Do I Still Have to Pay Taxes If I Move Out of the Country?
Understand how moving abroad impacts your U.S. tax obligations, including residency rules, exclusions, credits, and reporting requirements.
Moving to another country doesn’t mean you can stop paying taxes in your home country. Many governments, including the United States, tax their citizens and residents on worldwide income. Failing to understand these rules can lead to unexpected tax bills or penalties.
There are ways to reduce or eliminate double taxation, but compliance with tax laws is essential. Understanding how residency status, foreign income exclusions, and tax credits work will help you avoid costly mistakes.
Residency Status Rules
Where you live and how long you stay there determine whether you still owe taxes to your home country. Many nations use residency-based taxation, meaning if you meet certain criteria, you remain subject to their tax laws even after moving abroad. The United States follows a citizenship-based taxation system, requiring U.S. citizens and green card holders to file taxes regardless of residence. Other countries, like Canada and the United Kingdom, use residency tests to assess tax obligations.
Residency is often determined by physical presence and ties to the home country. The U.S. applies the Substantial Presence Test, which considers whether an individual has spent at least 183 days in the country over a three-year period using a weighted formula. Canada evaluates residency based on significant ties, such as maintaining a home, having a spouse or dependents in the country, or retaining provincial health coverage. The U.K. uses the Statutory Residence Test, which factors in the number of days spent in the country, work commitments, and available accommodations.
Tax treaties between countries help prevent double taxation by establishing tie-breaker rules when an individual qualifies as a resident in two jurisdictions. For example, the U.S. has treaties with France and Germany that outline how residency is determined when both nations claim tax authority over the same person.
Foreign Earned Income Exclusion
U.S. citizens and green card holders living abroad can reduce their taxable income through the Foreign Earned Income Exclusion (FEIE). For the 2024 tax year, qualifying individuals can exclude up to $126,500 in foreign earnings from U.S. taxation. A married couple filing jointly could exclude up to $253,000 if both meet the requirements.
To claim the FEIE, taxpayers must pass either the Physical Presence Test or the Bona Fide Residence Test. The Physical Presence Test requires individuals to be in a foreign country for at least 330 full days within a 12-month period. The Bona Fide Residence Test applies to those who establish a permanent home in another country and reside there for an uninterrupted tax year.
Only earned income, such as wages and self-employment earnings, qualifies for the exclusion. Passive income like dividends, rental income, and pensions remains taxable. While the FEIE reduces taxable income, it does not eliminate self-employment tax, which still applies unless the taxpayer qualifies for a Totalization Agreement with another country.
Reporting Foreign Assets
Holding financial assets outside your home country comes with additional reporting obligations. The U.S. requires taxpayers with foreign accounts exceeding certain thresholds to file the Report of Foreign Bank and Financial Accounts (FBAR) using FinCEN Form 114. This applies if the total value of all foreign accounts exceeds $10,000 at any point during the year. Unlike regular tax filings, the FBAR is submitted separately to the Financial Crimes Enforcement Network (FinCEN). Failure to file can result in penalties starting at $10,000 per violation, with higher fines for willful noncompliance.
In addition to the FBAR, U.S. taxpayers may need to file Form 8938 under the Foreign Account Tax Compliance Act (FATCA) if their foreign financial assets surpass certain thresholds. For individuals living in the U.S., reporting is required if total foreign assets exceed $50,000 at year-end or $75,000 at any time during the year. Those residing abroad have higher limits, with single filers required to report assets exceeding $200,000 at year-end or $300,000 at any point. Unlike the FBAR, which focuses solely on bank accounts, Form 8938 covers a broader range of assets, including foreign stocks, bonds, and certain retirement accounts.
Foreign Tax Credits
Earning income abroad often means paying taxes to a foreign government, which can lead to double taxation if the same income is also taxed by your home country. The Foreign Tax Credit (FTC) helps offset U.S. tax liability with taxes paid to another country. Unlike the Foreign Earned Income Exclusion, which removes income from taxation, the FTC directly reduces the amount of U.S. taxes owed on foreign-source income.
The credit applies only to income taxes and certain in-lieu-of taxes imposed by a foreign country or U.S. possession. It does not cover value-added taxes (VAT), property taxes, or social security payments unless a Totalization Agreement specifies otherwise. To claim the credit, taxpayers must file Form 1116 unless they qualify for the simplified election that allows direct reporting on Form 1040. The credit is limited to the lesser of the actual foreign taxes paid or the U.S. tax liability on that same foreign income. Any unused foreign tax credits can be carried back one year or forward up to ten years to offset future tax liabilities.
Consequences for Noncompliance
Failing to meet tax obligations while living abroad can result in financial penalties, loss of benefits, and legal consequences. The U.S. imposes automatic penalties for failing to file required forms, interest on unpaid taxes, and potential criminal charges for willful tax evasion.
The penalties for failing to report foreign financial accounts can be severe. Not filing an FBAR when required can lead to a $10,000 penalty per violation, while willful noncompliance can result in fines of up to the greater of $100,000 or 50% of the account balance per year. Similarly, failing to report foreign assets under FATCA can trigger an initial $10,000 penalty, with additional fines reaching up to $50,000 for continued noncompliance. If taxes are owed, the IRS can impose failure-to-file and failure-to-pay penalties, which accrue over time and significantly increase the total amount due.
In extreme cases, tax evasion can lead to criminal prosecution, with potential prison sentences and substantial fines. The IRS and other tax authorities work with foreign governments through agreements like the Common Reporting Standard (CRS) and FATCA to track offshore accounts and unreported income. If a taxpayer is found to have willfully avoided tax obligations, they may face asset seizures, passport revocation, or restrictions on re-entering their home country.