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U.S. Tax Abroad FAQs
Frequently Asked Tax Questions
Foreign IncomeQ: I received some dividends from a company in the United States from which United States income tax was withheld. My neighbour told me that I have to report the dividends on my tax return and pay tax on it again. Why do I have to pay tax on the same income twice?
A: Residents must pay tax to their "foreign tax home" on their worldwide income even though foreign income may also be taxed in the country from which it arises. However, to avoid double taxation, individuals who pay income or profits tax to a foreign country are allowed a foreign tax credit to offset the foreign taxes paid. Generally, any tax withheld at source for US investments may be refundable in the "foreign tax home" or the U.S.
Q: I receive Social Security retirement benefits from the United States. Should I be paying tax to the United States government for these benefits?
A: U.S. Social Security benefits paid to a resident of other countries may be fully exempt from tax in the United States and partially exempt from tax in their foreign tax home. The entire amount of benefits is reported as income on your foreign tax home tax return and the possible exempt portion is claimed as a deduction.
Emmigrating AbroadQ: I am a U.S. resident working in a foreign country on a one-year contract. I have not brought my family with me and I will be returning to the United States as soon as my contract has finished. Am I considered to be an "immigrant" to the foreign country for tax purposes?
A: No. Because you will be considered a resident of the United States under the various U.S. and Foreign Tax Treaties, you will be treated as a non-resident for the foreign country's tax purposes. This means you will not be taxable to the foreign country on your world income. However, you will be taxable on your foreign country employment income unless the total remuneration received in the year was less than $10,000 or you were in the foreign country for not more than 183 days and your remuneration was borne by a source outside the USA.
Q: I immigrated from the U.S. on July 1. Will I be taxed on my income for the whole year?
A: No. You will be taxed on that portion of your world income you earned after you established residential ties here. The only types of income earned before that which are taxable are foreign-source employment income, business income or scholarship income, or capital gains from the disposition of Taxable Foreign Property. "Taxable Foreign Property" is a technical term that includes real estate situated in the foreign country, but not publicly traded shares.
Q: Can I claim the expenses I incurred in moving to a foreign country?
A: You can only claim your expenses incurred in moving from the USA if you are a full-time student at a post-secondary institution. You may then deduct your expenses against any income you have from scholarships, fellowships, bursaries or research grants from that institution.
Q: I am immigrating to a foreign country later this year. Is there anything I can do to avoid paying more tax than I have to?
A: If you are expecting to receive any lump-sum payments (for example, a retiring allowance from your employer), you should try and time it so that you receive them before you establish residential ties abroad, otherwise they will be included in your income for foreign tax residency tax purposes. You may also want to consider the possibility of transferring some of your investments to a non-resident trust before you leave. As long as the income is retained in the trust, it will not be taxable in the foreign country until you have been there for five years.
Moving to the United StatesQ: Should I cash in my Retirement Savings before I move to the U.S.?
A: In most cases, it is not advisable to cash in your Retirement Savings before you move to the U.S. If you collapse your Retirement Savings while resident abroad, you will be taxed at your marginal rate for that year. If you wait until you move, lump sums will be taxed at a higher rate. If you leave the money in until you convert it to an annuity, the tax rate abroad drops.
Q: Will I have to file a tax return for my home country after I move?
A: If your move is temporary and you do not sever your foreign residential ties, you will have to continue filing a foreign return every year, reporting your world income. If you are making a permanent move and severing your foreign residential ties, you will have to file as a part-year resident in the year you move. In subsequent years, you will not have to file a foreign return unless you have foreign source employment or business income or dispose of taxable foreign property.