance tax, regardless of where the inheritance is coming from. However the deceased estate may be subject to estate taxes prior to paying or transferring your inheritance to you.

In essence this means you, as an individual taxpayer, do not have to be concerned about being assessed for specific inheritance taxes.

What taxes does an Australian need to be aware of when inheriting assets from overseas?

1. Ongoing earnings from the inherited estate

When you receive money from an inheritance you may be subject to taxation on any of the amounts that have been earned as income, and were not already taxed within the estate. This is because a deceased individual may continue to gather income after their date of death. If there is a delay between the date of ownership of the estate assets being transferred to you and the physical transfer of such assets to you then you may personally be assessed on such income. The executor of the estate would make you aware of any income amounts that this may apply to.

Furthermore, any ongoing income that you earn from inherited assets will be taxed under ordinary taxation laws. For example, if you inherit a business, you will be subject to any income tax on the ongoing business earnings once the business has been transferred to you. If you inherit an investment property then you will be subject to income tax on the ongoing rental income that you earn once the property has been transferred to you.

Since we are talking about inheritance from an overseas estate, it is important to note that you may also continue to be subject to taxes in the country in which the inherited asset is located. In this situation most countries have a double tax agreement with Australia which will typically ensure that you are limited to paying taxes based on the country that has the highest income (or capital gains) tax rate.

2. Capital Gains Tax

Sometimes a deceased estate may be liquidated so that the beneficiaries are simply paid out in cash. Other times beneficiaries may be bequeathed assets such as property, shares, a family business, collectables, or other assets.

Under Australian Capital Gains Tax laws the date of death is typically used as the date you acquired the asset, with the market value of the asset at this point in time being your cost base. This means that when you eventually sell the asset you will be subject to capital gains tax on any capital gain made on this sale.

There may be some exclusions. For instance if you inherit a family home and move into or continue to live in that home, then you may be exempt from capital gains under the main residence exemption.

3. Superannuation Death Benefits

A superannuation death benefit may be paid to you as a lump sum or an income stream. Typically a lump sum death benefit is tax-free where you were a dependent of the deceased. If you were not a dependent, or you receive a superannuation death benefit income stream, then you may be subject to taxes on part of the death benefit, depending on the components of the benefit paid.

4.  Bringing money into Australia

If you have inherited cash from an overseas estate you also need to be aware of the impact of transferring funds from overseas into Australia.

Foreign currency can be treated as a CGT asset. This means that when you withdraw money from an overseas bank account you are triggering a taxable event. This is because exchange rate valuations fluctuate and there can be a difference between the value of what you originally inherit and the value of what ends up in your Australian bank account, purely because of these exchange rate fluctuations.

This means that you may be taxed on any increased value of the overseas money, from the time of inheritance to the time the funds are transferred to your Australian bank account.

Inheriting money from overseas

In simple terms, inheriting money from an overseas estate is similar to inheriting money from within Australia. While you will not personally be assessed on inheritance taxes, you do need to consider other taxes based on the ongoing benefits earned through the inheritance.

The biggest difference is the added complications that inheriting from overseas may impose, including:

• Potential capital gains tax on exchange rate fluctuations when withdrawing foreign currency
• Estate taxes imposed on the estate that are paid prior to distributing your inheritance
• Foreign taxes imposed on continuing to hold onto any foreign assets or investments

Once you receive the inheritance the assets or money received are yours. This means that their ongoing use and benefit are assessed, where applicable, in your hands, just as any ordinary assets or finances that you earn or invest in yourself, would be.