Businesswoman considering tax obligations for working or living abroad.

Tax Obligations for U.S. Citizens Working or Living Abroad

Many employees take opportunities to live and work in various parts of the world but may have concerns about their U.S. tax obligations for working or living abroad.

We want to alert you to the tax implications you might encounter as a U.S. citizen living or working abroad. We’re going to use Switzerland in our examples.

As a U.S. citizen, you remain subject to U.S. tax obligations, even living abroad. But your government has granted you certain tax breaks and mechanisms to mitigate the risk of being doubly taxed by the U.S. and Switzerland on your income. Here are the key points:

  • Foreign Earned Income Exclusion allows you to exclude a portion of the wages you earned in Switzerland from your U.S. taxable income, up to $120,000 for 2023.
  • Housing Exclusion/Deduction allows you to exclude or deduct a certain amount of foreign housing costs, including rent, utilities (excluding telephone), and insurance.
  • Foreign Tax Credit helps you avoid double taxation by reducing your U.S. tax liability by the taxes you’ve paid in Switzerland.

The income and housing exclusions require that you pass a residency test. You have two choices: the physical presence test or the bona fide residence test. The physical presence test requires you to reside in Switzerland for at least 330 days within 12 months. The bona fide residence test requires you to live abroad for the entire tax year.

Another essential point to remember is reporting your foreign financial accounts. Suppose the combined value of all your foreign financial accounts exceeds $10,000 at any time during the year. In that case, you must file the Report of Foreign Bank and Financial Accounts (FBAR) and potentially Form 8938 for additional disclosures.

Moreover, the U.S. has income tax treaties with many countries, including Switzerland, that can influence your tax obligations. These treaties help prevent double taxation. They could also allow you to be eligible for certain credits, deductions, exemptions, and reductions in the rate of taxes on certain items of income you receive outside the U.S.

Finally, it’s crucial to note that international agreements known as “totalization agreements” eliminate double Social Security taxation. The U.S. has such agreements with 25 foreign countries. These agreements provide exemptions from the Federal Insurance Contributions Act (FICA) taxes. This is incase if your earnings are subject to similar taxes under the social security system of a foreign country.

If you have questions about tax obligations for working or living abroad or need further clarification, don’t hesitate to contact us for answers.

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